SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _____________ FORM 10-KSB _____________ (Mark One) [ X ] ANNUAL REPORT UNDER SECTION 13 or 15(d) of the SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________to____________ Commission File Number: 0-17843 REGAL ONE CORPORATION (name of small business issuer as specified in its charter) Florida 95-4158065 (State or other jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 551 Drift Stone Avenue, Las Vegas, Nevada 89123 (Address of Principal Executive Offices) (Zip code) Issuer's telephone number: (702) 897-5331 Securities registered under section 12(b) of the Exchange Act: None Securities registered under section 12(g) of the Exchange Act: Common Stock, no par Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [ X ] Check here if the disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-KSB or any amendment to this Form 10-KSB. [ ] Revenues for the year ending December 31, 1997 were $ -0-. The aggregate market value of the voting stock held by non- affiliates of the Company, based upon the average bid price of the common stock on May 25, 1998 was approximately $1,128,372. As of May 25, 1998, the Company had 1,196,342 shares of common stock issued and outstanding and 208,965 shares of convertible preferred stock issued and outstanding, each of which is convertible into 100 shares of the Company's common stock. REGAL ONE CORPORATION FORM 10-KSB for the fiscal year ended December 31, 1997 TABLE OF CONTENTS Part I Page Item 1 Description of Business 3 Item 2 Description of Property 5 Item 3 Legal Proceedings 5 Item 4 Submission of Matters to a Vote of Security Holders 5 Part II Item 5 Market for the Company's Common Equity and Related Stockholder Matters 6 Item 6 Management's Discussion and Analysis and Plan of Operation 7 Item 7 Financial Statements 9 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 Part III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 11 Item 10 Executive Compensation 12 Item 11 Security Ownership of Certain Beneficial Owners and Management 13 Item 12 Certain Relationships and Related Transactions 13 Item 13 Exhibits and Reports on Form 8-K 13 SIGNATURES 14 PART I ====== ITEM 1. DESCRIPTION OF BUSINESS General and Background Regal One Corporation (the "Company") is a Florida corporation originally incorporated as Electro-Mechanical Services, Inc. ("EMS") in 1959. In 1974, Mr. Israel Rubinstein, currently the President, a director and a shareholder of the Company, acquired the Company, then named EMS, which at the time had no operations. Pursuant to the merger agreement, Mr. Rubinstein transferred the assets of Regal Muffler Centers, a franchise network of over 100 muffler shops that he founded in 1972 and solely owned, into EMS. In March of 1975, EMS amended its certificate of incorporation and changed its name to Regal International Holding Co., Inc. In 1976, the Company sold substantially all of its assets, but Mr. Rubinstein retained control of the Company. In June 1988, after merging with its wholly owned Nevada Subsidiary, Regal One Corporation, the Company changed its name to Regal One Corporation, but remained a Florida entity. From 1987 to 1992, the Company was engaged in the acquisition and holding of real estate, primarily in the Western United States. Until the end of 1992, the Company's assets consisted primary of irrevocable options to acquire the real estate in exchange for shares of the Company's common stock. Generally, the Company would issue to the Seller of the property shares of its common stock with a fair value equal to the value of the real estate on the date of the agreement. During 1992, due to the protracted depressed national real estate market, the Company decided to abandon its real estate operations and pursue opportunities in the pharmaceutical and health fields. Xechem, Inc. In January, 1993, the Company executed an agreement to acquire Xechem, Inc. The total costs incurred by the Company relating to the proposed investment in Xechem were approximately $1,012,000. On January 14, 1994, the agreement with Xechem was canceled and a settlement agreement was entered into whereby the Company received 60,000 shares of common stock of Xechem, $250,000 in cash and the satisfaction of $131,000 of liabilities at no cost to the Company. Accordingly, based on this settlement agreement, the net realizable cost of the Xechem investment was adjusted down to the estimated fair value of $150,000, resulting in a loss of $142,645 in 1994. The Company then sold 20,000 shares of Xechem (one third of its investment) for $50,000. In 1995, the Company distributed the remaining 40,000 shares of Xechem common stock to consultants or advisors of the Company for services provided to the Company. Carbonex Systems Corporation In August, 1995, the Company acquired in a reverse acquisition all of the issued and outstanding shares of common stock of Carbonex Systems Corporation ("Carbonex"), a development stage Delaware Corporation, owning certain exclusive rights to a proprietary emission reduction system for internal combustion engines. To effect the acquisition, the Company issued a total of 464,000 shares of 8.75% convertible, participating voting Series B Preferred Stock (the "Preferred Stock"). Each share of Preferred Stock is convertible