FORM 10-K
                       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, 1996
                                       or
            ( ) Transition Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934
                         Commission File Number 1-11998

                                FAC REALTY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 DELAWARE
 (STATE OR OTHER JURISDICTION OF                        56-1819372
 INCORPORATION OR ORGANIZATION)            (I.R.S. EMPLOYER IDENTIFICATION NO.)

             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

                          Common Stock, $.01 par value

                    NAME OF EACH EXCHANGE ON WHICH REGISTERED

                             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[X].

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 31,1997, was approximately $65,900,000.

As of March 31,1997, there were 12,103,155 shares of the Registrant's Common
Stock, $.01 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE.


                                      - 1 -

<PAGE>




                                FAC REALTY, INC.
                               INDEX TO FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1996


                                                                      Page
                                     PART I

Item 1        -    Business                                            1

Item 2        -    Properties                                          7

Item 3        -    Legal Proceedings                                  15

Item 4        -    Submission of Matters to a Vote of
                   Security Holders                                   15

                                     PART II

Item 5        -    Market for the Registrant's Common Equity
                   and Related Stockholder Matters                    16

Item 6        -    Selected Financial Data                            16

Item 7        -    Management's Discussion and Analysis of
                   Financial Condition and Results of Operation       19

Item 8        -    Financial Statements and Supplementary
                   Data                                               28

Item 9        -    Changes in and Disagreements with Accountants
                   on Accounting and Financial Disclosure             28

                                    PART III

Item 10       -    Directors and Executive Officers of
                   the Registrant                                     29

Item 11       -    Executive Compensation                             31

Item 12       -    Security Ownership of Certain Beneficial
                   Owners and Management                              35

Item 13       -    Certain Relationships and Related
                   Transactions                                       36

                                     PART IV

Item 14       -    Exhibits, Financial Statement Schedules,
                   and Reports on Form 8-K                            37


                                     - ii -

<PAGE>



                                     PART I

ITEM 1 - BUSINESS

GENERAL

              FAC Realty, Inc. (the "Company"), a self-administered and
self-managed real estate investment trust ("REIT"), is one of the nation's
largest owners and operators of factory outlet centers. The Company is
vertically integrated, providing development, construction management, leasing,
marketing and asset management services. As of December 31, 1996, the Company
owned and operated 36 factory outlet centers (the "Properties") located in 21
states containing an aggregate of approximately 4.9 million square feet of gross
leasable area ("GLA"). The Properties are tenanted primarily by large
manufacturers of widely recognized, traditional brand name merchandise such as
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), Phillips-Van Heusen Corporation (Bass, Van
Heusen and Geoffrey Beene), 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 factory outlet centers from VF Corporation (the "VF Properties")
totaling 1,725,000 square feet. In December 1993, the Company used the proceeds
of a secondary public offering to purchase six additional factory outlet centers
totaling 908,000 square feet from entities and individuals constituting the
Willey Creek Group, at that time one of the largest private owners and operators
of factory outlet centers in the country. In addition, in June 1994, the Company
purchased three additional properties totaling 451,412 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.

              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.

              RECENT EVENTS. As a result of its recent decision to diversify its
portfolio, on March 27, 1997, the Company purchased five community shopping
centers located in the Raleigh, North Carolina area for $32,300,000 from an
unrelated third party. The centers total 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 and
internal cash flow. As a result of the recent acquisition, the Company owns 41
shopping centers containing an aggregate of approximately 5.5 million square
feet of GLA.

BUSINESS STRATEGY

              The Company's business strategy is to increase overall shareholder
return through acquisition and portfolio diversification, expansion of its
existing centers, selective development of new properties, 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 senior and middle management team
consists of a group of real estate professionals with over 410 years of
collective shopping center experience. The team is headed by its new 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, retail development, leasing and marketing. These new members of
management bring years of experience and shopping center industry designations
to the Company, along with relationships with factory outlet tenants, shopping
center tenants, and the financial and investment community.

                                      - 1 -

<PAGE>



              ACQUISITION AND PORTFOLIO DIVERSIFICATION. The Company believes
that retail concepts within the shopping center industry are merging, and that a
diversified shopping center portfolio will provide opportunities for growth and
overall return to shareholders. To implement this strategy, the Company intends
to focus on selective acquisitions of retail centers. Retail centers may
include, but are not limited to, community shopping centers, outlet centers,
"power strip" centers and "power outlet" centers. The Company believes
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, as well as the
potential for increase in cash flow through increasing rents, retenanting,
remerchandising or future expansions. The Company intends to use its existing
tenant relationships to assist in accomplishing its objectives.

              The recent acquisition of five community shopping centers from
North Hills, Inc. is the beginning of implementation of the Company's
diversification strategy. The North Hills properties meet the Company's
acquisition criteria and their proximity to the Company's headquarters, together
with the Company's knowledge of the market, should allow the Company to manage
them with little increase in cost. Most importantly, the Company believes its
existing tenant relationships should allow for not only remerchandising the
existing centers, but at potentially 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 full-service
restaurants, theaters, entertainment and hotels.

              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 over
600,000 square feet of expansion space to its outlet centers.

              The Company's asset management team, which includes development,
leasing, marketing, finance and property management, 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 sale. In addition, the Company
intends to improve its ongoing program of regular maintenance, periodic
renovation and capital improvement of existing facilities in an effort to
increase property values and tenants' sales. The Company is replacing the energy
management systems at certain Properties and is evaluating other Properties for
cost-saving opportunities.

               The Company intends to fund these expansions and improvements
primarily through its internally generated cash flow.

              DEVELOPMENT OF NEW PROPERTIES. The Company believes that
opportunities continue to exist to attract tenants to newly developed factory
outlet centers or community shopping centers (which may include both factory
outlet tenants and regional or national off-price, grocery or other
destination-type tenants). The Company intends to selectively develop centers on
new sites in areas with access to major highways, 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 and marketing
stage for a "power outlet" mall located in Lake Carmel, New York. The project is
planned to contain in excess of 300,000 square feet of GLA and is planned to
include "big box" users, which attract destination-oriented shoppers, as well as
traditional outlets. If appropriate tenant interest is obtained, and the
necessary agreements, permits and approvals are received, the Company intends to
commence construction in the fall of 1997. No assurance can be given, however,
that the project will be developed.


                                      - 2 -

<PAGE>



              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").

              In 1996, the Company issued convertible preferred stock in
exchange for $20 million of new equity. It also recently completed a
$150,000,000 credit facility with Nomura Asset Capital Corporation. The credit
facility with Nomura is secured by 17 of the Company's Properties, plus an
assignment of the excess cash flow from 18 additional Properties. The Nomura
credit facility was used in part to repay existing indebtedness of approximately
$84.5 million and may be utilized to expand existing properties, fund
acquisitions of retail centers, and refinance existing indebtedness.

              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; such centers account for the vast majority of the Company's NOI.
Each of the Properties has a marketing manager responsible for developing and
implementing marketing strategies.

              Marketing plans for each center are prepared by the marketing
manager for 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 real
estate investment trust providing development, construction management, legal,
leasing, marketing, finance 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 factory 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 management information systems (MIS) 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
MIS department is in the process of enhancing the Company's systems to allow all
personnel easy access to all financial and lease data in a concise format.


                                      - 3 -

<PAGE>



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 below have been determined by the Board of Directors of the Company
and may be amended or revised from time to time at the discretion of the Board
of Directors without a vote of the shareholders of the Company. No assurance can
be given that the Company's investment objectives will be attained or that the
value of the Company will not decrease.

              INVESTMENT POLICIES. The Company may expand existing properties,
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. The Company also
may participate with other entities in property ownership through joint ventures
or other types of co-ownership. Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority over the equity
interest of the Company. While the Company intends to emphasize equity real
estate investments, it may, in its discretion, invest in mortgages and other
real estate interests. The Company does not presently intend to invest in
mortgages or deeds of trust, but it may invest in such instruments if management
concludes that the Company may benefit from the cash flow or appreciation of the
subject property. Subject to the percentage of ownership limitations and gross
income tests which must be satisfied to qualify as a REIT, the Company also may
invest in securities of concerns engaged in real estate activities or in
securities of other issuers. The Company does not intend to 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. 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.

              CERTAIN OTHER ACTIVITIES. The Company may make investments other
than as previously described but has no present intention to do so. The Company
has authority to offer shares of Common Stock or other securities in exchange
for property, to repurchase or otherwise reacquire outstanding shares of Common
Stock or other securities and may engage in such activities in the future. At
all times the Company intends 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 determines that it is no longer in
the best interests of the Company to qualify as a REIT.

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 32 stores, 25 of which anchor the Company's
outlet 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 14% of the Company's 1996 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 36 factory outlet 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 6.6% of the Company's base
rental revenues or aggregate leased GLA during 1996.


              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

                                      - 4 -

<PAGE>



for the payment of all rental obligations for the remaining term. As of December
31, 1996 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

              The Company's factory outlet centers compete for customers
primarily with factory outlet centers built and operated by other developers,
traditional shopping malls and "off price" retailers. The Company's centers in
Casa Grande, AZ, Kittery, ME, Lake George, NY, Lake Park, GA and Las Vegas, NV
compete directly with nearby factory outlet centers. As a result, these centers
encounter significant competition in retaining existing tenants and attracting
future tenants. The Company carefully considers the degree of existing and
potential competition in a proposed area before deciding to build a new center.

              The Company's factory outlet centers compete to a limited extent
with various full- and off- price retailers in the highly fragmented retailing
industry. However, the Company believes that the majority of its customers visit
factory outlet centers because they are intent on buying first-quality,
name-brand goods at discounted prices. Traditional full- and off- price
retailers are often unable to provide such a variety of products at attractive
prices at a single location every day.

              The five community shopping centers recently acquired by the
Company have direct competition with other centers located in the same
geographic trade area.

              Numerous developers and real estate companies are engaged in the
development or ownership of factory outlet centers and other retail complexes
that compete with the Company in seeking tenants for all of its centers.
Management believes that the Company competes with many large national and small
developers of factory outlet centers. This results in competition for
acquisition of existing properties and development sites and for tenants to
lease space in the factory outlet centers that the Company and its competitors
own or operate. The development of a new, competing factory outlet center with a
more convenient location or more favorable rental terms may attract the
Company's tenants or cause them to renegotiate their leases at or prior to
renewal.

ENVIRONMENTAL MATTERS

              Under various Federal, state and local laws, ordinances and
regulations, an owner of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such liability may be imposed without regard to whether the owner knew of, or
was responsible for, the presence of such hazardous or toxic substances. The
cost of any required remediation and the owner's liability therefore as to any
property is generally not limited under such laws, ordinances and regulations
and could exceed the value of the property and/or the aggregate assets of the
owner. The presence of such substances, or the failure to remediate such
substances properly, may adversely affect the owner's ability to borrow using
such property as collateral.

              In conjunction with the issuance of the $95 million collateralized
commercial mortgage notes in May, 1995, all of the 18 mortgaged Properties were
subject to environmental assessments conducted by an independent environmental
consultant. As a result of the issues at the Company's Vacaville, California
property, discussed below, the lender 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. Seventeen of the
remaining Properties of the Company were subject to environmental assessments in
conjunction with the closing of a $75 million credit facility in April 1996.
This facility was subsequently paid off with its financing from Nomura Capital,
which reviewed the environmental assessments. None of these environmental
assessments or 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 and Lathrop, California properties 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.

                                                       - 5 -

<PAGE>



In each instance where remediation has been determined to be necessary, the
Company believes that the third 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 properties acquired by the Company and the properties adjacent to the
Company's properties, the Company accrued $600,000 for the potential remediation
cost at the date of acquisition of two of the properties in 1993 and 1994. 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.

              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, 1997, the Company employed 142 persons, 55 of whom
are located primarily at the Company's headquarters in Cary, North Carolina. The
remaining 87 employees are property management, marketing and maintenance
personnel located at the Properties. The Company believes that its relations
with its employees are good.


                                                       - 6 -

<PAGE>



ITEM 2 - PROPERTIES

              As of December 31, 1996, the Properties consisted of 36 factory
outlet centers containing approximately 4.9 million square feet of GLA located
in 21 states. In addition, the Company has acquired 606,000 square feet in the
recent property acquisition which brings the total GLA to 5.5 million square
feet. At December 31, 1996 the Company's Operating Properties, Development
Properties, and Properties Held for Sale (see table below) were 91.4%, 69.1% and
42.9% leased, respectively, for an overall leased percentage of 87.1%. The
outlet centers contained 756 stores with over 218 different tenants. Twenty-one
(21) of the Properties are enclosed malls, ranging in size from approximately
60,000 to 187,000 square feet of GLA (aggregating approximately 2.0 million
square feet of GLA), and 15 are strip centers containing between approximately
25,000 to 448,000 square feet of GLA (aggregating approximately 2.8 million
square feet of GLA). The Company owns an aggregate of approximately 181 acres of
undeveloped parcels located adjacent to certain of the Properties (the
"Undeveloped Parcels").

              The following table sets forth the location of, and certain
information relating to, the Properties as of December 31, 1996.
<TABLE>
<CAPTION>
<S>                               <C>          <C>            <C>             <C>                   <C>


                                   TOTAL                                                            PERCENTAGE
                                  NUMBER         TOTAL        PERCENTAGE       PERCENTAGE           OF GLA IN
                                    OF            GLA          OF TOTAL      OF TOTAL RENTAL        OPERATION
            STATE                 CENTERS       (SQ.FT.)          GLA          REVENUE (1)            LEASED
----------------------------------------------------------- -------------------------------------------------------
OPERATING PROPERTIES:
Alabama                              1              111,909           2.3%                 1.9%              100.0%
Arizona                              2              294,788           6.1%                 5.2%               93.2%
California                           1              447,745           9.2%                19.2%               88.8%
Florida                              1               83,962           1.7%                 1.3%               93.8%
Georgia                              1              140,025           2.9%                 2.0%               73.5%
Illinois                             1               91,063           1.9%                 0.9%               73.2%
Iowa                                 1              112,405           2.3%                 1.5%               85.5%
Kentucky                             3              304,402           6.3%                 5.1%               98.7%
Louisiana                            2              220,281           4.5%                 4.3%               98.8%
Maine                                1               24,620           0.5%                 1.5%              100.0%
Missouri                             1               83,464           1.7%                 1.3%              100.0%
Mississippi                          1              124,412           2.6%                 0.9%               91.4%
Nebraska                             1               89,646           1.8%                 1.2%               97.4%
Nevada                               1              229,958           4.7%                 5.2%               75.4%
New York                             1               43,650           0.9%                 1.4%               92.9%
North Carolina                       1              355,758           7.3%                 7.4%               96.2%
Tennessee                            4              597,730          12.3%                14.3%               94.0%
Texas                                6              515,412          10.6%                 7.2%               91.1%
Utah                                 1              185,281           3.8%                 2.6%               95.8%
Washington                           1              223,383           4.6%                 7.7%               85.7%
                              ----------------------------- -------------------------------------------------------
                                    32            4,279,894          88.0%                92.1%               91.4%
DEVELOPMENT PROPERTIES:
Missouri                             1              287,522           5.9%                 4.1%            69.1%(2)
PROPERTIES HELD FOR SALE:
Arizona                              1              141,828           2.9%                 2.7%               62.3%
California                           1              131,400           2.7%                 0.9%               19.9%
New Hampshire                        1               24,740           0.5%                 0.2%               54.2%
                              ----------------------------- -------------------------------------------------------
                                     3              297,968           6.1%                 3.8%               42.9%
                              ----------------------------- -------------------------------------------------------
    Total (All Properties)          36            4,865,384         100.0%               100.0%               87.1%
                              ============================= =======================================================
</TABLE>


                                                       - 7 -

<PAGE>



(1)     Total rental revenue consists of base and percentage rent plus 
        recoveries from tenants for the year ended December 31, 1996.
(2)     As of March 31, 1997, the Branson, MO center was  80.0% leased and 
        occupied with an additional 5% of GLA committed, and an additional 7% 
        of GLA under negotiation.

        The following table sets forth certain information as of December 31,
1996 relating to the Company's 36 centers. All of the Properties are owned in
fee simple by the Company, except for the factory outlet center located in Boaz,
Alabama, which the Company holds pursuant to a lease which has renewal options
through 2027. The Company recently obtained 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 $350.00 through and including
January 31, 1998; $500.00 from February 1, 1998 through and including January
31, 1999; $750.00 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>
<S>                    <C>                            <C>             <C>          <C>           <C>         <C>          <C>



                                                         DATE                     GROSS      PERCENTAGE     AVERAGE      PERCENTAGE
                                                      DEVELOPED/        LAND     LEASABLE     OF TOTAL       RENTAL       OF GLA IN
     PROPERTY/                                       (EXPANDED OR       AREA       AREA        RENTAL      REVENUE PER    OPERATION
      TYPE(1)                  LOCATION             RENOVATED) (2)    (ACRES)    (SQ.FT.)    REVENUE (3)    SQ.FT. (4)       LEASED
--------------------  ---------------------------  ----------------- ----------  ---------   -----------   ------------- -----------
OPERATING PROPERTIES:
Boaz, AL              Situated along                     1982
  (EM)                U.S. Highway 61                   (1994)         Lease       111,909         1.9%        $12.10        100.0%
Mesa, AZ              Situated along U.S. Highways       1987
  (EM)                60 and 89                         (1995)           26.9      167,213         3.5%         12.67         93.2%
Tucson, AZ            Situated along
  (EM)                Interstate 10                      1984            12.5      127,575         1.7%          8.27         93.3%
Vacaville, CA         Situated along
  (SC)                Interstate 84                      1988            52.6      447,745        19.2%         22.58         88.8%
Graceville, FL        Situated along
  (EM)                U.S. Highway 77                    1985            25.0       83,962         1.3%         10.15         93.8%
Lake Park, GA         Situated along                     1989
  (SC)                Interstate 75                     (1992)           12.5      140,025         2.0%         13.06         73.5%
West Frankfort, IL    Situated along
  (EM)                Interstate 57                      1990            20.0       91,063         0.9%          9.67         73.2%
Story City, IA        Situated along                     1990
  (EM)                Interstate 35                     (1996)           20.0      112,405         1.5%         10.96         85.5%
Carrollton, KY        Situated along
  (EM)                Highway 22                         1989            21.2       63,896         0.8%         12.67        100.0%
Georgetown, KY        Situated along
  (SC)                Interstate 75                      1991            16.7      176,615         3.6%         12.21         97.8%
Hanson, KY            Situated along
  (EM)                U.S. Highway 41                    1989            21.1       63,891         0.7%          7.12        100.0%
Arcadia, LA           Situated along                     1989
  (EM)                Interstate I-20                   (1994)           28.7       89,528         1.4%         11.50        100.0%
Iowa, LA              Situated along                     1989
  (EM)                Interstate 10                     (1994)         Lease       130,753         2.9%         14.59         97.9%
Kittery, ME           Situated along
  (SC)                U.S. Highway 1                     1987             5.3       24,620         1.5%         27.94        100.0%

</TABLE>

                                                       - 8 -

<PAGE>

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




                                                         DATE                     GROSS      PERCENTAGE     AVERAGE      PERCENTAGE
                                                      DEVELOPED/        LAND     LEASABLE     OF TOTAL       RENTAL       OF GLA IN
     PROPERTY/                                       (EXPANDED OR       AREA       AREA        RENTAL      REVENUE PER    OPERATION
      TYPE(1)                  LOCATION             RENOVATED) (2)    (ACRES)    (SQ.FT.)    REVENUE (3)    SQ.FT. (4)      LEASED
--------------------  ---------------------------  ----------------- ----------  ---------- ------------  -------------  -----------
OPERATING PROPERTIES:
                      
Tupelo, MS            Situated along                     1987
  (EM)                Interstate 44                     (1996)         16.8      124,412          0.9%          7.26        91.4%
Lebanon, MO           Near Interstate 44 and State
  (EM)                Highways 5, 32 and 64              1985          23.7       83,464          1.3%          9.24       100.0%
Nebraska City, NE     Intersection of U.S.
  (EM)                Highway 75 and State               1990
                      Highway 2                         (1996)         21.4       89,646          1.2%         12.49        97.4%
Las Vegas, NV         Situated along
  (SC)                Las Vegas Blvd.                    1992          25.7      229,958          5.2%         15.18        75.4%
Lake George, NY       Intersection of
  (SC)                Rt. 9 & 49                         1988           4.6       43,650          1.4%         15.58        92.9%
Smithfield, NC        At the junction of                 1988
  (SC)                Interstate 95 and U.S.            (1995)
                      Highway 70 and 70-A               (1996)         46.5      355,758          7.4%         14.66        96.2%
Crossville, TN        Intersection of Interstate 40      1988
  (EM)                and Genesis Road                  (1994)         16.5     118,785          2.5%         13.61        100.0%
Nashville, TN         Across from Opryland               1993
  (SC)                                                  (1995)         33.3     285,808          9.4%         15.83         96.0%
Tri-Cities, TN        Situated along Interstate 81 and
  (SC)                State Highway 125                  1990          23.3     132,908          1.7%         10.50         81.5%
Union City, TN        Situated along
  (EM)                U.S. Highway 51                    1988          23.3      60,229          0.7%          8.99        100.0%
Corsicana, TX         Intersection of Interstate
  (EM)                45/287 and State Highway 32        1989          20.0      63,605          0.7%          7.89        100.0%
Hempstead, TX         Situated along
  (EM)                U.S. Highway 290                   1989          14.8      63,605          0.7%         13.10         94.0%
La Marque, TX         Situated along
  (SC)                Interstate 45                      1990          19.2     176,071          3.2%         11.64         76.2%
Livingston, TX        Situated along
  (EM)                U.S. Highway 59                    1989          15.0      63,605          0.8%         10.42        100.0%
Mineral Wells, TX     Situated along
  (EM)                U.S. Highway 180                   1989          15.5      63,609          0.7%          8.06        100.0%
Sulphur Springs, TX   Situated along
  (EM)                Interstate 30                      1986          13.3      84,917          1.1%          7.80        100.0%
Draper, UT            Situated along                     1986
  (EM)                Interstate 15                     (1995)         27.7     185,281          2.6%          7.40         95.8%
North Bend, WA        Situated along                     1990
  (SC)                Interstate 90                     (1994)         16.1     223,383          7.7%         19.35         85.7%
                                                                     -----  ------------ -------------- -------------  -----------
                                                                      639.2   4,279,894         92.1%         14.79         91.4%
DEVELOPMENT PROPERTIES:
Branson, MO           Situated along
  (SC)                U.S. Highway 248                   1995          34.5     287,522          4.1%          9.29         69.1%(5)



                                                       - 9 -

<PAGE>



                                                         DATE                     GROSS      PERCENTAGE     AVERAGE      PERCENTAGE
                                                      DEVELOPED/        LAND     LEASABLE     OF TOTAL       RENTAL       OF GLA IN
     PROPERTY/                                       (EXPANDED OR       AREA       AREA        RENTAL      REVENUE PER    OPERATION
      TYPE(1)                  LOCATION             RENOVATED) (2)    (ACRES)    (SQ.FT.)    REVENUE (3)    SQ.FT. (4)      LEASED
--------------------  ---------------------------  ----------------- ----------  ---------- ------------  -------------  -----------
PROPERTIES HELD FOR SALE:
Casa Grande, AZ       Situated along
  (SC)                Interstate 10                      1991         14.9      141,828         2.7%         16.84          62.3%
Lathrop, CA           Situated along
  (SC)                Interstate 5                       1993         14.3      131,400         0.9%         16.41          19.9%(6)
Conway, NH            Intersection of
  (SC)                Rt. 16 & 153                       1985          2.1       24,740         0.2%          7.47          54.2%
                                                                  ----------  ------------ --------- -------------  -------------
                                                                      31.3      297,968         3.8%         15.51          42.9%
                                                                  ----------  ------------ --------- -------------  -------------
                 Total (All Properties)                              705.0    4,865,384       100.0%        $14.44          87.1%
                                                                  ==========  ============ =========== ===========  =============

</TABLE>

1)      "EM" indicates an enclosed mall and "SC" indicates a strip center.
2)      Reflects the year in which the factory outlet center was developed or 
        re-developed for use as a factory outlet center.
3)      Total Rental Revenue consists of base and percentage rent plus 
        recoveries from tenants for the year ended December 31, 1996.
4)      Average Rental Revenue per square foot is defined as Total Rental 
        Revenue divided by GLA in operation, exclusive of anchors, at December
        31, 1996. The average rental revenue paid by the Company's anchor
        tenants (VF Factory Outlet, Carolina Pottery, and WestPoint Stevens),
        including base and percentage rents plus recoveries, was $5.57, $4.89,
        and $6.35 per square foot, respectively, in 1996.
(5)     As of March 31, 1997, the Branson, MO center was 80.0% leased and 
        occupied with an additional 5% of GLA committed, and an additional
        7% of GLA under negotiation.
(6)     The Company is converting this property to general office use.

PROPERTIES HELD FOR SALE

        Due in part to the Company's ongoing strategic evaluation of its
portfolio of assets, the Directors of the Company authorized management 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. Three of these
properties presently held for sale were written down by $8.5 million in 1995 to
their fair value less costs to sell and an additional $5 million write down was
taken on one of the properties in 1996.

        These non-cash adjustments were charged to operations and represent the
difference between the estimated net realizable value and net book value of each
asset. After recording the $5 million valuation adjustment in 1996, the net
carrying value of assets currently being marketed for sale at December 31, 1996
is $11.4 million. Two assets previously classified as held for sale will no
longer be carried as held for sale and have been reclassified as income
producing properties. The two centers were previously classified for sale to
combine with another property; after further evaluation the Company feels that
this will not be necessary in order to sell the other property. There is also
$15.8 million of debt which is required to be retired from the sale proceeds and
during 1996, these three properties contributed about $2.1 million of revenue
and $1.1 million of net operating income before interest expense. This non-cash
adjustment was charged to operations and represents the difference between the
estimated net realizable value and net book value of that asset.

        The Company is still in the process of marketing the properties.
Management plans to evaluate all properties on a regular basis in accordance
with its strategy for growth and diversification 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.

        One of these properties (Lathrop, CA) is currently being converted to
office use and has 30% of the total GLA leased with an additional 52% of GLA
under negotiation. The Company anticipates that it will retain the property
during 1997 to stabilize the revenues and dispose of the center in 1998 in order
to obtain a higher return.

PLANNED EXPANSIONS

        For the year ended December 31, 1996 the Company had delivered
approximately 163,000 square feet of expansion space to tenants in Nebraska
City, Nebraska; Story City, Iowa; Tupelo, Mississippi and Smithfield, North

                                                      - 10 -

<PAGE>



Carolina. The Company also completed final construction of approximately 81,000
square feet of its 288,000 square foot outlet center being developed in Branson,
Missouri. The following table sets forth certain information relating to the
Company's proposed 1997 expansion activities:

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


                                                                               PERCENTAGE
                                                                POST-              OF
                               CURRENT        EXPANSION       EXPANSION         EXPANSION          PLANNED        ESTIMATED
                                 GLA             GLA             GLA               GLA           COMPLETION        COST OF
LOCATION                       (SQ.FT.)        (SQ.FT.)        (SQ.FT.)        COMMITTED*           DATE          EXPANSION
--------------------------  --------------  --------------  --------------  -----------------  ---------------  --------------
Crossville, TN                 118,785              32,470     151,255             61%            Fall 1997         $2,350,000
Wilson, NC                      91,266              44,000     135,266            100%          Spring 1998         $2,450,000

</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 March 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 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 its obligations under the agreement.

ADDITIONAL INFORMATION ABOUT CERTAIN CENTERS

        As of December 31, 1996, the Company's factory outlet center at
Vacaville, California, had a book value of at least 10% of the total assets of
the Company and generated gross revenue in 1996 that accounted for more than 10%
of the Company's 1996 aggregate gross revenue. The following sets forth
information relating to this center:

        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. As of December 31, 1996, 1995 and 1994, Vacaville was 89%, 88% and
92%, respectively, leased to over 100 tenants with an average effective annual
rental revenue per square foot of $22.58, $25.97

                                                      - 11 -

<PAGE>



and $25.82, respectively. Major tenants at the center include VF Factory Outlet,
Levi's, Reebok, Mikasa, 9 West and Carter Childrenswear, with The GAP Outlet
scheduled to open in August 1997.

        The following table shows the lease expirations for tenants in occupancy
as of December 31, 1996 for the Vacaville outlet center (assuming that none of
the tenants exercise renewal options).

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

                                                   PRO FORMA                                AVERAGE
                                   LEASED          ANNUALIZED            % OF             ANNUAL BASE
                LEASES TO           GLA           BASE RENTAL           TOTAL                RENT
   YEAR         EXPIRE(2)       (SQ. FT.)(1)        REVENUE            REVENUE            PER SQ.FT.
  ------  ----------------- ---------------- ------------------ ------------------  -------------------
   1997            25                   91,073         $1,410,614                 21.7%               $15.50
   1998            14                   51,276            868,912                 13.4%                16.95
   1999            19                   71,468          1,051,426                 16.2%                14.71
   2000            16                   52,720            996,174                 15.3%                18.90
   2001            19                   50,451            884,735                 13.5%                17.54
   2002             5                   24,665            422,270                  6.5%                17.12
   2003             5                   43,674            620,509                  9.5%                14.21
   2004             1                    6,400            140,800                  2.2%                22.00
   2005             0                        0                  0                  0.0%                 0.00
   2006             1                    6,000            108,000                  1.7%                18.00
            ----------------- ---------------- ------------------    ------------------  -------------------
  TOTAL            105                 397,727         $6,503,440                100.0%               $16.35
            ================= ================ ==================    ==================  ===================
</TABLE>

(1)     Total leased GLA is not equal to leased GLA due to vacancies.
(2)     Expirations assume no renewals or releasing for tenants in occupancy as
        of December 31, 1996.

UNDEVELOPED PARCELS

        The Company owns approximately 181 acres of undeveloped parcels located
near certain of the Company's factory outlet centers. The Company intends to
pursue a marketing program to lease, develop or sell the parcels it owns through
third party brokers. During 1996, 2.4 acres were sold at Mesa, Arizona for a
total sale price of $205,000 and a gain of $37,000. 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 able to avoid 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 manufacturers a
diverse tenant mix which includes many well-known manufacturers/retailers. The
majority of the Company's current tenants are large, publicly-traded
manufacturers. The Company's current core tenant mix at its Properties features
such well-known brands as Lee, Wrangler, Jantzen, Jansport, Bass, Van Heusen,
Vanity Fair, Health-tex, Easy Spirit, 9 West, Enzo, Casual Corner, L'eggs,
Hanes, Bali, Champion, Levi's, Nike, Revlon, Liz Claiborne, Mikasa, Martex and
Bugle Boy. In Nashville, Tennessee and Branson, Missouri, the Company has added
Reading China & More as an anchor in an effort to diversify its tenant base.
Several new relationships were developed during the year, such as The GAP, which
plans to open in three of the Company's locations in 1997, and 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 1997 and 2006.
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, 1996, 21% of the aggregate GLA of its factory
outlet 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 factory outlet center. VFFO is the Company's largest tenant. See
"Item 1 -- Business -- Major Tenant" for a discussion of the Company's leases
with VFFO.


                                                      - 12 -

<PAGE>



LEASE EXPIRATION

        The following table shows tenant lease expirations for tenants in
occupancy as of December 31, 1996 for the next ten years at the Properties
(assuming that none of the tenants exercises any renewal option):
<TABLE>
<CAPTION>
<S>               <C>                <C>                 <C>                   <C>                    <C>                     


                                                           PRO FORMA
                                      LEASED              ANNUALIZED                                   AVERAGE
                  LEASES TO            GLA                BASE RENTAL               % OF           ANNUAL BASE RENT
     YEAR         EXPIRE(2)        (SQ. FT.)(1)             REVENUE                TOTAL             PER SQ. FT.
-------------- --------------- -----------------   ------------------  -----------------  -----------------------
     1997            156                555,429            $5,531,051              14.8%               $   9.96
     1998            134                528,132             5,189,119              13.9%                   9.83
     1999             99                338,393             4,738,563              12.7%                  14.00
     2000            159                632,003             7,498,310              20.1%                  11.86
     2001             84                310,597             4,172,723              11.2%                  13.43
     2002             18                 71,260               969,750               2.6%                  13.61
     2003             58              1,257,302             5,706,291              15.3%                   4.54
     2004             10                185,448               983,891               2.6%                   5.31
     2005             12                206,744             1,407,710               3.8%                   6.81
     2006+             9                153,749             1,131,099               3.0%                   7.36
               --------------- ---------------- ---------------------    ---------------  ---------------------
TOTAL                739              4,239,057           $37,328,507             100.00%                 $8.81
               =============== ================ =====================    ===============  =====================
</TABLE>

(1)     Total leased GLA is not equal to leased GLA due to vacancies.
(2)     Expirations assume no renewals or releasing for tenants in occupancy as 
        of December 31, 1996.

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, 1996.


<TABLE>
<CAPTION>
<S>                                         <C>                <C>               <C>            <C>               <C>    
                                                             PERCENTAGE OF       NUMBER          ACTUAL
                                          TOTAL GLA            TOTAL GLA           OF          BASE RENTAL          % OF
                 TENANT                      LEASED(1)          LEASED           STORES          REVENUE            TOTAL
----------------------------------------  ---------------  -----------------  ------------  -----------------  --------------
VF Factory Outlet, Inc.                         1,225,752            28.9%        32           $4,827,609           14.2%
Carolina Pottery Retail Group, Inc.               278,458             6.6%         4              892,225            2.6%
Phillips-Van Heusen Corporation                   243,141             5.7%        56            1,796,383            5.3%
The Dress Barn, Inc.                              136,481             3.2%        27            1,553,413            4.6%
Nine West Group, Inc.                             132,662             3.1%        28              893,850            2.6%
Bugle Boy Industries, Inc.                        108,148             2.6%        18              727,043            2.1%
The Paper Factory of Wisconsin, Inc.               87,208             2.1%        24              873,028            2.6%
Designs, Inc./Levi Strauss & Co.                   85,111             2.0%         9            1,085,005            3.2%
WestPoint Stevens Stores, Inc.                     82,840             2.0%         4              222,831            0.6%
The Book Market, Inc.                              73,000             1.7%        18              635,879            1.8%
                                          ---------------  ------------  ------------      --------------  --------------
                                                2,452,801            57.9%       220           13,507,266           39.6%

Others                                          1,786,256            42.1%       519           20,591,850           60.4%
                                          ---------------  ------------  ------------      --------------  --------------
Total                                           4,239,057           100.0%       739          $34,099,116          100.0%
                                          ===============  ============  ============      ==============  ==============
</TABLE>

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


                                                      - 13 -

<PAGE>



MORTGAGE DEBT

        The following table sets forth, as of December 31, 1996, certain
information regarding the mortgages encumbering certain of the Properties (in
thousands).


<TABLE>
<CAPTION>
                                                                  1996     ESTIMATED
                                                                 ANNUAL     BALLOON
   PRINCIPAL       INTEREST                                       DEBT    PAYMENT AT
      AMOUNT         RATE                      TYPE              SERVICE   MATURITY    MATURITY         SECURED BY
-------------------------------------------------------------------------------------------------------------------------
<S>                 <C>     <C>                                <C>         <C>            <C>    <C>
     $55,907        7.42%   Collateralized Mortgage Notes      $ 1,351     $ 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        7.78   Collateralized Mortgage Notes         --         20,000       2002    FSA Finance Properties
      17,000        8.31   Collateralized Mortgage Notes         --         17,000       2002    FSA Finance Properties
------------                                                -----------------------

      92,907   Total Fixed Rate Debt                             1,351      83,716
------------                                               ------------------------

       5,788   Prime + 2.25%  Mortgage                             83        5,719       1998    Lathrop, CA
      75,000   LIBOR + 2.75%  Revolving Credit Facility(1)          --      75,000       1998    Branson, MO; Georgetown,
------------                                              -------------------------
                                                                                                 KY; Lake Park, GA;
      80,788   Total Variable Rate Debt                            83       80,719               Nashville, TN; Smithfield,
------------                                              -------------------------
                                                                                                 NC; Tri-Cities, TN; Story
                                                                                                 City, IA; Sulphur Spring,
                                                                                                 TX ; Nebraska City, NE;
                                                                                                 Boaz, AL; Graceville, FL;
                                                                                                 Tupelo, MS; Lebanon, MO;
                                                                                                 Corsicana, TX; Hempstead,
                                                                                                 TX; Livingston, TX; and
                                                                                                 Mineral Wells, TX
    $173,695   Total Mortgage Debt                             $1,434    $164,435
  ==========                                                =======================
</TABLE>

(1)     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, 1996, was approximately $5.1 million,
or $1.09 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.