into 100 shares of common stock and has 100 votes for each vote allowed to a share of common stock. In June, 1996, the Company entered into a Stock Exchange Settlement Agreement and General Release whereby the Company exchanged all of the issued and outstanding shares of common stock of Carbonex for 255,035 shares of Preferred Stock owned by Gene Bemel and certain members of his family. As part of the agreement, the Company assumed certain specified accounts payable totaling approximately $61,000. The net impact of this transaction was a gain on sale of $295,803, primarily due to the forgiveness of debt and accrued interest payable (see note 3 to the Financial Statements). As a result of this transaction, the Company has issued and outstanding 208,965 shares of Preferred Stock. Quality Franchise Systems, Inc. In November, 1996, the Company executed a Letter of Intent to acquire all of the issued and outstanding stock of Quality Franchise Systems, Inc. However, a final agreement was never completed, and the Company is no longer pursuing this acquisition. Safesight, Inc. In July, 1997, the Company announced the acquisition of Safesight, Inc., a development-stage company engaged in the design of vehicle anti-collision warning products for the automobile, commercial vehicle, recreational vehicle and motorcycle markets. In August, 1997, the parties elected not to proceed with this transaction because of the parties' inability to obtain adequate funding for operations. Current Operations In April, 1998, the Company entered into an agreement to merge a newly formed subsidiary of the Company with Infectech, Inc.("Infectech"). Infectech, founded In 1989, is a development- stage biotechnology company which owns 15 patents for the rapid identification and antibiotic sensitivity testing of 34 disease- causing bacteria. The Company will issue approximately 26,320,520 shares of common stock to the shareholders of Infectech. Upon closing, the Company will change its name to Infectech, Inc. and the shareholders of Infectech, as a group, will own approximately 85% of the Company. The Company must cause holders of the Preferred Stock to convert their shares into an aggregate of not more than 3,447,923 shares of common stock. This transaction is contingent upon the approval of the shareholders of both companies, upon certain regulatory approvals and other conditions. The Company expects to notice a special meeting of the shareholders prior to the fall of 1998, and anticipates that the merger will be completed by December 31, 1998. However if it is not completed by that date the Company or Infectech may terminate and abandon the merger. Employees Mr. Israel Rubinstein has, since June 1, 1996, acted as President, Chief Executive Officer and a Director. Mr. Rubinstein served without remuneration until December 31, 1997. The Company has no full-time employees and no employee of the Company earned in 1997, or is currently earning annually, as much as $50,000. (See Item 10, "Executive Compensation") ITEM 2. DESCRIPTION OF PROPERTY As of December 31, 1997, the Company did not and currently does not own or lease any real property. The Company's current street and mailing address is: Regal One Corporation 551 Driftstone Avenue Las Vegas, NV 89123 (702) 897-5331 The Company did not and currently does not have any tangible fixed assets as of December 31, 1997 ITEM 3. LEGAL PROCEEDINGS The Company has no current legal proceedings pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS For the fourth quarter of the fiscal year ending December 31, 1997, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise. PART II ======= ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Company's shares of common stock trade on the OTC Bulletin Board under the symbol "RONE". The following table sets forth the range of high and low bid quotes of the Company's common stock per quarter as provided by NASDAQ Trading and Marketing Services (which reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessary represent actual transactions). Common Stock 1997 1996 1995 High Low High Low High Low Quarter ended: March 31: .75 .688 2.25 .375 .30 .25 June 30: 1.50 .500 1.625 .3125 1.25 .25 September 30: 1.23 .583 .75 .375 3.00 .375 December 31: .563 .313 1.3125 .325 1.50 .75 Quarter ended March 31, 1998: High: 1.25 Low: 0.3125 Shareholders As of May 25, 1998, there were approximately 608 shareholders of record, inclusive of those brokerage firms and/or clearing houses holding the Company's common shares in "street name". Dividend Matters The Company has not paid or declared any dividends upon its common stock since its inception, and does not contemplate or anticipate paying any dividends in the foreseeable future. Any future declaration of cash or stock dividends will be at the discretion of the Board of Directors and will depend upon the financial condition, capital requirements, earnings, and liquidity of the Company as well as other factors that the Board of Directors may deem relevant. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION The following discussion should be read in conjunction with the Company's financial statements and notes thereto included in Item 7 of this Form 10-KSB report. The Company was incorporated in 1959 in Florida. Since that time, the Company has owned and operated, and subsequently sold off, a number of businesses. During 1987, the Company pursued a policy of using its common stock to purchase, either in fee simple or as an irrevocable option to purchase, a number of parcels of real estate, in the form of commercial, industrial, residential and development stage land parcels. In 1992, market conditions for real estate were no longer deemed to be favorable and the Company decided to abandon its real estate operations and pursue other courses of operation. In January, 1993, the Company agreed to acquire Xechem, Inc., a development-stage company engaged in the research and development of pharmaceuticals from plants and other naturally-occurring sources. However, the transaction was terminated in January, 1994 pursuant to a settlement agreement. In August, 1995, the Company acquired all of the issued and outstanding common stock of Carbonex Systems Corporation ("Carbonex"). In June, 1996, the Company entered into a Stock Exchange, Settlement Agreement and General Release whereby the Company exchanged with its then-principal shareholders, Gene Bemel and members of his family, all of the issued and outstanding common stock of Carbonex for 255,035 shares of Preferred Stock. In November, 1996, the Company executed a Letter of Intent to acquire all of the issued and outstanding stock of Quality Franchise Systems, Inc. However a final agreement was never completed and the Company is no longer pursing this acquisition. In July, 1997, the Company announced the acquisition of Safesight, Inc., a development-stage company engaged in the design of vehicle anti-collision warning products. However, in August, 1997, the parties elected not to proceed with the transaction because of the inability to obtain adequate funding for operations. In April, 1998, the Company entered into an agreement to merge a newly formed subsidiary of the Company with Infectech. Infectech, founded in 1989, is a development-stage biotechnology company which owns 15 patents for the rapid identification and antibiotic sensitivity testing of 34 disease-causing bacteria. (See Item 1, "Description of Business - Current Operations") Plan of Operation Through December 31, 1997, the Company had no active business operations but continued to pursue acquisition candidates. The independent auditor's report for the fiscal year ended December 31, 1997 will include an explanatory paragraph calling attention to a going concern issue. The Company has suffered recurring losses and, at December 31, 1997, has a stockholders' deficit. The Company's ability to continue as a going concern depends upon the Company obtaining additional financing to satisfy the operating needs of the Company and/or complete a successful merger. In April, 1998, the Company agreed to a reverse acquisition of Infectech, Inc. (See Item 1, "Description of Business - Current Operations" and Item 13, "Exhibits and Reports on Form 8-K - Reports on Form 8-K"). No assurances can be given that the Company will complete the acquisition of Infectech. Liquidity and Capital Resources - December 31, 1997 Compared to December 31, 1996 During the current year, the Company had continuing losses from operations. There can be no assurances that the Company will be able to secure long-term borrowings with which to finance its future operations. The Company does not currently have any established bank lines of credit. The Company's lack of liquidity is reflected in the table below, which shows comparative working capital (current assets less current liabilities) which is an important measure of the Company's ability to meet its short-term obligations. December 31, 1997 December 31, 1996 Working Capital (deficit) $ (108,752) $ (56,778) The Company's financial condition at December 31, 1997 reflects an immediate inability to meet its short-term obligations. At December 31, 1997, the Company had $55 cash on hand. The liabilities of the Company at December 31, 1997 aggregated $108,752, consisting primarily of accounts payable to accountants, lawyers and other service providers. Accounts payable are due and in default, and it is possible that persons to whom these obligations are due may seek to collect the amounts due them. Since April, 1998, the Company has relied on Infectech for the infusion of capital to fund basic operations, principally fees due to accountants and lawyers. Additionally, the Company can expect a further infusion of capital from the exercise of common stock warrants from the Company's Stock Option Plan if share prices increase. The Company's Stock Option Plan is for its employees, directors, officers, and consultants or advisors of the Company. In May, 1995, the Company filed a registration statement on Form S- 8 covering 3,000,000 shares of common stock for this Plan. Since May, 1995, holders have exercised options to purchase 548,506 shares of common stock. No options were exercised during the year ended December 31, 1997, leaving 2,451,494 yet available, with an amended expiration date of March 31, 1999. (See the Company's 14c, filed April 8, 1998). As of December 31, 1997, the Company remains generally delinquent on most of its accounts payable obligations. Capital Expenditures and Commitments During the fiscal year ended December 31, 1997, the Company had no capital