EXECUTIVE OFFICES

        The Company relocated its corporate headquarters in December 1996 and
currently leases its 17,500 square foot executive offices in Cary, North
Carolina.

                                                      - 14 -

<PAGE>



ITEM 3 - LEGAL PROCEEDINGS

        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 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 purchase of the OPERS' centers and the management and business
operations of RRI's Charter Oak Group, Ltd. The Note is payable only upon the
occurrence of certain conditions relating to the termination of the Agreements
and the Company asserts that certain of the required conditions were not met and
thus, the Note is not properly due and payable as RRI has asserted.

        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. RRI did not appeal the order and the
parties are in the process of selecting a mutually acceptable arbitrator in
Raleigh, North Carolina.

        The Company intends to continue to vigorously defend its position in the
upcoming arbitration and, while no assurance can be given as to the outcome of
such arbitration, it continues to assert that it has meritorious defenses to the
payment of the Note.

        On July 19, 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 seeks
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 alleges 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.

        On October 30, 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 have been consolidated and the Company has filed motions to dismiss
both lawsuits, which motions are currently pending.

        The Company believes that it and the named officers have substantial
defenses to the plaintiffs' claims and the Company intends to vigorously defend
the actions. However, no assurance can be given as to the ultimate outcome of
the litigation.

        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.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

                                                      - 15 -

<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." At March 31, 1997, there were approximately 758 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 1996 and 1995:

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

            1996                       HIGH                LOW            DIVIDENDS
-----------------------------  -------------------- -----------------  ----------------
First Quarter                     $ 13 5/8            $   9 7/8              $  0.25
Second Quarter                      10 1/8                9                     0.25
Third Quarter                        9 1/2                8 1/2                 0.25
Fourth Quarter                       8 7/8                6 5/8                 0.00

            1995
-----------------------------
First Quarter                     $ 23 7/8             $ 20                     0.48
Second Quarter                      21                   18 5/8                 0.51
Third Quarter                       22                   19                     0.51
Fourth  Quarter                     20 3/8               12 1/4                 0.51
</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
$5.2 million of net operating loss carry forwards for 1997 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 of North Carolina at (800)
829-8432.

RELATED SHAREHOLDER MATTERS

              See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity" for a discussion of the Series
A Convertible Preferred Stock, Senior Notes and Warrants issued pursuant to a
Note Purchase Agreement. All such securities were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Exchange
Act of 1934.

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

                                                      - 16 -

<PAGE>



Company's operating performanc 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 1996 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.

              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).


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

                                                                                                                   COMPANY ADJUSTED
                                                                         FAC REALTY, INC.                        HISTORICAL COMBINED
                                                                                                                         (B)
                                                 ------------------------------------------------------- ---------------------------
                                                           1996         1995         1994        1993(A)       1993       1992
                                                 --------------- ------------  ------------  ----------- --------------- -----------
         OPERATING DATA:
            Rental revenues                                $47,133        $46,784    $42,077     $12,135    $23,094        $21,390
            Property operating costs                        13,936         13,648     10,454       3,371      7,181          6,449
                                                      ------------      ---------  ---------   ---------  ------------ -----------
                                                            33,197         33,136     31,623       8,764    $15,913        $14,941
                                                                                                         ============= ===========
            Depreciation and amortization                   13,802         11,900      8,511         1,997
            General and administrative                       6,238         15,279      5,567         1,615
            Interest                                        14,175         10,903      4,435            13
            Adjustment to carrying value of assets          (5,000)        (8,500)         -             -
            Gain on sale of real estate                         37            345          -             - 
            Extraordinary loss on early                       (103)             -       (884)            -
                  extinguishment of debt  
                                                    ---------------   ------------  ------------  -----------
            Net  income (loss)                            $ (6,084)      $(13,101)   $12,226        $5,139
                                                    ===============   ============  ============  ===========
            Income (loss) before extraordinary item
             applicable to common shareholders            $ (6,349)      $(13,101)   $13,110        $5,139
                                                    ===============   ============  ============  ===========
            Per common share data:
               Income (loss) before extraordinary item    $ (0.54)         $(1.11)     $1.11        $ 0.86
               Extraordinary item                           (0.01)            -        (0.07)            -
                                                   ---------------     ----------  ------------  -----------
               Net  income (loss)                         $ (0.55)         $(1.11)     $1.04         $ 0.86
                                                   ===============     ==========  ============  ===========
            Weighted average common shares outstanding     11,816          11,814     11,811          5,989
                                                   ===============     ==========  ============  ===========
</TABLE>


                                                               - 17 -

<PAGE>


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



                                                                                                           COMPANY ADJUSTED
                                                                 FAC REALTY, INC.                         HISTORICAL COMBINED
                                                                                                                 (B)
                                         ------------------------------------------------------- ---------------------------
                                                   1996           1995           1994         1993(A)      1993           1992
                                         --------------- ------------  ------------  ----------- --------------- -----------

 OTHER DATA:
    EBITDA                                     $ 27,886       $ 24,357       $ 26,056       $7,149
                                         ===============   ============   ============  ===========
    Funds from Operations (FFO):
      Net income (loss)                           $(6,084)        $(13,101)     $ 12,226      $ 5,139
      Adjustments:
         Straight line rent                          383              (626)        (922)         (355)
         Depreciation and amortization            13,513            11,722         8,428        1,953
         Interest on exchangeable notes              553            -                 -            -
         Compensation under restricted stock award   392            -                 -            -
         Gain on sale of real estate                (37)              (345)           -            -
         Unusual items:
           Non-recurring administrative costs        927             6,500            -            -
           Adjustment to carrying value of assets  5,000             8,500            -            -
           Extraordinary loss on early 
                extinguishment of debt               103                -           884            -
                                         ---------------      ------------  ------------  -----------
         Funds from Operations                  $ 14,750          $ 12,650      $20,616       $ 6,737
                                         ===============      ============  ============  ===========
    Weighted average shares outstanding
                - fully diluted                   13,399            11,814       11,811         5,989
                                         ===============      ============  ============  ===========
    Funds from Operations per share - assuming full
      dilution                                    $ 1.10            $ 1.07       $ 1.75        $ 1.12
                                         ===============      ============  ============  ===========
    Funds Available for Distribution/Reinvestment:
      Funds from Operations                     $ 14,750          $ 12,650      $20,616       $ 6,737
      Adjustments:
       Non-recurring administrative costs          (927)            (6,500)      -            -
       Capitalized tenant allowances               (316)            (1,380)      (1,340)        (156)
       Capitalized leasing costs                   (549)              (407)        (402)         (68)
       Recurring capital expenditures              (312)              (796)      (1,314)        (233)
                                         ---------------       ------------  ------------  -----------
       Funds Available for Distribution/
              Reinvestment:                     $12,646             $3,567      $17,560       $6,280
                                         ===============       ============  ============  ===========
    Funds Available for Distribution/Reinvestment per
     share                                        $0.94              $0.30        $1.49         $1.05
                                         ===============       ============  ============  ===========
    Dividends declared on annual earnings       $10,142           $ 24,101      $22,681      $  9,469
                                         ===============       ============  ============  ===========
    Dividends declared on annual earnings 
        per share                                 $0.75              $2.04        $1.92         $1.58
                                         ===============       ============  ============  ===========
 BALANCE SHEET DATA:
    Income-producing properties (before accumulated
     depreciation and amortization)            $368,005           $357,034      $321,088      $236,383
   Total assets                                 358,612            355,095       326,270       245,457
   Debt on income properties                    173,695            170,067       101,193        33,968
   Total liabilities                            194,020            194,609       122,930        38,808
   Total stockholders' equity                   164,592            160,486       203,340       206,649
 PORTFOLIO PROPERTY DATA:
   Total GLA (at end of period)                  4,865               4,626         4,234         3,502
   Weighted average GLA                          4,674               4,336         3,768         2,474
   Number of properties (at end of period)          36                  36            35            32
   Occupancy (at end of year)
       Operating                                 91.4%                92.3%         92.9%         93.5%
       Development                               69.1%                52.1%           -            -
       Held for sale                             42.9%                66.3%           -            -
</TABLE>

 (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 adjusted historical combined data for 1992 include financial data
          for the four CP Properties and the 21 VF Properties on an adjusted
          historical combined basis. For 1993, the adjusted historical combined
          data includes the operations of the CP and VF Properties from January
          1, 1993, through their respective dates of acquisition combined with
          the operations of the Company from March 31, 1993 (inception) through
          December 31, 1993.


                                                               - 18 -

<PAGE>



         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 factory outlet centers 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 aggregating 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.

                  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.

                  In March, 1997, the Company purchased five retail community
         shopping centers located in the Raleigh, North Carolina area for
         $32,300,000. The centers total 606,000 square feet and feature anchor
         tenants such as Winn Dixie, Food Lion, K-Mart and Eckerd Drug. The
         centers had revenues in excess of operating expenses, exclusive of
         interest, depreciation, amortization and general and administrative
         expenses, of $3.8 million for the year ended December 31, 1996.

                  During 1997, the Company plans to begin construction on
         expansions at its Crossville, Tennessee and Wilson, North Carolina
         centers, totaling 76,000 square feet. Additionally, the Company is
         currently in the pre-development and marketing stage for a "power"
         outlet mall located in Lake Carmel, New York. The project is planned to
         contain in excess of 300,000 square feet of GLA. If appropriate tenant
         interest is obtained and the appropriate agreements, permits

                                                               - 19 -

<PAGE>



         and approvals are received, the Company intends to commence
         construction in the fall of 1997. No assurance can be given, however,
         that the expansions or project will be developed and/or completed.

                   The Company receives rental revenue through base rent,
         percentage rent, overage rent and expense recoveries from tenants and
         through miscellaneous income including tenant lease buyouts. 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 overage 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, including marketing, real estate taxes,
         insurance, utilities 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,
         utilities, common area maintenance charges and contribute to the
         marketing fund, as of December 31, 1996, approximately 21% of the
         leased GLA of the Company's factory outlet centers is leased to tenants
         whereby they 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 or
         percentage rent to expense recoveries and utility expense.

                  The Company has approximately 181 acres of outparcels located
         near or adjacent to certain centers which are actively being marketed
         for sale or as ground leases. As outparcels are sold and cash received,
         these revenues are available for reinvestment.

         RESULTS OF OPERATIONS

         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 Public
         Employees System of Ohio (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 was $14.8 million, or $1.10 per share, assuming
         full dilution for the issuance of convertible preferred stock in 1996.
         This compares to $12.7 million, or $1.07 per share, for 1995. Factors
         that had a positive impact on 1996 FFO were: (a) $1.1 million, or $0.08
         per share, in improved property level performance as described below
         and (b) $3.8 million, or $0.29 per share, in lower general and
         administrative expenses also as described below. Factors that had a
         negative impact on 1996 FFO were: (a) $2.7 million, or $0.20 per share,
         in higher interest expense due to a higher average borrowing level; (b)
         $0.1 million, or $0.01 per share, in higher depreciation and
         amortization expense on non real estate assets plus (c) $0.13 per share
         resulting from the dilutive effect of the increase in the weighted
         average shares outstanding due to principally the result of the
         issuance of convertible preferred stock. The issuance of the
         convertible preferred stock for $20 million can be attributed to the
         excess ($20.5 million) of the dividend declared on 1995 earnings ($24.1
         million) over the funds available for distribution in 1995 ($3.6
         million).

                  Earnings before interest, taxes, depreciation and amortization
         (EBITDA) was $27.9 million in 1996, an increase of $3.5 million, or
         14%, 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.


                                                               - 20 -

<PAGE>



                  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 the operating and development centers was offset
         by declining rents on renewals at certain 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. Percentage rent represents amounts
         due from tenants based on a specified percentage of the tenants sales
         in excess of a sales break point agreed to in the lease.

                  Recoveries from tenants, representing contractual
         reimbursements from tenants of certain common area maintenance,
         utilities, taxes, insurance and marketing cost, increased in 1996 to
         $11.8 million from $11.1 million in 1995. On a weighted average square
         foot basis, recoveries from tenants increased to $2.85 in 1996 from
         $2.82 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 leased 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 $0.6 million in 1996 compared
         to $0.5 million in 1995 and primarily represented slightly higher lease
         termination settlements.

                  Operating expenses increased $0.3 million, or 2%, to $13.9
         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 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
         $3.8 million, or 44%, to $4.9 million in 1996 from $8.7 million in
         1995. The decrease was due principally to the savings of $3.7 million
         associated with the termination of the 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 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 center in Branson, MO and the
         expansions of the Company's properties in Nebraska City, NE,
         Smithfield, NC and Tupelo, MS. 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

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         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 in the form of Exchangeable Notes, as more fully described in
         footnote 5 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 and 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 $103,000 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 assets 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 is also $15.8 million of debt secured by the properties
         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 has begun the process of marketing the properties
         and no sales agreements have been completed to date. 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.

         YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.

                  The Company reported a net loss of $13.1 million, or $1.11 per
         share, for the year ended December 31, 1995 compared to net income of
         $12.2 million, or $1.04 per share, for the comparable period in 1994.
         The loss resulted from two factors. First, the Company recognized a
         charge of $9.5 million related to the termination of agreements to
         acquire the factory outlet centers owned by the Public Employees System
         of Ohio (OPERS) and certain other reorganization costs. Secondly, the
         Company took a charge against earnings of $8.5 million to reduce the
         carrying amount of certain properties. Exclusive of the above charges,
         net income for 1995 was less than that of 1994 by $7.3 million, or
         $0.62 per share. As more fully described below, this reduction was
         primarily due to higher interest expense and property operating costs.

                  FFO for the year ended December 31, 1995 was $12.7 million or
         $1.07 per share. This compares to $20.6 million, or $1.75 per share,
         for the year ended 1994. Factors that had a negative impact on 1995 FFO
         and contributed to the decrease were: (a) $6.4 million, or $0.55 per
         share, in higher interest expense due to a higher average borrowing
         level and amortization of deferred financing cost; (b) $3.0 million, or
         $0.25 per share, in higher general and administrative cost due to lower
         capitalization of leasing and related costs, expensing of deferred cost
         resulting from the cancellation of the Company's continuing
         participation in the NASCAR motorsports program, future development
         projects no longer being pursued and termination of a long term lease
         on a corporate plane, and (c) higher operating cost per weighted
         average square foot at the properties of $1.6 million, or $0.14 per
         share, due to higher marketing costs, taxes and common area maintenance
         cost.


                                                               - 22 -

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                  Earning before interest, taxes, depreciation and amortization
         (EBITDA) was $24.4 million for the year ended December 31, 1995, a
         decrease of $1.7 million, or 7%, from $26.1 million in 1994. The
         decrease was due primarily to the higher property operating cost and
         general and administrative cost noted above.

                  Base rents increased $2.7 million, or 8%, to $34.6 million in
         1995 from $31.9 million in 1994. The Company's weighted average square
         foot of GLA in operation in 1995 increased 13% from 3.8 million in
         1994 to 4.3 million square feet in 1995 resulting from expansions
         of existing centers and new development. Base rental revenue of $34.6
         million, as reported, includes a charge to the reserve for
         uncollectible tenant accounts of $0.6 million, an increase of 0.4
         million over the 1994 reserve. At December 31, 1995, the average base
         rent per square foot was approximately $7.98 per square foot, as
         compared to $8.27 per square foot in 1994.

                  Percentage rents increased $0.1 million or 16%, to $0.6
         million in 1995 compared to $0.5 million in 1994. Percentage rents
         represent amounts due from tenants based on a specified percentage of
         the tenants sales in excess of a breakpoint agreed to in the lease.

                  Recoveries from tenants, represent contractual reimbursements
         from tenants of certain common area maintenance, real estate taxes,
         utilities and insurance. In lease agreements where the tenant is not
         required to reimburse the Company for real estate taxes, utilities,
         insurance and common area maintenance costs, the Company has allocated
         a portion of the rental amount to tenant recoveries. Recoveries
         decreased $0.2 million, or 2%, to $11.1 million in 1995 from $11.3
         million in 1994. On a weighted average square foot basis, recoveries
         from tenants decreased to $2.82 in 1995 from $2.99 in 1994, or 6%.

                  Other income was $0.5 million in 1995 compared to $0.8 million
         in 1994 and primarily represented lease termination settlements and
         other miscellaneous property level income.

                  Operating expenses increased $3.2 million, or 31%, to $13.6
         million in 1995 from $10.4 million in 1994. The increase was due to
         costs related to the increase in GLA from expansions and developments,
         as well as an increase in the weighted average cost per square foot to
         operate the properties. On a weighted average square foot basis,
         operating expenses increased 7% from $2.77 in 1994 to $3.15 in 1995.
         The increase was due principally to a $0.21 per square foot increase in
         promotional and property marketing expenditures and a $0.16 per square
         foot increase associated with increased repair and maintenance projects
         undertaken by the Company in 1995. For tenants who are not obligated to
         pay directly or to reimburse the Company for utility costs of their
         store, the Company has allocated a portion of their rental revenue to
         offset the utility expense.

                  General and administrative expenses in 1995 include a charge
         of $9.5 million related to the termination of agreements entered into
         in 1995 to acquire the factory outlet centers owned by OPERS and
         certain other reorganization charges. As a result of the Company's
         pursuit of the acquisition, the Company incurred direct costs of
         approximately $4.5 million related to due diligence and $2.0 million
         associated with certain severance agreements. In addition, the Company
         recognized a $3.0 million charge in 1995 due primarily to (a) the
         expensing of deferred cost resulting from the cancellation of the
         Company's participation in 1996 in the NASCAR motorsports program ($1.9
         million), (b) lower capitalization of leasing and development costs
         ($0.4 million), (c) future development projects no longer being pursued
         ($0.4 million) and termination of a long term lease on a plane ($0.2
         million). Exclusive of the $9.5 million charge, general and
         administrative cost increased $0.6 million, or 12%, to $6.3 million in
         1995 from $5.7 million in 1994. The increase was due principally to
         higher personnel and office cost associated with managing a larger
         portfolio and higher spending on the 1995 motorsport program. On a
         weighted average square foot basis, general and administrative expenses
         decreased 3% to $1.46 in 1995 from $1.51 in 1994.

                  Depreciation and amortization increased as a result of the
         larger portfolio of properties in operation during 1995.

                  Interest expense for the year ended December 31, 1995
         increased by $6.5 million, or 146%, to $10.9 million compared to $4.4
         million for the same period in 1994. This increase resulted from higher
         borrowing levels in 1995 compared to 1994, as well as a higher level of
         amortization of deferred financing cost primarily associated with the
         Company's $95 million rated debt securitization in May 1995. On a
         weighted average basis, debt outstanding and the average interest cost
         were approximately $147.1 million and 8.3%, respectively, in 1995
         compared to $64.4 million and 8.5%, respectively, in 1994. Amortization
         of deferred financing cost amounted to $1.5 million in 1995 compared to
         $0.3

                                                               - 23 -

<PAGE>



         million in 1994. The Company capitalized interest cost of $2.6 million
         in 1995 compared to $1.1 million in 1994 due to the increase in
         construction activity.

                  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 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. During
         1995, these properties contribute about $3.0 million of revenue and
         incurred a loss of $0.5 million after deducting related interest
         expense

         LIQUIDITY AND CAPITAL RESOURCES

                  The Company's cash and cash equivalents balance at December
         31, 1996 was $7.0 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 $7.6 million for
         the year ended December 31, 1996. Net cash used in investing activities
         was $17.3 million for 1996. The primary use of these funds included:
         $12.3 million in construction costs, principally $11.2 million for
         completion of a development project in 1996 and the 1996 expansion
         projects, $0.3 million toward completion of the 1995 expansion projects
         and $0.8 million towards normal recurring capital expenditures; $0.7
         million for pre-development cost; and $5.2 million for re-tenanting,
         lease renewal and leasing costs; offset partially by $0.9 million
         reduction in restricted cash. Net cash provided by financing activities
         was $15.0 million for the year ended December 31, 1996. The principal
         source of such funds was $34.6 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
         $1.9 million towards scheduled debt principal repayment and $15.6
         million for distribution to stockholders which included $6.0 million of
         dividends declared in 1995, but paid in 1996.

                  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.

                  In January 1996, the Company borrowed an aggregate of $5.0
         million under two separate short-term promissory notes from Bank One,
         Dayton at prime plus 1% to meet certain cash requirements for certain
         costs arising from the termination of the OPERS factory outlet
         acquisition agreements as discussed below, ongoing construction
         expenditures and the payment of a portion of the dividends to
         stockholders for the fourth quarter of 1995. These promissory notes
         were repaid on April 30, 1996 with a portion of the proceeds from the
         new $75 million credit facility discussed below.

                  In April 1996, the Company closed on a $75 million credit
         facility from Bank One, Dayton. The terms of the credit facility were
         for a period of two years bearing interest at a rate of LIBOR plus
         2.75%. The new credit facility was used to refinance the Company's
         existing line of credit and repay the $5.0 million in short-term
         promissory notes noted above. The $75 million credit facility contained
         various financial covenants which included maintaining minimum interest
         coverage, debt service coverage, debt to market capitalization ratio,
         debt to market value ratio, funded debt to tangible capital funds ratio
         and modified net income ratio as well as maintaining a minimum net
         worth of $165 million which was deemed to include the $20 million of
         Convertible Preferred Stock. Additionally, the covenants precluded the
         Company from paying dividends in excess of 85% of FFO, as defined in
         the agreement, for any fiscal quarter.

                  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.

                                                               - 24 -

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         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, which include Mass Mutual,
         Bank of Scotland and National Union Fire Insurance Company of
         Pittsburgh, were required, subject to certain conditions, 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 on the NYSE 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.

                  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 holder,
         into an aggregate of 2,222,222 shares of the Company's Common Stock.

                  On April 29, 1996, $5 million of the Senior Notes were placed
         at 97% of their face amount. On November 12, 1996, an additional $2.5
         million of the Senior Notes were placed at 100% of their face amount.
         Under the Agreements, these notes mature on the second anniversary of
         the initial funding and bear interest, payable quarterly, at an annual
         rate of 11% during the first year and 13% thereafter until maturity.
         The resulting discount ($150,000) on the Senior Notes is being
         amortized to interest expense over the term of the notes. In March
         1997, the Company repaid the Senior Notes at their face amounts.

                  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 had 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.

                  Under the terms of the purchase agreement to acquire the VF
         Properties, entered into in 1993, 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. The original commitment contemplated the
         completion of two more expansions. Under the terms of the agreement, at
         completion of an expansion and upon payment to VF Corporation of a
         tenant allowance, VF Corporation would renew its lease for its original
         term as of that date. 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. Under the terms of the Amendment Agreement, in lieu of the
         requirement to expand the additional two centers, the Company remained
         obligated to pay a tenant allowance for the two centers and will
         provide for VFFO's benefit nine additional billboards at three center
         locations selected by VFFO for at least three years. Additionally, the
         Amendment Agreement requires that the Company continue to manage and
         market an adjacent factory outlet center at its Sulphur Springs, TX
         center as a single property. The Company entered into a third party
         management agreement with this outlet center in June 1996. 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. As of December 31, 1996, the Company's other unsecured
         notes payable included $2,016,000 due to VFFO for tenant allowances
         which were subsequently paid with the Nomura credit facility discussed
         below.

                  Subsequent to December 31, 1996, the Company obtained a
         $150,000,000 credit facility with Nomura Asset Capital corporation
         which closed on February 19, 1997. The credit facility with Nomura is
         secured by 17 of the

                                                               - 25 -

<PAGE>



         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 will be 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 the $75 million credit facility, the $7.4
         million of Senior Notes and a $2.0 million note payable
         incurred in connection with the acquisition of the VF Properties,
         above. The new credit facility contains financial covenants
         relating to debt to total asset value and net operating income to debt
         service coverage.

                  CAPITAL EXPENDITURES. The Company's capital expenditures have
         included expansions of existing centers and acquisitions of new
         properties.
                 
                  On August 25, 1995, the Company signed definitive
         agreements to acquire 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 conditions. On
         December 7, 1995, the Company reported that RRI had terminated the
         agreements under which the Company would have acquired the properties
         owned by OPERS and the management and business operations of the
         Charter Oak Group, Ltd.

                  As a result of the Company's pursuit of the acquisition, the
         Company incurred direct costs approximating $4.5 million related to the
         performance of due diligence. In addition, in contemplation of a
         successful consummation of the acquisition transaction, the Company
         entered into various severance arrangements aggregating $2.0 million
         with three former executive officers and certain other employees of the
         Company in 1995. The Company has reported the $6.5 million charge as a
         component of general and administrative expense in the 1995 financial
         statements. As of December 31, 1996, approximately $2.2 million of the
         obligation remains outstanding.

                  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 anticipated cost of these
         projects is $42.5 million of which $40.7 million has been expended as
         of December 31, 1996 and has been reclassified from the properties
         under development category for financial statement purposes. The
         remaining $1.8 million anticipated cost represents estimated tenant
         buildouts and allowances. Additionally, the Company is currently in the
         pre-development and marketing stage for a property located in 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 1997.

                  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 $32.3 million. The centers total approximately 606,000 square
         feet of GLA, are well-located and feature well-known regional tenants.
         Management believes that there will be similar opportunities for the
         acquisition of community shopping centers in the United States, and in
         particular, the southeastern region of the country.

                  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, distributions to stockholders,
         acquisitions and planned development and construction activities. The
         $27.5 million raised through the private placement with Gildea and
         Blackacre was used to fund the 1996 developments and expansions, repay
         certain debt obligations, settle certain costs incurred in connection
         with the termination of the OPERS factory outlet acquisition agreements
         and provide additional working capital. The $150 million Nomura credit
         facility will have in excess of $30 million of potential availability

                                                               - 26 -

<PAGE>



         following the retirement of $84.5 million of debt which existed at
         December 31, 1996 and the funding of the acquisition of the five
         community centers in March 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.

                  Dividends declared on 1996 results totaled $9.4 million, or
         $0.75 per share. On April 9, 1996, July 2, 1996 and October 17, 1996,
         the Board of Directors declared cash dividends of $0.25 per share.
         Dividends on the Series A Preferred are to 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. Pursuant to the terms of the
         Series A Convertible Preferred Stock, dividends of $368,000 were paid.
         The dividend payout ratio for the combined preferred and common
         dividends, as a percentage of Funds from Operations assuming full
         dilution, was 64% for the year ended December 31, 1996. The Board of
         Directors determined that the Company would not pay a fourth quarter
         dividend for 1996. In addition, the Company announced that future
         dividends 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.

         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 7.3% of the
         Company's total revenue in 1996. 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, 1996, 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

                                                               - 27 -

<PAGE>



         at a rate higher than rents. Approximately 45% of the Company's debt on
         income properties and notes payable as of December 31, 1996 bore
         interest at rates that adjust periodically based on market conditions.
         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-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 (including the North Hills
         acquisition), 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.

                                                               - 28 -

<PAGE>



                                                              PART III

         ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         DIRECTORS
<TABLE>
<CAPTION>
<S>                      <C>          <C>                             <C>



         NAME              AGE        PRINCIPAL OCCUPATION              DIRECTOR SINCE
----------------------   --------  --------------------------------  ------------------
 C. Cammack Morton         45        President and Chief Executive           1996  
                                     Officer of the Company
 Patrick M. Miniutti       49        Executive Vice President and            1996  
                                     Chief Financial Officer of the
                                     Company
 Robert O. Amick           64        President of The Amick Group            1993  
 B. Mayo Boddie, Sr.       67        Chairman of Boddie-Noell                1993  
                                     Enterprises, Inc.
 J. Richard Futrell, Jr.   66        Former Chairman and Chief               1993  
                                     Executive Officer of Centura
                                     Banks, Inc.
 John W. Gildea            53        Managing Director of Gildea             1996  
                                     Management Company and
                                     Advisor for The Network
                                     Funds
 Theodore E. Haigler, Jr.  72        Former President and Chief              1993  
                                     Executive 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.

         B. Mayo Boddie, Sr. is the Chairman of the Board of Boddie-Noell 
Enterprises, Inc., an operator of Hardee's Restaurant franchises, a position 
he has held since it was founded by Mr. Boddie and his family in 1962.  He is 
also the Chairman of the Board of Boddie-Noell Properties, Inc., a real estate 
investment trust, since 1987.  Mr. Boddie is a director and a member of the 
executive board of First Union National Bank of North Carolina, a subsidiary of 
First Union Corporation.

         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. Mr. Gildea also is
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.

         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.



                                                      - 29 -

<PAGE>



         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          45             President and Chief Executive
                                            Officer
  Patrick M. Miniutti        49             Executive Vice President and Chief
                                            Financial Officer
  Christopher G. Gavrelis    43             Senior Vice President - Management
  Connell L. Radcliff        42             Senior Vice President - Development
  Michaela M. Twomey         45             Senior Vice President and General
                                                   Counsel

                  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. Mr. Morton is
         the immediate past president of the Developers of Outlet Centers, the
         leading trade organization for the owners and operators of factory
         outlet centers. He also serves on the Editorial Advisory Board of
         SHOPPING CENTER WORLD and on the Advisory Board of VALUE RETAIL NEWS, a
         unit of the International Council of Shopping Centers.

                  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. 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.

                  Christopher G. Gavrelis joined the Company in December 1995
         and was named Senior Vice President in January 1996. Prior to his
         affiliation with the Company, Mr. Gavrelis was Vice President of the
         Charter Oak Group for approximately four years. From 1989 to 1991, Mr.
         Gavrelis served as regional property manager for McArthur/Glen Realty
         Corp. (now HGI Realty, Inc.), a company engaged in the development and
         operation of factory outlets centers. Mr. Gavrelis is responsible for
         the Company's management, administration and construction activities.

                  Connell L. Radcliff has served as Senior Vice President of the
         Company 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 
         real estate broker for The Shopping Center Group, a real estate 
         brokerage firm specializing in national tenant representation.  Mr. 
         Radcliff is responsible for the Company's development activities.

                  Michaela M. Twomey joined the Company as Senior Vice President
         and General Counsel in August  1996.  Ms. Twomey was previously with 
         Morrison & Foerster LLP in Washington, D.C. for eleven years where she 
         served as principal outside counsel to the Charter Oak Group since its 
         inception.  Prior thereto, she practiced primarily real estate
         law for seven years.  Ms. Twomey is a member of the bars of the 
         District of Columbia and Virginia as well as the Real Property, Probate
         and Trust Law Section of the American Bar Association.



                                                               - 30 -

<PAGE>



         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, during the
         year ended December 31, 1996, all required Section 16(a) reports were
         filed on a timely basis.

         ITEM 11. EXECUTIVE COMPENSATION

                  The following table sets forth the compensation of (i) the
         Chief Executive Officer, (ii) the three most highly compensated
         executive officers other than the Chief Executive Officer who were
         serving as executive officers at December 31, 1996 and (iii) one former
         executive officer (collectively, the "Named Executive Officers") for
         services rendered in all capacities during 1996.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                                             LONG-TERM
                                                              ANNUAL                        COMPENSATION
                                                           COMPENSATION                        AWARDS
                                   -------------------------------------------- ---------------------------------
                                                                                     RESTRICTED        SECURITIES       ALL OTHER
                                                       SALARY         BONUS          STOCK             UNDERLYING       COMPENSATION
 NAME AND PRINCIPAL POSITION               YEAR         ($)             ($)         AWARD($)          OPTIONS (#)      ($)
---------------------------------     -----------  -----------  ---------------- ----------------  ---------------  ----------------
<S>                                     <C>            <C>            <C>             <C>                <C>       
 C. Cammack Morton                          1996       287,692        112,500(1)       900,000(2)        300,000            3,570(3)
    President and Chief Executive           1995        11,458          --               --               --                 --
    Officer
 Patrick M. Miniutti                        1996        70,769         40,625(1)       776,250(2)        200,000           50,000(4)
    Executive Vice President and Chief
    Financial Officer
 Christopher G. Gavrelis                    1996       129,742         37,500(1)       166,670(2)         35,000            1,163(3)
    Senior Vice President -                 1995         5,208         --                 --             --                 --
    Management
 Connell L. Radcliff                        1996       181,923         37,500(1)          --             --                 3,750(3)
     Senior Vice President -                1995       158,654         41,250             --              18,000            3,332(3)
     Development                            1994       150,000           --               --              --                3,173(3)

 J. Dixon Fleming, Jr.                      1996       300,173           --           900,000(5)          --              770,750(6)
   Former Chairman and Chief Executive      1995       297,000         75,625         900,000(5)          25,000            4,442(3)
   Officer                                  1994       275,000           --               --              --                3,808(3)
</TABLE>
                                                                       
 ------------------
 (1)  The 1996 bonuses were paid in the form of restricted stock, which at the
      time of the award the market price of Common Stock was $6.25 per share.
      The restricted stock issued in lieu of cash bonuses is subject to a
      three year cliff vest.
 (2)  Pursuant to employment agreements entered into between the Company and
      Messrs. Morton, Miniutti and Gavrelis, restricted stock of 90,000, 90,000
      and 16,667 shares, respectively, were issued to each executive. The
      value of the restricted stock is based on the market price of Common
      Stock at the date of grant. At December 31, 1996, the market value of such
      shares were $596,250 for Messrs. Morton and Miniutti and $110,419
      for Mr. Gavrelis.
 (3)  Consists of matching contributions to the Company's 401(k) Retirement and 
      Savings Plan.
 (4)  Allowance for relocation expenses paid by the Company.

                                                         - 31 -

<PAGE>


 (5)  Restricted stock of 90,000 shares originally awarded as a long-term
      incentive with a market value of $10.00 per share Common Stock
      on the date of grant pursuant to Mr. Fleming's employment 
      agreement. Such shares were cancelled upon his termination as an
      officer and director of the Company. Mr. Fleming received the
      equivalent value of 16,000 shares, or approximately $100,000,
      pursuant to his employment agreement, which is included as other
      compensation (see Note (6) below).
 (6)  Includes amounts accrued as of December 31, 1996 representing the 
      remaining value of Mr. Fleming's employment contract (see "Item 
      11 -- Executive Compensation -- Severance Agreements") and 
      matching contributions to the Company's 401(K) Retirement and 
      Savings Plan.

         STOCK OPTIONS

          The following table provides certain information regarding the stock 
options granted during 1996 to the Named Executive Officers.


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


                                           OPTION GRANTS IN LAST FISCAL YEAR
                                              INDIVIDUAL GRANTS
                           ------------------------------------------------------------------
                                                                                                     POTENTIAL REALIZABLE
                                    NUMBER OF                                                         VALUE AT ASSUMED
                                    SECURITIES          PERCENT OF TOTAL                            ANNUAL RATES OF STOCK
                                    UNDERLYING          OPTIONS GRANTED                         PRICE APPRECIATION FOR
                                    OPTIONS             TO EMPLOYEES          EXERCISE   EXPIRATION      OPTION TERM($)
               NAME                 GRANTED (#)         IN FISCAL YEAR(%)     PRICE ($)  DATE             5%        10%
-------------------------- ------------------- -------------------------------- ------------- --------------------------
         C. Cammack Morton          300,000(1)              48.8%             10.25      2/14/06     1,935,000     4,902,000   
         Patrick M. Miniutti        200,000(2)              32.5%             8.625      8/26/06     1,085,000     2,749,000
         Christopher G. Gavrelis     35,000(2)               5.7%             10.25      2/14/06       225,750       571,900
          -----------------

</TABLE>

         (1)      100,000 option share vested upon grant with the remainder at 
                  20% per year.
         (2)      20% vested upon grant with the remainder at 20% per year.

                  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, 1996.

                                    FISCAL YEAR-END OPTION VALUES

                                 NUMBER OF                   VALUE OF
                                 SECURITIES UNDERLYING       IN-THE-MONEY
                                 UNEXERCISED OPTIONS         OPTIONS AT
                                 AT FISCAL                   FISCAL YEAR-END
                                 YEAR-END (#)                    ($)
                                 EXERCISABLE/                EXERCISABLE/
         NAME                    UNEXERCISABLE               UNEXERCISABLE
---------------------  --------------------------  --------------------------
  C. Cammack Morton               100,000/200,000              --
  Patrick M. Miniutti              40,000/160,000              --
  Christopher G. Gavrelis            7,000/28,000              --
  Connell L. Radcliff               30,750/32,500              --
  J. Dixon Fleming, Jr.             64,270/50,180              --



                                                      - 32 -

<PAGE>



         LONG-TERM COMPENSATION

                  The following table sets forth certain information regarding
         long-term incentive awards made to the Named Executive Officers during
         1996 in the form of Restricted Stock.

              LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR

                                                      PERFORMANCE OR
                                 NUMBER OF          OTHER PERIOD UNTIL
        NAME                    SHARES (#)         MATURATION OR PAYOUT
--------------------      ----------------         --------------------
 C. Cammack Morton                  90,000           10 years (1)
 Patrick M. Miniutti                90,000           10 years (1)
 Christopher G. Gavrelis            16,667            3 years (2)
 J. Dixon Fleming, Jr.              90,000           10 years (3)

(1)      Awards increased to 150,000 shares and 120,000 shares, respectively, 
         subsequent to December 31, 1996 for Messrs. Morton and Miniutti with 
         vesting to occur in ten equal annual installments, provided Mr. Morton 
         and Mr. Miniutti continue to be employed by the Company.
(2)      Vesting to occur in three equal annual installments, provided Mr. 
         Gavrelis continues to be employed by the Company.
(3)      The 90,000 shares awarded to Mr. Fleming were canceled upon his 
         termination as an officer and director of the Company.

         EMPLOYMENT AGREEMENTS

                  ANNUAL COMPENSATION AND BASIC TERMS. The Company is a party to
         employment agreements with Messrs. Morton, Miniutti, Gavrelis and
         Radcliff. The agreements with Messrs. Morton and Miniutti were entered
         into in December 1995 and August 1996, respectively, and provide for an
         initial three-year term which is automatically extended for an
         additional year at the end of each year of the agreement, subject to
         the right of either party to terminate as of the end of the
         then-existing three-year term by giving one year's prior written
         notice. The agreement with Mr. Gavrelis was entered into in December
         1995 and provides for an initial two-year term. The agreement with Mr.
         Radcliff was entered into in May 1993 and provided for an initial
         two-year term, which has been extended through May 1997.
          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. Pursuant to recent actions by the
         Independent Directors, following consultations with an executive
         compensation consultant retained by the Executive Compensation
         Committee, the employment agreements will be revised to reflect current
         base annual salaries as follows: Mr. Morton - $330,000; Mr. Miniutti -
         $225,000; Mr. Gavrelis - $160,000; and Mr. Radcliff - $182,000. In
         addition, Messrs. Morton and Miniutti will receive 30,000 shares and
         15,000 shares of restricted stock as part of their annual compensation,
         respectively, based on an equivalent cash value of approximately
         $200,000 and $100,000, respectively. The number of restricted shares
         issued annually will be adjusted on March 1st of each year based on the
         then market price of the stock. Such restricted stock will be 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
         will be 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 (i) the greater of 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 and Miniutti, the product of the number of years representing
         the unexpired term of the agreement and an amount equal to the average
         bonuses paid to such executive over the three years immediately prior
         to termination, and in the case of Messrs. Gavrelis and Radcliff, a pro
         rata portion of any incentive compensation or bonus payable for the
         years of


                                                      - 33 -

<PAGE>



         termination and (iii) certain other accrued benefits. If the employment
         of any executive is terminated due to "change of control" an additional
         two years will added to the unexpired term of the respective
         agreements.

                  LONG-TERM COMPENSATION. Subsequent to December 31, 1996, in
         recognition of the increases in their responsibilities and after
         consultation with an 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
         are being issued pursuant to the Company's 1996 Restricted Stock Plan.
         These restricted shares will 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. Gavrelis was awarded
         16,667 shares of restricted stock which vests in three equal annual
         installments commencing March 1, 1997, provided he continues to be
         employed by the Company.

                  In addition, the employment agreements for Messrs. Morton,
         Miniutti and Gavrelis provide for the grant of options to purchase
         300,000, 200,000 and 35,000 shares of the Common Stock, respectively.
         The Company granted the options to Messrs. Morton and Gavrelis at an
         exercise price of $10.25 per share and at $8.625 per share for Mr.
         Miniutti. The options for Mr. Morton vest on the following schedule:
         100,000 shares at date of grant and 20% of the remainder per year
         thereafter. The options for Messrs. Miniutti and Gavrelis vest at the
         rate of 20% at date of grant and 20% per year thereafter.

         SEVERANCE AGREEMENTS

                  The Company is also party to an employment agreement with Mr.
         Fleming which stipulates an annual base salary of $285,000. Mr.
         Fleming's employment as chief executive officer of the Company
         terminated effective December 31, 1996 and he resigned as Chairman
         effective February 15, 1997. The Company agreed to treat his departure
         as a termination without cause pursuant to the terms of his employment
         agreement with the Company. Pursuant to such agreement, Mr. Fleming is
         entitled to severance payments through December 1998 that are expected
         to aggregate approximately $600,000. He will also be entitled to
         certain other benefits. In addition, pursuant to the agreement, Mr.
         Fleming waived his rights with respect to 90,000 shares of restricted
         stock of the Company, however, he is entitled to receive the equivalent
         value of 16,000 shares, or approximately $100,000 as additional
         compensation. In addition, Mr. Fleming and the Company agreed to modify
         the non-competition provisions of Mr. Fleming's employment agreement to
         permit Mr. Fleming's ownership, management, control or participation in
         the development of outlet shopping centers located outside the United
         States.

                  The Company was party to employment agreements with David A.
         Hodson, John M. Slocum and R. Kenneth Langston, all former officers of
         the Company. In 1995, the Company entered into severance agreements
         with the three former officers which provided them with certain
         severance payments, which the Company recorded as an expense in 1995.
         The severance agreements also provided for the vesting of certain stock
         options and the continued participation in the Company's medical and
         dental insurance plans.

         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
         (as defined in the Option Plan), all nonvested stock options granted
         thereunder become immediately vested and exercisable in full. "Change
         in control" generally is defined


                                                               - 34 -

<PAGE>



         under the Option Plan to occur at such time as any person or group
         beneficially owns at least 25% of the outstanding Common Stock.

         ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
                   MANAGEMENT

                  BY MANAGEMENT. The following table sets forth certain
         information regarding the beneficial ownership of Common Stock of the
         Company as of March 31, 1997 by the: (a) Chief Executive Officer; (b)
         other current executive officers named on the Summary Compensation
         Table; (c) certain former executive officer named on the Summary
         Compensation Table; (d) directors; and (e) current executive officers
         and directors as a group. 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.
<TABLE>
<CAPTION>
<S>                                        <C>                     <C>   

                                          AMOUNT AND NATURE OF         PERCENT
                                          BENEFICIAL OWNERSHIP     OF CLASS (1)
                                         ---------------------    --------------
C. Cammack Morton.............               210,100(2)                 1.39%
Patrick M. Miniutti...........               136,500(3)                   *
Christopher G. Gavrelis.......                29,667(4)                   *
Connell L. Radcliff...........               121,891(5)                   *
Robert O. Amick...............                 4,324(6)                   *
B. Mayo Boddie, Sr............                 5,124(6)                   *
J. Richard Futrell, Jr........                 3,824(7)                   *
John W. Gildea................               885,557(8)                5.85%
Theodore E. Haigler, Jr.......                 4,134(9)                   *
J. Dixon Fleming, Jr..........               373,582(10)               2.47%
All current executive officers and         1,774,703(11)              11.72%
directors as a group (10 persons)
</TABLE>


(1)      An asterisk (*) indicates less than one percent. Class
         includes the common share equivalents of the Convertible
         Preferred Stock and warrants convertible into common stock.
(2)      Includes 108,000 shares of restricted stock as to which Mr. Morton has
         sole voting power, and 100,000 shares subject to presently exercisable 
         options.
(3)      Includes 96,500 shares of restricted stock as to which Mr. Miniutti has
         sole voting power, and 40,000 shares subject to presently exercisable 
         stock options.
(4)      Includes 22,667 shares of restricted stock as to which Mr. Gavrelis has
         sole voting power, and 7,000 shares subject to presently exercisable 
         stock option.
(5)      Includes 6,000 shares of restricted stock as to which Mr. Radcliff has 
         sole voting power, and 30,750 shares subject to presently exercisable 
         stock options.
(6)      Includes 2,000 shares subject to presently exercisable stock options.
(7)      Includes 2,000 shares subject to presently exercisable stock options 
         and 200 shares held by a trust established for the benefit of Mr. 
         Futrell.
(8)      Includes 4,000 shares held by Mr. Gildea's spouse as custodian
         for their children, 111,111 shares of common stock equivalents
         of Convertible Preferred Stock as to which Mr. Gildea has sole
         voting power and 746,666 shares of common stock equivalents of
         Convertible Preferred Stock and warrants convertible into
         20,000 shares of common stock owned by Network Fund III, Ltd.
         ("Network") as to which Mr. Gildea is a director of Network
         and a Managing Director of Gildea Management Company, which
         has an investment advisory agreement with Network.


                                                        - 35 -

<PAGE>



(9)      Includes 2,000 shares subject to presently exercisable stock
         options and ten shares held by Mr. Haigler as a custodian under the 
         Uniform Gifts to Minors Act.
(10)     Includes 64,270 shares subject to presently exercisable options and 
         100 shares held by Mr. Fleming's spouse.
(11)     Includes 250,020 shares subject to presently exercisable options, 
         857,777 shares of common stock equivalents of Convertible Preferred 
         Stock and warrants convertible into 20,000 shares of common stock.

                  BY OTHERS. The following table sets forth certain information
         regarding each person or entity known by the Company to be the
         beneficial owner of more than 5% of the Company's Common Stock as of
         March 31, 1997.


 NAME AND ADDRESS OF            AMOUNT AND NATURE OF
  BENEFICIAL OWNER             BENEFICIAL OWNERSHIP        PERCENT OF CLASS (1)
---------------------        ------------------------   -----------------------
Jeffrey B. Citrin(2)                       807,222(3)                    5.33%
950 Third Avenue
17th Floor
New York, NY 10022

(1)      Class includes the common stock equivalents of the Convertible
         Preferred Stock and warrants convertible into common stock.
(2)      Based upon a Schedule 13D dated July 22, 1996 filed with the Securities
         and Exchange Commission.
(3)      Includes 547,222 shares of common stock equivalents as to which 
         Blackacre Capital Group, L.P. possess voting and investment control 
         over and warrants convertible into 260,000 shares of common stock as to
         which Blackacre Bridge Capital, L.L.C. is the record holder. Jeffrey 
         B. Citrin is the President of Blackacre Capital Management Corp., the 
         general partner of Blackacre Capital Group, L.P. and the managing 
         member of Blackacre Bridge Capital, L.L.C.

         ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                                                        
     On May 5, 1995 the Company purchased three parcels of land near its
Smithfield, North Carolina factory outlet center totaling 4.94 acres for
$735,000 from two partnerships, of which former executive officers and their
affiliates are general partners. The parcels were used as part of the expansion
of the Smithfield center.

     In 1994, the Company's Board of Directors approved acquisition of certain
land adjacent to one of the Company's existing outlet centers for potential
expansion of that center. The cost of the land acquisition was $400,000. The
seller of the land was a partnership whose partners include former executive
officers of the Company.

                                                                            
     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 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.

     The Company has granted Mr. Fleming an option to purchase the Company's
interest in a project to develop international outlet centers for an amount
equal to the Company's total costs plus interest. Mr. Fleming has also agreed to
be responsible for the costs of the project in excess of $250,000. The option
expires on December 31, 1997. In the event such option is not exercised, the
Company has agreed to negotiate a similar option, exercisable in 1998 for the
greater of (i) the fair market value of such investment, or (ii) $250,000 plus
interest.


                                                               - 36 -

<PAGE>



                                     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

                Report of independent auditors............................ F-1

                Consolidated balance sheets as of December 31, 1996 
                and 1995.................................................. F-2

                Consolidated statements of operations for the years ended
                December 31, 1996, 1995 and 1994.......................... F-3

                Consolidated statements of stockholders' equity for years
                ended December 31, 1996, 1995 and 1994.................... F-4

                Consolidated statements of cash flows for the years
                ended December 31, 1996, 1995 and 1994.................... F-5

                Notes to consolidated financial statements................ F-6


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

                Schedule III - Real Estate and Accumulated Depreciation... F-25

                    
                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:

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


 Exhibit
 Number                                                                            Exhibit Description

 3.1       Second Restated Certificate of Incorporation (1)

 3.2       Articles of Amendment of Factory Stores of America, Inc., dated 
           July 1, 1996 (2)

 3.3       Certificate of Designation, Preferences and Rights of the Series A 
           Convertible Preferred Stock of FAC Realty, Inc., dated July 1, 1996 (3)

 3.4       Amended and Restated Bylaws of FAC Realty, Inc.

 4.1       Specimen Common Stock Certificate

 4.2       Specimen Series A Preferred Stock Certificate

 10.1      Amended and Restated Employment Agreement between the Company and 
           J. Dixon Fleming, Jr.(4)

 10.2      Second Amended and Restated Employment Agreement between the Company and
           C. Cammack Morton (4)

 10.3      Employment Agreement between the Company and John N. Nelli (4)



                                                               - 37 -

<PAGE>



  10.4      First Amendment to Employment Agreement between the Company and 
            John N. Nelli (4)

  10.5      First Amendment to Employment Agreement between the Company and 
            Connell L. Radcliff (4)

  10.6      Employment Agreement between the Company and Christopher G. 
            Gavrelis (4)

  10.7      Severance Agreement between the Company and David A. Hodson (4)

  10.8      Severance Agreement between the Company and John M. Slocum (4)

  10.9      Severance Agreement between the Company and R. Kenneth Langston (4)

  10.10     Factory Stores of America, Inc. Amended and Restated 1993 Employee 
            Stock Option Plan

  10.11     1995 Directors' Stock Award Plan

  10.12     Factory Stores of America, Inc. 1996 Restricted Stock Plan

  10.13     Restricted Stock Agreement between the Company and J. Dixon 
            Fleming, Jr.(4)

  10.14     Restricted Stock Agreement between the Company and C. Cammack 
            Morton (4)

  10.15     Restricted Stock Agreement between the Company and John N. Nelli (4)

  10.16     Employment Agreement between the Company and Patrick M. Miniutti

  10.17     Employment Agreement between the Company and Michaela M. Twomey

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

  10.19     Restricted Stock Agreement between the Company and Michaela M.
            Twomey

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

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

  10.22     Incentive Stock Option Agreement between the Company and Michaela M.
            Twomey

  10.23     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 (5)

  10.24     Master Servicing Agreement by and between FSA Finance, Inc., as
            issuer, Bank One, Columbus, National Association, as trustee, and
            Fleet Management and Recovery Corporation, as master servicer(6)

  10.25     Specimen copies of the various types of Class A, B, C and R Notes
            (7)

  10.26     Mortgage Note given by FSA Properties, Inc., as maker, in favor of
            The Travelers Insurance Company, as payee (8)

  10.27     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 (9)

  10.28     Gap Note given by FSA Properties, Inc., as maker, in favor of The 
            Travelers Insurance Company, as payee (10)

                                                               - 38 -

<PAGE>



 10.29     Mortgage Loan Purchase Agreement by and between The Travelers 
           Insurance Company, as seller, and FSA Finance, Inc., as purchaser
           (11)

 10.30     Note Purchase Agreement by and among the Company, Blackacre Bridge 
           Capital, L.L.C. ("Blackacre") and Gildea Management Company 
           ("Gildea"), dated as of April 2, 1996 (12)

 10.31     Amendment No. 1 to Note Purchase Agreement by and among the Company, 
           Blackacre and Gildea, dated as of April 12, 1996

 10.32     Amendment No. 2 to Note Purchase Agreement by and among the Company, 
           Blackacre and Gildea, dated as of November 12, 1996

 10.33     Addendum to Note Purchase Agreement by and among the Company, 
           Blackacre, Gildea and Network Funds III, Ltd. (13)

 10.34     Addendum to Note Purchase Agreement by and among the Company, 
           Blackacre, Gildea and John W. Gildea (14)

 10.35     Addendum to Note Purchase Agreement by and among the Company, 
           Blackacre, Gildea and Blackacre Capital Group, LLP (15)

 10.36     Addendum to Note Purchase Agreement by and among the Company, 
           Blackacre, Gildea and Blackacre Holdings, LLC

 10.37     Addendum to Note Purchase Agreement by and among the Company, 
           Blackacre, Gildea and National Union FireInsurance Company of 
           Pittsburgh

 10.38     Addendum to Note Purchase Agreement by and among the Company, 
           Blackacre, Gildea and Network Funds III, Ltd.

 10.39     Warrant Agreement between the Company and Blackacre (16)

 10.40     Warrant Agreement between the Company and Blackacre

 10.41     Warrant Agreement between the Company and National Union Fire 
           Insurance Company of Pittsburgh

 10.42     Warrant Agreement between the Company and Network Fund III, Ltd.

 10.43     Line of Credit Agreement between FAC Realty, Inc. and Nomura Asset 
           Capital Corporation, dated February 19, 1997 (17)

 21        Subsidiaries of the Registrant

 23        Consent of Ernst & Young, LLP
</TABLE>

 --------------

   (1)  Incorporated herein by reference to Exhibit 3.1 to the Company's 
        Registration Statement on Form S-11 (File No. 33-71558).

   (2)  Incorporated by reference to Exhibit 3.1 of the Company's
        Current Report on Form 8-K filed with the Commission on
        July 10, 1996.

   (3)  Incorporated by reference to Exhibit 3.2 of the Company's
        Current Report on Form 8-K filed with the Commission on
         July 10, 1996.


                                                               - 39 -

<PAGE>



  (4)  Incorporated herein by reference to the document filed
       under the same Exhibit number to the Company's Form 10-K
       filed with the Commission on April 16, 1996.

  (5)  Incorporated herein by reference to Exhibit 10.12 to the Company's 
       Current Report on Form 8-K filed with the Commission on May 31, 1995.

  (6)  Incorporated herein by reference to Exhibit 10.13 to the Company's 
       Current Report on Form 8-K filed with the Commission on May 31, 1995.

  (7)  Incorporated herein by reference to Exhibit 10.14 to the Company's 
       Current Report on Form 8-K filed with the Commission on May 31, 1995.

  (8)  Incorporated herein by reference to Exhibit 10.15 to the Company's 
       Current Report on Form 8-K filed with the Commission on May 31, 1995.

  (9)  Incorporated herein by reference to Exhibit 10.16 to the Company's 
       Current Report on Form 8-K filed with the Commission on May 31, 1995.

  (10)Incorporated herein by reference to Exhibit 10.17 to the
       Company's Current Report on Form 8-K filed with the
       Commission on May 31, 1995.

  (11)Incorporated herein by reference to Exhibit 10.18 to the
       Company's Current Report on Form 8-K filed with the
       Commission on May 31, 1995.

  (12)Incorporated herein by reference to Exhibit 10.1 to the
       Company's Current Report on Form 8-K filed with the
       Commission on July 10, 1996.

  (13)Incorporated herein by reference to Exhibit 10.23 to the
       Company's Form 10-K filed with the Commission on April
       16, 1996.

  (14)Incorporated herein by reference to Exhibit 10.24 to the
       Company's Form 10-K filed with the Commission on April
       16, 1996.

  (15)Incorporated herein by reference to Exhibit 10.25 to the
       Company's Form 10-K filed with the Commission on April
       16, 1996.

  (16)Incorporated herein by reference to Exhibit 10.26 to the
       Company's Form 10-K filed with the Commission on April
       16, 1996.

  (17)Incorporated herein by reference to Exhibit 2.1 to the
       Company's Form 8-K filed with the Commission on March 10,
       1997.

                                               - 40 -

<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.

                                   FACTORY STORES OF AMERICA, INC.



                                   By /s/ C. CAMMACK MORTON
                                   C. Cammack Morton, President, Chief Executive
                                   Officer and Director


                  Pursuant to the requirements of the Securities Exchange Act of
         1934, this report has been signed by the following persons on behalf of
         the Registrant and in the capacities indicated on the 11th day of
         April, 1997.

<TABLE>


<S>                                       <C>     
 /s/ C. CAMMACK MORTON                    Director, President and Chief Executive Officer
 C. Cammack Morton                        (principal executive officer)


 /s/ PATRICK M. MINIUTTI                  Director, Exec. Vice President and Chief Financial Officer
 Patrick M. Miniutti                      (principal financial officer and accounting officer)


 /s/ ROBERT O. AMICK                       Director
 Robert O. Amick


 /s/ B. MAYO BODDIE, SR.                   Director
 B. Mayo Boddie, Sr.


 /s/ J. RICHARD FUTRELL, JR.               Director
 J. Richard Futrell, Jr.


 /s/ THEODORE E. HAIGLER, JR.              Director
 Theodore E. Haigler, Jr.


 /s/ JOHN W. GILDEA                     
 John W. Gildea                            Director
 
</TABLE>


                                                       - 41 -

<PAGE>


                                FAC REALTY, INC.
                    AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994



               INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<S>                                                                                                   <C>
Report of Independent Auditors........................................................................F-1

Consolidated Balance Sheets as of December 31, 1996, and 1995.........................................F-2

Consolidated Statements of Operations for the years ended December 31, 1996,
   1995 and 1994......................................................................................F-3

Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1996, 1995 and 1994....................................................................F-4

Consolidated Statements of Cash Flows for the years ended
   December 31, 1996, 1995 and 1994...................................................................F-5

Notes to Consolidated Financial Statements............................................................F-6

Schedule III - Real Estate and Accumulated Depreciation..............................................F-25

</TABLE>


<PAGE>



                         Report of Independent Auditors


Board of Directors and Stockholders
FAC Realty, Inc.


We have audited the accompanying consolidated balance sheets of FAC Realty, Inc.
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule 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, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information required to be set forth therein.


                                                               ERNST & YOUNG LLP

Raleigh, North Carolina
January 31, 1997, except for Notes 10 and 12
  as to which the date is March 27, 1997


                                      F-1
<PAGE>


                                FAC REALTY, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                       1996                 1995
                                                                              ------------------------------------------
                                                                                           (IN THOUSANDS)
<S>                                                                              <C>                    <C>
                                                        ASSETS
INCOME PRODUCING PROPERTIES (NOTES 2,4 AND 6):
   Land                                                                          $      77,011          $    71,668
   Buildings and improvements                                                          259,383              222,524
   Deferred leasing and other charges                                                   17,635               13,416
                                                                              --------------------------------------------
                                                                                       354,029              307,608
   Accumulated depreciation and amortization                                           (36,027)             (24,004)
                                                                              --------------------------------------------
                                                                                       318,002              283,604
   Properties under development (NOTE 9)                                                 2,538               32,837
   Properties held for sale (NOTE 13)                                                   11,438               16,589
 OTHER ASSETS:
   Cash and cash equivalents                                                             7,034                1,655
   Restricted cash                                                                       3,860                4,806
   Tenant and other receivables                                                          5,864                5,245
   Deferred charges and other assets (NOTE 3)                                            9,876               10,359
                                                                              --------------------------------------------
                                                                              $     358,612          $   355,095
                                                                              ============================================

                                          LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
   Debt on income properties (NOTES 4 AND 12)                                      $   173,695           $  170,067
   Unsecured senior notes (NOTES 5 AND 12)                                               7,420                    -
   Other unsecured notes (NOTE 12)                                                       2,542                  844
   Capital lease obligations (NOTE 6)                                                      826                  797
   Accounts payable and other liabilities                                                9,537               16,876
   Dividends payable                                                                         -                6,025
                                                                              --------------------------------------------
                                                                                       194,020              194,609
                                                                              --------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 4, 9 AND 11)

STOCKHOLDERS' EQUITY (NOTES 5 AND 8):
   Convertible preferred stock, Series A, 5,000,000 shares authorized,
     800,000 issued and outstanding in 1996                                             19,162                    -
   Stock purchase warrants                                                                   9                    -
   Common stock, $0.01 par value, 45,000,000 shares authorized, 12,100,955
     and 11,814,523 issued and outstanding in 1996 and 1995, respectively                  121                  118
   Additional paid-in capital                                                          147,346              160,368
   Retained earnings                                                                         -                    -
   Deferred compensation - Restricted Stock Plan                                        (2,046)                   -
                                                                              --------------------------------------------
                                                                                       164,592              160,486
                                                                              --------------------------------------------
                                                                                    $  358,612           $   355,095
                                                                              ============================================

</TABLE>

SEE ACCOMPANYING NOTES.



                                      F-2
<PAGE>


                                FAC REALTY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                        1996               1995             1994
                                                              -------------------------------------------------------
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                <C>                <C>               <C>        
RENTAL OPERATIONS:
   Revenues:
      Base rents                                                   $    34,099        $    34,584       $    31,920
      Percentage rents                                                     633                616               531
      Property operating cost recoveries                                11,757             11,065             8,786
      Other income                                                         644                519               840
                                                              -------------------------------------------------------
                                                                        47,133             46,784            42,077
                                                              -------------------------------------------------------
   Property operating costs:
      Common area maintenance                                            6,037              5,518             4,191
      Utilities                                                          1,121                970               828
      Real estate taxes                                                  5,098              4,733             4,096
      Insurance                                                            684                589               513
      Marketing                                                            996              1,838               826
                                                              -------------------------------------------------------
                                                                        13,936             13,648            10,454
   Depreciation and amortization                                        13,802             11,900             8,511
                                                              -------------------------------------------------------
                                                                        27,738             25,548            18,965
                                                              -------------------------------------------------------
                                                                        19,395             21,236            23,112
                                                              -------------------------------------------------------
OTHER EXPENSES:
   General and administrative (NOTE 11)                                  6,238             15,279             5,567
   Interest                                                             14,175             10,903             4,435
                                                              -------------------------------------------------------
                                                                        20,413             26,182            10,002
                                                              -------------------------------------------------------
                                                                        (1,018)            (4,946)           13,110
                                                              -------------------------------------------------------
PROPERTY SALES AND ADJUSTMENTS:
   Adjustment to carrying value of assets (NOTE 13)                     (5,000)            (8,500)                -
   Gain on sale of outparcel land                                           37                345                 -
                                                              -------------------------------------------------------
                                                                        (4,963)            (8,155)                -
                                                              -------------------------------------------------------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                 (5,981)           (13,101)           13,110
   Extraordinary loss on early extinguishment of debt (NOTE 3)            (103)                 -              (884)
 
                                                              _______________________________________________________
NET INCOME (LOSS)                                                  $    (6,084)       $   (13,101)      $    12,226
                                                              =======================================================

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM APPLICABLE TO COMMON
   SHAREHOLDERS                                                   $     (6,349)       $   (13,101)      $   13,110
                                                              =======================================================

EARNINGS PER COMMON SHARE:
   Income (loss)  before extraordinary item                        $     (0.54)       $    (1.11)       $     1.11
   Extraordinary item                                                    (0.01)                 -            (0.07)
                                                              -------------------------------------------------------
NET INCOME (LOSS)                                                  $     (0.55)       $    (1.11)       $     1.04
                                                              =======================================================
                                                              
WEIGHTED AVERAGE NUMBER OF  COMMON SHARES OUTSTANDING                   11,817             11,814            11,811
                                                              =======================================================
</TABLE>

SEE ACCOMPANYING NOTES.

                                      F-3
<PAGE>


                                FAC REALTY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                                                               DEFERRED
                                               CONVERTIBLE  STOCK                     ADDITIONAL            COMPENSATION
                                                PREFERRED  PURCHASE COMMON             PAID IN    RETAINED   RESTRICTED 
                                                 STOCK     WARRANTS STOCK              CAPITAL    EARNINGS   STOCK PLAN   TOTAL
                                               -------------------------------------------------------------------------------------
                                                                   (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S>                                             <C>         <C>    <C>              <C>         <C>        <C>          <C>      
BALANCE AT DECEMBER 31, 1993                    $      -    $  -   $ 115            $ 205,548   $     986  $     -      $ 206,649
   Issuance of 300,800 shares, $0.01 par
     value, common stock, net                          -       -       3                6,788           -        -          6,791
   Net income                                          -       -       -                    -      12,226        -         12,226
   Common dividends declared ($1.89 per share)         -       -       -               (9,114)    (13,212)       -        (22,326)
                                               ------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994                           -             118              203,222           -        -        203,340
   Issuance of directors stock awards                  -       -       -                   18           -        -             18
   Net loss                                            -       -       -                    -     (13,101)       -        (13,101)
   Common dividends declared ($2.52  per share)        -       -       -              (42,872)     13,101        -        (29,771)
                                               -------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995                           -       -     118              160,368           -        -        160,486
   Issuance of convertible preferred stock        19,162       -       -                    -           -        -         19,162
   Issuance of directors stock awards                  -       -       -                   29           -        -             29
   Issuance of restricted stock awards                 -       -       4                3,334           -   (3,338)             -
   Issuance of stock purchase warrants                 -       9       -                    -           -        -              9
   Compensation under restricted stock plan            -       -       -                    -           -      392            392
   Cancellation of restricted stock awards             -       -      (1)               (899)           -      900              -
   Net loss                                            -       -       -                    -      (6,084)       -         (6,084)
   Preferred dividends declared ($.46 per              -       -       -                 (368)           -       -           (368)
     share)
   Common dividends declared ($.75 per share)          -       -       -              (15,118)      6,084        -         (9,034)
                                               ___________________________________________________________________________________
BALANCE AT DECEMBER 31, 1996                     $19,162     $ 9    $121             $147,346    $      -  $(2,046)      $164,592
                                               =====================================================================================
</TABLE>

SEE ACCOMPANYING NOTES.


                                      F-4
<PAGE>



                                FAC REALTY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                       1996           1995            1994
                                                               ----------------------------------------------------
                                                                                 (IN THOUSANDS)
<S>                                                              <C>               <C>             <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income  (loss)                                            $    (6,084)      $   (13,101)    $    12,226
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
       Adjustment to carrying value of assets                          5,000             8,500               -
       Depreciation and amortization                                  13,802            11,900           8,511
       Extraordinary loss on early extinguishment of debt                103                 -             884
       Amortization of deferred financing costs                        1,422             1,552             287
       Compensation under restricted stock plan                          392                 -               -
       Net changes in:
         Tenant and other receivables                                   (619)              828          (3,003)
         Deferred charges and other assets                               122             3,968          (2,605)
         Accounts payable and other liabilities                       (6,489)            8,431           4,374
                                                               ----------------------------------------------------
          NET CASH PROVIDED BY OPERATING ACTIVITIES                    7,649            22,078          20,674
                                                               ----------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Investment in income-producing properties                        (18,234)          (46,048)        (32,892)
    Acquisition of  income-producing properties, net                       -                 -         (51,827)
    Change in restricted cash                                            946            (4,806)              -
                                                               ----------------------------------------------------
          NET CASH USED IN  INVESTING ACTIVITIES                     (17,288)          (50,854)        (84,719)
                                                               ----------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from debt on income properties                             5,061           139,672         101,193
    Proceeds from exchangeable notes                                   20,000                -               -
    Proceeds from other debt                                            9,580               582           1,775
    Deferred financing charges                                         (2,289)           (4,361)         (4,463)
    Debt repayments                                                    (1,936)          (71,294)        (34,957)
    Payable related to acquisition of properties                            -           (11,737)         11,737
    Net proceeds from sale of common stock                                 29                18           6,791
    Distributions to stockholders                                     (15,427)          (23,746)        (22,326)
                                                               ----------------------------------------------------
          NET CASH PROVIDED BY FINANCING ACTIVITIES                    15,018            29,134          59,750
                                                               ----------------------------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    5,379               358          (4,295)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                        1,655             1,297           5,592
                                                               ____________________________________________________
CASH AND CASH EQUIVALENTS AT END OF PERIOD                          $   7,034         $   1,655       $   1,297
                                                               ====================================================
                                                               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest (net of
 interest capitalized of $1,974 in 1996,
 $2,567 in 1995, $1,059 in 1994)                                    $  15,347         $   9,848       $   6,631
                                                                ====================================================
    Dividend declared not paid                                      $       -         $   6,025       $       -
                                                               ====================================================

</TABLE>

SEE ACCOMPANYING NOTES.



                                      F-5
<PAGE>

                                FAC REALTY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

1.   ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION

FAC Realty, Inc. (the "Company"), formerly Factory Stores of America, 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
development, ownership, acquisition, and operation of factory outlet and
community shopping centers. The Company's revenues are primarily derived under
real estate leases with national, regional and local retailing companies.

The properties owned by the Company consist of: (1) 21 enclosed and 12
unenclosed factory outlet centers in 20 states aggregating approximately
4,600,000 square feet; (2) five community shopping centers located in the
Raleigh, NC area (see Note 12); (3) two unenclosed factory outlet centers held
for sale aggregating approximately 150,000 square feet; (4) one former factory
outlet center which is being converted to commercial office use with
approximately 150,000 square feet that is held for sale; and (5) approximately
181 acres of outparcel land located near or adjacent to certain of the Company's
centers and is actively 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.

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, FSA Properties, Inc., which was formed
on December 30, 1994 to hold the assets and liabilities of 18 of the Company's
outlet centers in connection with the Company's $70 million bridge financing
(see Note 2). As of December 31, 1996 and 1995, the consolidated financial
statements also include the accounts of FSA Finance, Inc., a wholly owned
subsidiary formed on May 22, 1995 in connection with a $95 million securitized
debt offering (see Note 3). As of December 31, 1996, the consolidated financial
statements also include the accounts of FAC Outparcels, Inc., a majority owned
subsidiary formed on February 22, 1996 to hold certain outparcels which the
Company is marketing for sale or lease. All significant intercompany balances
have been eliminated in consolidation.




                                      F-6
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.   ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

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,
tenant improvements, 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 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, 15 years for
land improvements and 5 to 10 years for equipment.

       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.

       Properties under development include costs related to new development and
expansions in process totaling approximately $2.5 million and $32.8 million at
December 31, 1996 and 1995, respectively. The pre-construction stage of project
development involves certain costs to secure land and zoning and 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.

       The Company adopted the Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of" ("FAS 121") as of January 1, 1996. The pronouncement requires that
certain long-lived assets be reviewed for potential impairment when
circumstances indicate that the carrying amount of such assets may not be
recoverable. Additionally, FAS 121 requires that certain long-lived assets held
for disposition (see Note 13) be reported at the lower of the carrying amount or
fair value less any selling costs.

                                      F-7
<PAGE>


                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       Properties held for sale, at their expected net realizable values, have
been separately classified in the accompanying balance sheet at December 31,
1996. As a result of the Company's intent to sell three outlet center
properties, the Company recognized a charge to 1996 earnings of $5.0 million and
to 1995 earnings of $8.5 million to reduce the carrying amount of these centers
to their estimated net realizable value.

       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 $2.0 million, $2.6 million and $1.1 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Interest expense
includes amortization of deferred financing costs (see Note 3) 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
to approximately $3.9 and $4.8 million at December 31, 1996 and 1995,
respectively.

       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 rents and other receivables from tenants 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 and reimbursement of real estate taxes, insurance, advertising,
utilities and certain common area maintenance (CAM) costs. These additional
rents 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 the rental amount to tenant
recoveries. 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 rental revenue to offset the utility expense.



                                      F-8
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

      2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       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.

       ACCRUED EXPENSES

       Due to potential environmental issues associated with the properties
acquired by the Company and the properties adjacent to the Company's properties,
the Company accrued for the potential remediation costs at the date of
acquisition of the properties. At December 31, 1996 and 1995, accrued expenses
include $500,000 for the potential remediation costs based on the Company's
review of environmental assessments.

       STOCK OPTIONS

       In October 1995, FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("FASB 123"). FASB 123 encourages companies to adopt
the fair value method for expense recognition of employee stock options. FASB
123 also allows companies to continue to account for stock options and stock
based awards using the intrinsic value method as outlined under Accounting Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and to
make pro forma disclosures of net income and net income per share as if the fair
value method had been applied. Currently, the Company uses APB 25 in accounting
for its stock options and stock based awards and will continue to apply APB 25
for future stock options and stock based awards.

       EARNINGS PER SHARE

       Primary earnings per common share amounts are computed by dividing income
less preferred dividends ($368,000 for the year ended December 31, 1996) by the
weighted average number of common shares actually outstanding for the years
ended December 31, 1996, 1995 and 1994 of 11,817,000, 11,814,000, and
11,811,000, respectively, which exclude unvested restricted shares. Under fully
diluted earnings computation per share amounts would be based on income divided
by the weighted average number of common shares as increased by the number of
shares that would be outstanding assuming conversion of the Convertible
Preferred Stock. Fully diluted earnings per share amounts are not presented
because the effect of such inclusion would be to increase earnings per share.
Shares issuable under employee stock options and the warrant agreements (see
Note 5) are excluded from the weighted average number of shares on the
assumption that their effect is not dilutive because the market price of the
stock did not exceed the exercise price for the reporting period.


                                      F-9
<PAGE>


                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

      2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       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, 1995 and 1994, distributions were paid of $0.75, $2.52, and
$1.89, respectively. The ordinary income, return of capital and long-term gain
portions of such distributions for each year are indicated in the table below:

<TABLE>
<CAPTION>
                                                    1996              1995           1994
                                              ---------------- ---------------- ------------------

<S>                                                 <C>                <C>            <C>  
       Ordinary income                              24.7%              0.0%           61.4%
       Return of capital                            74.9              98.8            38.6
       Long-term gains                               0.4               1.2             0.0
                                              ________________ ________________  _________________
                                                     100%              100%            100%
                                              ================ ================ ==================
</TABLE>

       There were no accrued dividends as of December 31, 1996.

       RECLASSIFICATIONS

       Certain 1995 and 1994 financial statement amounts have been reclassified
to conform with 1996 classifications. These reclassifications had no effect on
net income or stockholders' equity as previously reported.

       3.  DEFERRED CHARGES AND OTHER ASSETS

       Deferred charges and other assets as of December 31 are summarized as
follows (in thousands):

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

<S>                                                           <C>                 <C>          
          Deferred financing costs                            $       5,915       $       5,898
          Prepaid expenses                                              518                 607
          Other assets                                                3,443               3,854
                                                             __________________________________
                                                                     $9,876             $10,359
                                                             =======================================

</TABLE>

                                      F-10
<PAGE>


                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.    DEFERRED CHARGES AND OTHER ASSETS (CONTINUED)

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.

As described in Note 4, on April 30, 1996 the Company refinanced its existing
credit line and in connection therewith the related deferred financing costs of
$103,000 were written off as an extraordinary loss.

OTHER ASSETS

During 1993, as part of the VF acquisition (see Note 9), 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 $3.1 and
$3.6 million at December 31, 1996 and 1995, 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.

4.   DEBT ON INCOME PROPERTIES

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

<TABLE>
<CAPTION>
                                                                                1996             1995
                                                                          -----------------------------------
<S>                                                                           <C>             <C>
Class A Notes payable in 85 monthly principal payments ranging from
   approximately $104 to $173 determined using various parameters plus
   weighted average monthly interest payments at 7.42%.  Unpaid
   principal and accrued interest due June 1, 2002.                           $ 55,907         $ 57,257
Class B Notes - monthly interest payments at 7.78% with entire balance
   due June 1, 2002.                                                            20,000           20,000
Class C Notes - monthly interest payments at 8.31% with entire balance
   due June 1, 2002.                                                            17,000           17,000
Note payable to a financial institution with 45 monthly principal and
   interest payments of approximately $59 at a stated rate of prime plus 2 1/4%
   and one final payment of the entire principal balance and unpaid accrued
   interest payable due on March 23, 1998. Collateralized by a construction deed
   of trust, a financing statement, and a security agreement and fixture filing
   (with assignment of rents and leases).                                        5,788            5,871
   
Credit facility with a financial institution, $75,000,000 and $70,000,000
   available as of December 31, 1996 and 1995, respectively, interest at a rate
   of LIBOR plus 2.75%, amount outstanding paid in full 
   in February 1997.                                                            75,000           69,939
                                                                          _____________________________
                                                                             $ 173,695     $     170,067
                                                                          ===================================
</TABLE>

                                      F-11
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.   DEBT ON INCOME PROPERTIES (CONTINUED)

On May 22, 1995, the Company closed a $95 million rated debt securitization (the
"Mortgage Notes") by FSA Finance, Inc. The total offering of $95 million
consisted of $58 million of Class A Notes rated "AA"; $20 million of Class B
Notes rated "A"; and $17 million of Class C Notes rated "BBB". Interest on the
Class A Notes, Class B Notes and Class C Notes is payable monthly in arrears at
rates per annum equal to 7.42%, 7.78% and 8.31%, respectively. The Company used
these proceeds to repay a $70 million bridge loan, applied $16 million to reduce
the Company's existing revolving credit line, fund escrow reserves and applied
the balance to pay certain expenses related to the issuance and sale of the
Mortgage Notes. The Mortgage Notes are secured by a cross-collateralized
mortgage which covers 18 factory outlet centers owned by FSA Properties, Inc.

Principal of the Class A Notes is paid monthly in accordance with an
amortization schedule calculated based upon level debt service payments in
respect of the Mortgage Notes, the weighted average interest rate on the
Mortgage Notes (7.67%) and a 25-year amortization schedule. The remaining unpaid
principal of the Mortgage Notes is scheduled to be paid as a balloon payment on
June 1, 2002 (the "Scheduled Maturity Date"). Neither the Class B Notes nor the
Class C Notes will receive scheduled note principal payments prior to the
Scheduled Maturity Date. At the Scheduled Maturity Date the entire principal
amount of each of the Class B Notes and the Class C Notes is scheduled to be
paid as a balloon payment.

The 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.

On April 30, 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 related unamortized loan costs of $103,000 which has been
classified as an extraordinary item in the accompanying consolidated statements
of operations. In February 1997, the Company closed a $150 million line of
credit facility with Nomura Asset Capital Corporation, replacing this $75
million credit facility (see Note 12).

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

         1997                                 $    76,353
         1998                                       7,383
         1999                                       7,383
         2000                                       1,822
         2001                                       1,964
         Thereafter                                78,790
                                         --------------------
                                              $   173,695
                                         ====================


                                      F-12
<PAGE>



                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.   DEBT ON INCOME PROPERTIES (CONTINUED)

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,
1996. 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.

5.    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 on the NYSE 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.

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.

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 place
at 100% of their face amount. Under the Agreements, these notes mature on the
second anniversary of the initial funding and bear interest, payable quarterly,
at an annual rate of 11% during the first year and 13% thereafter until
maturity. The resulting discount ($150,000) on the Senior Notes is being
amortized to interest expense over the term of the notes. In March 1997, the
Company repaid the Senior Notes at their face amounts.


                                      F-13
<PAGE>


                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.   CONVERTIBLE PREFERRED STOCK AND UNSECURED SENIOR NOTES (CONTINUED)

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.

6.    LEASES

The Company leases certain signage and equipment under capital lease agreements
which expire beginning in 1998 through 2007. Capital leases entered into during
the years ended December 31, 1996, 1995 and 1994 totaled approximately $214,800,
$168,000, and $147,000, respectively. The signage and equipment are included in
equipment and total capitalized cost is approximately $1,324,000 and $1,109,000,
with related accumulated depreciation of $210,000 and $131,000 as of December
31, 1996 and 1995, respectively. Amortization of assets acquired through capital
leases is included with depreciation and amortization expense in the
accompanying statement 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 and $133,000 for the years ended December 31, 1995 and
1994. As of December 31, 1995, the lease was canceled at a cost of approximately
$180,000.

Aggregate future minimum lease payments under capital and operating leases
having remaining terms in excess of one year as of December 31, 1996, are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                          CAPITAL            OPERATING
                                                           LEASES             LEASES
                                                     ---------------------------------------

<S>                                                       <C>                <C>      
     1997                                                 $     292          $     167
     1998                                                       271                314
     1999                                                       156                309
     2000                                                       132                426
     2001                                                       100                438
     Thereafter                                                 128              1,200
                                                     ---------------------------------------
                                                              1,079          $   2,854
                                                    ====================
     Less amounts representing interest                         253
                                                     -------------------
     Present value of minimum lease payments              $     826
                                                     ===================

</TABLE>


                                      F-14
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.   LEASE AGREEMENTS

The Company is the lessor of retail stores under operating leases with initial
terms that expire from 1997 to 2006. 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,
1996, are as follows (in thousands):

         1997                         $     34,206
         1998                               30,050
         1999                               25,623
         2000                               19,821
         2001                               13,774
         Thereafter                         34,206
                                  --------------------
                                      $    157,680
                                  ====================

For the years ended December 31, 1996, 1995 and 1994 rental revenue from a
single major tenant, VF Corporation, comprised approximately 14%, 14% and 15%,
respectively, of total rental revenue.

8.    STOCK AND BONUS INCENTIVE PLANS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

EMPLOYEE STOCK OPTION PLAN

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 reserved for issuance under the Stock Incentive Plan. 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.

The options generally are exercisable on a pro rata basis over a period of four
to five years from the grant date. As of December 31, 1996 and 1995, options
outstanding were 1,047,500 shares and 432,500 shares, respectively, of which
512,820 shares and 317,080 shares, respectively, were exercisable. As of
December 31, 1996 and 1995, no stock options had been exercised.


                                      F-15
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.    STOCK AND BONUS INCENTIVE PLANS (CONTINUED)

In connection with the severance arrangements the Company entered into with
certain former executive officers in 1995 (see Note 11) who held options to
purchase a total of 204,800 shares, the vesting of options for 138,080 shares
was accelerated. The remaining 66,720 shares had vested prior to severance date.

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing a model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.99%
and 7.74%, dividend yields of 0% and 0%, volatility factors of 0.104 and 0.104;
and a weighted-average expected life of the option of 10 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earning per share
information):

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

<S>                                                                 <C>                <C>         
Pro forma net loss applicable to common shareholders                $  (6,843)         $   (13,860)
                                                                ================== ==================
Pro forma loss per common share:
   Primary                                                        $     (0.58)       $      (1.17)
                                                                ================== ==================
   Fully diluted                                                  $     (0.58)       $      (1.17)
                                                                ================== ==================
</TABLE>

Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.

A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:



                                      F-16
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.    STOCK AND BONUS INCENTIVE PLANS (CONTINUED)

<TABLE>
<CAPTION>
                                                                 WEIGHTED                     WEIGHTED
                                                                  AVERAGE        NON-          AVERAGE
                                                   INCENTIVE     EXERCISE      QUALIFIED      EXERCISE
                                                     PLAN          PRICE         PLAN           PRICE
                                                 -------------- ------------ -------------- --------------

<S>                                                <C>            <C>         <C>             <C>   
Options outstanding December 31, 1994               43,470         $23.00      287,030         $23.00
   Options granted                                  18,604          21.50       83,396          21.50
   Canceled or expired                                   -               -           -              -
   Exercised                                             -               -           -              -
                                                 -------------- ------------ -------------- --------------
Options outstanding December 31, 1995               62,074          22.55      370,426          22.66
   Options granted                                 219,835           9.61      395,165           9.66
   Canceled or expired                                   -              -            -            -
   Exercised                                             -               -           -              -
Options outstanding December 31, 1996              281,909         $12.46      765,591         $15.95
                                                 ============== ============ ============== ==============
<CAPTION>
                                                                               WEIGHTED-
                                                                  NUMBER       AVERAGE          NUMBER
                                                                OUTSTANDING    REMAINING     EXERCISABLE
                                                   EXERCISE     AT DECEMBER   CONTRACTUAL    AT DECEMBER
                                                    PRICES       31, 1996        LIFE          31, 1996
                                                 ------------- -------------- ------------- ---------------

                                                    23.00          330,500         6.5         282,220
                                                    21.50          102,000         8.1          67,600
                                                    10.25          380,000         9.4         116,000
                                                      8.88          35,000         9.7           7,000
                                                      8.63         200,000         9.7          40,000
</TABLE>


RESTRICTED STOCK PLAN

The Company established the FAC Realty, Inc. 1996 Restricted Stock Plan (the
"Restricted Plan"), reserving 350,000 shares of Common Stock for issuance
thereunder, to give the Executive Compensation Committee ("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 more closely align the financial interests of
management with that of the shareholders. Pursuant to recent action by the Board
of Directors, the Company has reserved an additional 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.


                                      F-17
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.    STOCK AND BONUS INCENTIVE PLANS (CONTINUED)

In 1996, as part of employment agreements or incentives, the Company granted and
issued 42,592 shares of restricted stock to certain officers and other key
employees at no purchase cost to the employees. These shares will vest in three
equal annual installments commencing March 1, 1997. Subsequent to December 31,
1996, the Company granted 60,000 shares of restricted stock to the officers of
the Company in lieu of a cash bonus for 1996 which are subject to a three year
cliff vesting and represent 150% of an equivalent cash bonus of an average of
20% of the salaries for the officers. The recipients of the restricted stock are
entitled to receive dividends on both the vested and unvested shares.

The Company's Independent Directors, upon the recommendation of the Executive
Compensation Committee, which in turn received recommendations from an
executive compensation consulting firm, have approved a long-term incentive
program for two senior executive officers. Pursuant to such program, 270,000
shares of restricted stock will be awarded to the senior executives officers
replacing the 180,000 shares awarded in 1996. These shares will vest in equal
annual installments over ten years commencing March 1, 1997, were awarded. The
senior executive officers will be entitled to receive dividends on only the
vested portion of these specific restricted shares. They will be entitled to
receive dividends on all other vested and unvested restricted stock issued to
them as other compensation, including their portion of the restricted stock
issued in lieu of cash bonuses as noted above. In addition, 90,000 shares of
restricted stock previously granted to the former chairman and chief executive
officer of the Company were cancelled upon his resignation.

The issuance of restricted shares in 1996, net of the cancelled shares, has been
reflected in the Company's financial statements as an increase to Common Stock,
and Additional Paid in Capital of $3,000 and $2,435,000, respectively, with an
offsetting amount in the stockholder's equity section labeled deferred 
compensation. The deferred compensation expense will be recognized as 
compensation expense ratably over the vesting periods.

DIRECTORS' STOCK AWARD PLAN

On May 23, 1995, the Board of Directors adopted, with stockholder approval, the
1995 Directors' Stock Award Plan (the "Directors' Plan") and reserved 25,000
shares of Common Stock for awards to be granted under the Directors' Plan. Under
the Directors' Plan, each Outside Director who continues as a director as of the
adjournment of each quarterly meeting of the Board, beginning with the first
quarterly meeting after May 1, 1995, will automatically receive an award of
shares of Common Stock equal in value to, and in lieu of, one-half of the
quarterly installment of the retainer fee. The number of shares subject to each
award will be based on the closing price of the Common Stock on the New York
Stock Exchange on the trading date immediately preceding the date of the
relevant quarterly meeting. The awards will be fully vested on the date of
grant, but an Outside Director will not be permitted to sell or otherwise
dispose of the shares until six months after the grant date. During 1996 and
1995, 2,197 and 924 shares were issued in connection with this plan.



                                      F-18
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.    STOCK AND BONUS INCENTIVE PLANS (CONTINUED)

OTHER PLANS

The Company has adopted a Bonus Incentive Plan for senior management. Under the
terms of the plan, senior management employees can earn bonuses up to 75% of
their base salary based on the achievement of specific individual and Company
performance goals. Bonuses were paid in 1996 with restricted stock as noted
above and bonuses of $176,900 were paid in 1995. There were no bonuses earned
for the year ended December 31, 1994.

On January 1, 1994, the Company adopted a 401(k) Savings & Retirement Plan and
Trust (the "Plan"), a tax qualified defined contribution plan. 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, 1996, 1995
and 1994, the Company contributed $64,084, $59,710, and $44,140, respectively,
as a matching contribution and there was no profit sharing contribution made by
the Company. The Plan was replaced effective January 1, 1997 by The FAC Realty,
Inc. 401(k) and Profit Sharing Plan, which is substantially similar to the Plan,
as described above.

9.    COMMITMENTS AND CONTINGENCIES

Under the terms of the purchase agreement to acquire the VF Properties, entered
into in 1993, 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. The original commitment contemplated
the completion of two more expansions. Under the terms of the agreement, at
completion of an expansion and upon payment to VF Corporation of a tenant
allowance, VF Corporation would renew its lease for its original term as of that
date. On December 10, 1996, the Company and VF Factory Outlet, Inc. ("VFFO"), a
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. Under the terms of the Amendment Agreement, in lieu
of the requirement to expand the additional two centers, the Company remained
obligated to pay a tenant allowance for the two centers and will provide for
VFFO's benefit nine additional billboards at three center locations selected by
VFFO for at least three years. Additionally, the Amendment Agreement requires
that the Company continue to manage and market an adjacent factory outlet center
at its Sulphur Springs, TX center as a single property. The Company entered into
a third party management agreement with this outlet center in June 1996.
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. As of
December 31, 1996, the Company's other unsecured notes payable included
$2,016,000 due to VFFO for tenant allowances which were subsequently paid with
the Nomura credit facility (see Note 12).



                                      F-19
<PAGE>


                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.    COMMITMENTS AND CONTINGENCIES (CONTINUED)

During 1996 the Company completed construction of 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 anticipated cost of these projects is $42.5 million of
which $40.7 million has been expended as of December 31, 1996 and has been
reclassified from the properties under development category for financial
statements purposes. The remaining $1.8 million in anticipated costs represent
estimated tenant buildouts and allowances. Additionally, 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 1997.

On July 19, 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 seeks
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 alleges 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.

On October 30, 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 have
been consolidated and the Company has filed motions to dismiss both lawsuits,
which motions are currently pending.

The Company believes that it and the named former officers have substantial
defenses to the plaintiffs' claims and the Company intends to vigorously defend
the actions. However, no assurance can be given as to the ultimate outcome of
the litigation.

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.



                                      F-20
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.   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 (see Note 12) 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 substantially satisfy the asset
valuation issues.

In 1994, the Company's Board of Directors approved acquisition of certain land
adjacent to one of the Company's existing outlet centers for potential expansion
of that center. The cost of the land acquisition was $400,000. The seller of the
land was a partnership whose partners include former executive officers of the
Company.

On May 5, 1995 the company purchased three parcels of land near its Smithfield,
North Carolina Factory outlet center totaling 4.94 acres for $735,000 from two
partnerships, of which former executive officers and their affiliates are
general partners. The parcels were used as part of the expansion of the
Smithfield center.

11.   TERMINATED ACQUISITION

On August 25, 1995, the Company signed definitive agreements to acquire 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
conditions. On December 7, 1995, the Company reported that RRI had terminated
the agreements under which the Company would have acquired the properties owned
by OPERS and the management and business operations of the Charter Oak Group,
Ltd.

As a result of the Company's pursuit of the acquisition, the Company incurred
direct costs approximating $4.5 million related to the performance of due
diligence. In addition, in contemplation of a successful consummation of the
acquisition transaction, the Company entered into various severance arrangements
aggregating approximately $2.0 million with three former executive officers and
certain other employees of the Company in 1995. The Company has recorded the
$6.5 million charge as a component of general and administrative expense in the
1995 financial statements.



                                      F-21
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.   TERMINATED ACQUISITION (CONTINUED)

In 1996, RRI for itself and on behalf of OPERS made a demand for payment with
respect to a $5.0 million promissory note (the "Note") issued by the Company in
connection with the Company's proposed purchase of the factory outlet centers
and other properties owned by OPERS. The Note was payable only upon the
occurrence of certain conditions relating to termination of the definitive
acquisition agreements, some of which conditions the Company asserts were not
satisfied. The Company's management has unsuccessfully pursued negotiations with
RRI to settle this claim. To date, these discussions have focused on payment by
the Company of a portion of the actual costs incurred by RRI, OPERS and certain
affiliates in connection with the transaction. RRI has represented these costs
to be approximately $1.3 million. RRI has filed an arbitration action to settle
the dispute. While no assurance can be given as to the outcome of any such
arbitration, the Company believes it has meritorious defenses to the payment of
the Note.

12.   SUBSEQUENT EVENTS

The Company obtained a $150,000,000 credit facility with Nomura Asset Capital
Corporation on February 19, 1997. The credit facility with Nomura is secured by
17 of the Company's centers plus an assignment of excess cash flow from the
properties currently secured under the $95 million rated debt securitization
(see Note 4). 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 will be 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 $75,000,000 of debt on income properties,
$7,420,000 of unsecured senior notes and $2,016,000 of other unsecured notes
outstanding at December 31, 1996 The new credit facility contains financial
covenants relating to debt to total asset value and net operating income to debt
service coverage.

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, 1996 and 1995 are set forth below which assume
the acquisition of the five properties aggregating 605,668 square feet of retail
and office space had been completed as of January 1, 1995. 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, 1995, nor does it purport to represent
results of operations of future periods (in thousands, except for per share
data).



                                      F-22
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12.   SUBSEQUENT EVENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                  PRO FORMA YEAR ENDED            PRO FORMA YEAR ENDED
                                                    DECEMBER 31, 1996               DECEMBER 31, 1995
                                             ------------------------------- -------------------------------
                                                       (Unaudited)                     (Unaudited)

<S>                                                     <C>                             <C>        
Revenues                                                $   52,302                      $    51,953
Property Operating Costs                                    15,279                           14,991
   Depreciation                                             14,610                           12,708
   General and administrative                                6,338                           15,379
   Interest                                                 16,678                           13,406
   Property sales and adjustments                            4,963                            8,155
                                             ------------------------------- -------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                 $   (5,566)                     $   (12,686)
                                             =============================== ===============================
NET INCOME (LOSS) PER SHARE                             $    (0.47)                     $     (1.07)
                                             =============================== ===============================
</TABLE>

Subsequent to December 31, 1996, 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 is entitled to a lump sum
distribution of the value of the remaining term of the agreement. The Company
has accrued $767,000 as an additional general and administrative expense for
1996 representing the remaining value of his contract.
-
13.   ADJUSTMENT TO CARRYING VALUE OF ASSETS

As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Directors of the Company authorized management 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. Under generally accepted
accounting principles ("GAAP"), assets held for the long-term production of
income are recorded at their historical cost, adjusted for depreciation.
However, when a decision is made to dispose of certain assets, the carrying
value of those assets is computed using fair value less costs to sell.

Accordingly, in the fourth quarter of 1996 and 1995, the Company recorded a $5.0
million and $8.5 million adjustment, respectively, to the carrying value of the
assets held for sale as required under GAAP. This non-cash adjustment was
charged to operations and represents the difference between the net realizable
value and net book value of that asset. Under GAAP, when a decision is made to
dispose of several discrete assets, the anticipated loss on disposal of one
asset cannot be offset by the anticipated gains on the others. Any gains are
deferred until realized, while estimated losses are recorded currently as an
adjustment to the carrying value.



                                      F-23
<PAGE>

                                FAC REALTY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.   ADJUSTMENT TO CARRYING VALUE OF ASSETS (CONTINUED)

After recording the $5.0 million and $8.5 million valuation adjustment, the net
carrying value of assets currently being marketed for sale at December 31, 1996
and 1995 are $11.4 million and $16.6 million, respectively. There is also $15.8
million of debt associated with these assets held for sale. 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
net loss of $0.5 million after deducting related interest expense.

The Company has begun the process of marketing these properties and no sales
agreements have been completed to date. 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.

14.   QUARTERLY INFORMATION

Selected quarterly financial data for the four quarters in 1996 and 1995 are 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>        
1996:
    Total revenue                           $ 11,575       $ 12,038         $   12,346        $    11,174
                                         ====================================================================

    Net income (loss) applicable
     to common shareholders                 $     412      $    (94)      $       (510)       $    (6,260)
                                         ====================================================================
                                         
    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)
                                         ====================================================================

1995:
    Total revenue                           $ 11,642       $ 11,995         $   12,159        $    10,988
                                         ====================================================================

    Net income (loss) applicable
     to common shareholders                 $  2,665       $  2,288         $    2,464        $   (20,518)
                                         ====================================================================
                                      
    Earnings (loss) per common share        $   0.23       $   0.19         $    0.21         $   (1.74)
                                         ====================================================================


</TABLE>

                                      F-24
<PAGE>


                                FAC Realty, Inc.

             Schedule III - Real Estate and Accumulated Depreciation

                                December 31, 1996

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    
                                                  Cost Capitalized                   Gross Amount at Which Carried At               
                      Initial Cost to Company       Subsequent to                            Close of Period                        
                                                     Acquisition                                                                    
------------------------------------------------------------------------------------------------------------------------------------
                                    Buildings                             Adjustment               Buildings                        
                                       and                     Carrying     to Net                    and               Accumulated 
Description Encumbrances    Land     Improvements Improvements   Costs    Realizable     Land     Improvements   Total  Depreciation
                                                                             Value                                                  
                                                                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
<S>          <C>          <C>         <C>          <C>          <C>       <C>           <C>        <C>          <C>         <C>     
Boaz, AL     2,381,533       34,998      42,004     805,639     271,672                  39,230   1,115,083    1,154,313     146,964
------------------------------------------------------------------------------------------------------------------------------------
Casa         5,834,532    2,220,397  10,557,446     301,293      67,848   (7,400,000)    858,207   4,888,777  5,746,984    1,238,250
Grande,
AZ
------------------------------------------------------------------------------------------------------------------------------------
Mesa, AZ     3,071,744    1,399,858   7,060,705   3,236,720     169,317                1,441,663  10,424,937  11,866,600   1,090,653
------------------------------------------------------------------------------------------------------------------------------------
Tucson,      1,133,460      772,231   3,572,837      20,215      58,956                  792,446   3,631,793    4,424,239    426,948
AZ
------------------------------------------------------------------------------------------------------------------------------------
Lathrop,     5,788,398    2,842,636   7,048,844                 290,935   (4,900,000)  1,409,731   3,872,684    5,282,415    627,234
CA
------------------------------------------------------------------------------------------------------------------------------------
Vacaville,  36,236,479   30,008,142  49,464,506                 876,071               30,008,142  50,340,577   80,348,719  5,272,740
CA
------------------------------------------------------------------------------------------------------------------------------------
Graceville,  1,347,037      556,765   2,544,654                 200,031                  556,765   2,744,685    3,301,450    304,455
FL
------------------------------------------------------------------------------------------------------------------------------------
Lake         2,392,174    1,128,056   4,801,250                  39,827                1,128,056   4,841,077    5,969,133  1,901,085
Park, GA
------------------------------------------------------------------------------------------------------------------------------------
W.             966,228      471,041   2,130,358                   8,945                  471,041   2,139,303    2,610,344    240,340
Frankfort,
IL
------------------------------------------------------------------------------------------------------------------------------------
Story        1,970,865      601,802   2,737,481   1,921,580      37,394                  621,443   4,676,814    5,298,257    359,685
City, IA
------------------------------------------------------------------------------------------------------------------------------------
Carrollton,  1,049,844      340,190   1,555,641                   3,854                  340,190   1,559,495    1,899,685    175,711
KY
------------------------------------------------------------------------------------------------------------------------------------
Georgetown,  5,712,654      937,490   6,510,116                  40,761                  937,490   6,550,877    7,488,367  1,287,556
KY
------------------------------------------------------------------------------------------------------------------------------------
Hanson,        845,450      308,876   1,408,641                   3,300                  308,876   1,411,941    1,720,817    158,640
KY
------------------------------------------------------------------------------------------------------------------------------------
Arcadia,     1,282,111      404,864   1,856,173   1,455,341      95,374                  408,356   3,403,396    3,811,752    406,608
LA
------------------------------------------------------------------------------------------------------------------------------------
Iowa, LA     3,493,287      627,061   2,860,591   2,284,703      23,898                  627,061   5,169,192    5,796,253    574,875
------------------------------------------------------------------------------------------------------------------------------------
Kittery,     2,165,526      355,080   2,485,826                  98,547                  355,080   2,584,373    2,939,453    224,002
ME
------------------------------------------------------------------------------------------------------------------------------------
Branson,    18,494,716    5,702,365  24,600,479                                        6,005,848  24,296,996   30,302,844    526,176
MO
------------------------------------------------------------------------------------------------------------------------------------
Lebanon,     1,580,501      403,915   1,889,710                  13,768                  403,915   1,903,478    2,307,393    219,182
MO
------------------------------------------------------------------------------------------------------------------------------------
Tupelo,        971,151      430,765   1,956,158   1,078,612                              439,220   3,026,315    3,465,535    240,878
MS
------------------------------------------------------------------------------------------------------------------------------------
Nebraska     1,970,865      400,684   1,813,050   1,673,098      53,628                  416,909   3,523,551    3,940,460    279,703
City, NE
------------------------------------------------------------------------------------------------------------------------------------
Las          9,968,875    7,158,719  18,761,605                 159,671                7,158,719  18,921,276   26,079,995  1,997,503
Vegas, NV
------------------------------------------------------------------------------------------------------------------------------------
Conway,        739,432      324,652   2,277,122                 107,941   (1,200,000)    172,655   1,337,060    1,509,715    188,591
NH
------------------------------------------------------------------------------------------------------------------------------------
Lake         1,865,421      975,466   4,441,445                 105,683                  975,466   4,547,128    5,522,594    349,925
George,
NY
------------------------------------------------------------------------------------------------------------------------------------
Smithfield, 14,472,056       77,667   9,064,651   8,432,590      98,359                1,329,981  16,343,286   17,673,267  3,701,571
NC
------------------------------------------------------------------------------------------------------------------------------------
Crossville,  2,703,581      519,239   2,415,619   2,253,670      13,900                  530,628   4,671,800    5,202,428    555,934
TN
------------------------------------------------------------------------------------------------------------------------------------
Nashville,  17,221,270    5,947,579  10,078,170   5,936,074      37,117                6,487,873  15,511,067   21,998,940  1,690,349
TN
------------------------------------------------------------------------------------------------------------------------------------
Tri-Cities,  3,856,041      353,983   5,648,812     748,050      11,594                1,102,033   5,660,406    6,762,439  1,369,178
TN
------------------------------------------------------------------------------------------------------------------------------------
Union        1,007,218      296,580   1,343,859                  88,011                  296,580   1,431,870    1,728,450    161,293
City, TN
------------------------------------------------------------------------------------------------------------------------------------
Corsicana,     428,449      336,335   1,533,169                  12,025                  336,335   1,545,194    1,881,529    173,007
TX
------------------------------------------------------------------------------------------------------------------------------------
Hempstead,     499,857      375,487   1,711,282                                          375,487   1,711,282    2,086,769    192,367
TX
------------------------------------------------------------------------------------------------------------------------------------
LaMarque,    7,757,698    4,066,414  11,864,248                  26,711                4,066,414  11,890,959   15,957,373  1,167,303
TX
------------------------------------------------------------------------------------------------------------------------------------
Livingston,    568,885      354,381   1,615,979                  12,331                  354,381   1,628,310    1,982,691    182,712
TX
------------------------------------------------------------------------------------------------------------------------------------
Mineral        504,618      315,944   1,441,675                   2,819                  315,944   1,444,494    1,760,438    166,514
Wells, TX
------------------------------------------------------------------------------------------------------------------------------------
Sulphur        761,687      512,898   2,326,326                  34,233                  512,898   2,360,559    2,873,457    269,463
Springs,
TX
------------------------------------------------------------------------------------------------------------------------------------
Draper,      3,440,401      718,188   4,294,019   3,879,518     305,068                  758,719   8,438,074    9,196,793    881,355
UT
------------------------------------------------------------------------------------------------------------------------------------
North        9,736,608    8,428,229  12,052,296  13,411,035     107,288                8,469,661  25,529,187   33,998,848  2,449,873
Bend, WA
------------------------------------------------------------------------------------------------------------------------------------
           174,220,652   80,708,977 227,766,747  47,438,138   3,476,877 (13,500,000)  80,813,443 265,077,296  345,890,739 31,198,623
           =========================================================================================================================
</TABLE>


------------------------------------------------
                                       Life on   
                                        Which    
                                     Depreciation
                                     in Latest  
                                        Income    
                  Date of     Date  Statements if
               Construction Acquired  Computed (1)
-----------------------------------------------
Boaz, AL                      1993  31.5 / 5   
-----------------------------------------------
Casa                          1994  31.5 / 5   
Grande,                                        
AZ                                             
-----------------------------------------------
Mesa, AZ                      1993  31.5 / 5   
-----------------------------------------------
Tucson,                       1993  31.5 / 5   
AZ                                             
-----------------------------------------------
Lathrop,                      1994  31.5 / 5   
CA                                             
-----------------------------------------------
Vacaville,                    1993  31.5 / 5   
CA                                             
-----------------------------------------------
Graceville,                   1993  31.5 / 5   
FL                                             
-----------------------------------------------
Lake                          1993  31.5 / 5   
Park, GA                                       
-----------------------------------------------
W.                            1993  31.5 / 5   
Frankfort,                                     
IL                                             
-----------------------------------------------
Story                         1993  31.5 / 5   
City, IA                                       
-----------------------------------------------
Carrollton,                   1993  31.5 / 5   
KY                                             
-----------------------------------------------
Georgetown,                   1993  31.5 / 5   
KY                                             
-----------------------------------------------
Hanson,                       1993  31.5 / 5   
KY                                             
-----------------------------------------------
Arcadia,                      1993  31.5 / 5   
LA                                             
-----------------------------------------------
Iowa, LA                      1993  31.5 / 5   
-----------------------------------------------
Kittery,                      1993  31.5 / 5   
ME                                             
-----------------------------------------------
Branson,          1995              31.5 / 5   
MO                                             
-----------------------------------------------
Lebanon,                      1993  31.5 / 5   
MO                                             
-----------------------------------------------
Tupelo,                       1993  31.5 / 5   
MS                                             
-----------------------------------------------
Nebraska                      1993  31.5 / 5   
City, NE                                       
-----------------------------------------------
Las                           1993  31.5 / 5   
Vegas, NV                                      
-----------------------------------------------
Conway,                       1993  31.5 / 5   
NH                                             
-----------------------------------------------
Lake                          1993  31.5 / 5   
George,                                        
NY                                             
-----------------------------------------------
Smithfield,                   1993  31.5 / 5   
NC                                             
-----------------------------------------------
Crossville,                   1993  31.5 / 5   
TN                                             
-----------------------------------------------
Nashville,                    1993  31.5 / 5   
TN                                             
-----------------------------------------------
Tri-Cities,                   1993  31.5 / 5   
TN                                             
-----------------------------------------------
Union                         1993  31.5 / 5   
City, TN                                       
-----------------------------------------------
Corsicana,                    1993  31.5 / 5   
TX                                             
-----------------------------------------------
Hempstead,                    1993  31.5 / 5   
TX                                             
-----------------------------------------------
LaMarque,                     1994  31.5 / 5   
TX                                             
-----------------------------------------------
Livingston,                   1993  31.5 / 5   
TX                                             
-----------------------------------------------
Mineral                       1993  31.5 / 5   
Wells, TX                                      
-----------------------------------------------
Sulphur                       1993  31.5 / 5   
Springs,                                       
TX                                             
-----------------------------------------------
Draper,                       1993  31.5 / 5   
UT                                             
-----------------------------------------------
North                         1993  31.5 / 5   
Bend, WA                                       
-----------------------------------------------


(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 - 10 years.


                                      F-25
<PAGE>



                                FAC Realty, Inc.

       Schedule III - Real Estate and Accumulated Depreciation (continued)

                                December 31, 1996



The changes in total real estate for years ended December 31, 1996, 1995 and
1994 are as follows:

<TABLE>
<CAPTION>
                                                      1996                 1995                 1994
                                              ---------------------------------------------------------------

<S>                                           <C>                     <C>                 <C>           
Balance, beginning of period                  $     340,166,756       $  308,586,835      $  232,842,072
Developed or acquired properties                     10,339,504         24,819,456           48,570,023
Improvements                                            547,694         15,474,668           27,174,740
Adjustment to net realizable value                   (5,000,000)        (8,500,000)                   -
Sales                                                  (163,215)          (214,203)                   -
                                              _______________________________________________________________
Balance, end of period                        $     345,890,739       $  340,166,756       $ 308,586,835
                                              ===============================================================
</TABLE>

The changes in accumulated depreciation for years ended December 31, 1996, 1995
and 1994 are as follows:

<TABLE>
<CAPTION>
                                                      1996                 1995                 1994
                                              ---------------------------------------------------------------

<S>                                           <C>                  <C>                  <C>            
Balance, beginning of period                  $     20,386,741     $     12,561,252     $     5,648,428
Developed or acquired properties                     8,865,743            6,857,428           6,831,754
Improvements                                         1,946,139              968,061              81,070
Sales                                                        -                    -                   -
                                              ---------------------------------------------------------------
Balance, end of period                        $     31,198,623     $     20,386,741     $     12,561,252
                                              ===============================================================

</TABLE>



                                      F-26
<PAGE>