expenditures. In the near term, the Company believes its capital will principally be expended for accountants, auditors, attorneys, interim salaries and related office expenses. The amount of such additional capital required is uncertain, and may be beyond that generated from future operations. There can be no assurance that the Company will be able to obtain any such capital or merger acquisition candidate on satisfactory terms. Results of Operations - The fiscal year ended December 31, 1997 compared to the fiscal year ended December 31, 1996. The Company reported no cash revenues for the current or prior year. During the years ended December 31, 1997 and 1996, the Company had a net loss of $51,974 and net income of $48,822, respectively. The net income in 1996 resulted primarily from a gain on the sale of Carbonex common stock of $295,803 when accrued interest and amounts due to a former officer of the Company were assumed by the purchaser of the Carbonex common stock, a former officer, director and principal shareholder of the Company. During the years ended December 31, 1997 and 1996, operating expenses were $67,989 and $30,754, respectively. The increase in expenses in 1997 was primarily due to an increase in consulting and professional fees. For the year ended December 31, 1997, expenses were offset by a forgiveness of debt of $16,015. An equity loss on a subsidiary sold was $246,227 for the year ended December 31, 1996. Factors that may affect future results A number of uncertainties exist that may affect the Company's future operating results, including the possibility of uncertain general economic conditions, market acceptance of the Company's planned future operations, the Company's ability to manage expense growth and the ability to acquire long-term funding (including costs of the Infectech merger). ITEM 7. FINANCIAL STATEMENTS The following financial statements listed in the table below have been prepared in accordance with the requirements of item 310 (a) of Regulation SB (see Item 13). Page Independent Auditor's Report F-2 Balance Sheet at December 31, 1997 F-3 Statement of Operations for the fiscal years ended December 31, 1997 and December 1996 F-4 Statements of Shareholders' Equity(Deficit) for the fiscal years ended December 31, 1997 and December 31, 1996 F-5 Statement of Cash Flows for the fiscal years ended December 31, 1997 and December 31, 1996 F-6 Notes to the Financial Statements F-8 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with accountants with respect to accounting and/or financial disclosure for any periods reported on in this Form 10-KSB. PART III ======== ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE The following table sets forth certain information concerning the current directors and executive officers of the Company: Name Age Position Israel Rubinstein 70 President, Chief Executive Officer and Director Dr. Malcolm R. Currie 71 Chairman of the Board Richard Babbit 72 Secretary, Treasurer and Director Michael Platt 56 Director Each director holds office for a one-year term until his successor has been elected and qualified at the annual meeting of the Company's shareholders. The members of the Board of Directors serve without remuneration. Corporate Officers are elected by the Board of Directors and serve at the discretion of the Board. Israel Rubinstein has been President, Chief Executive Officer and a Director of the Company since 1975, except for the period from August 7, 1995 to June 1, 1996, when Mr. Gene Bemel was President as part of the Carbonex acquisition. From 1977 to 1984, Mr. Rubinstein owned and operated several travel agencies and was also involved in real estate development projects in Southern California. In 1972, Mr. Rubinstein founded Regal Mufflers Centers, a franchise network which grew to over 100 muffler shops by 1976. This network was subsequently merged into the Company. Previously, in 1961, Mr. Rubinstein formed Lawn-Mat Chemical and Equipment Corporation, the first Company to utilize automated mechanical equipment to serve suburban property owners' demand for landscaping and lawn care services. Dr. Malcolm Currie was appointed as Chairman of the Board of Directors of the Company in August, 1995. From 1969 to 1973, Dr. Currie was the Undersecretary of Research and Engineering for the Office of Defense. From 1973 to 1977, Dr. Currie was President of the Missile Systems Group for Hughes Aircraft Corporation. From 1977 to 1988, Dr. Currie started as Executive Vice President and eventually became Chief Executive Officer and Chairman of the Board of Delco Electronics Corporation. From 1992 to present, Dr. Currie has been Chairman Emeritus of Hughes Aircraft Corporation. Dr. Currie is also on the Board of Directors of Unocal Oil. Dr. Currie obtained a graduate MBA from the University of California, Berkeley, and a PhD in Research Engineering at the University of California, Berkeley. Richard Babbitt was appointed as the Secretary and Treasurer and a member of the Board of Directors of the Company in August, 1995. Mr. Babbitt has been the President of the Medical Supply Company, Bl Industries, American Safety Equipment Corporation, and Bl Advisors. Mr. Babbitt is an international marketing consultant to Teikuro Corporation and Cosmo Corporation in Japan. Mr. Babbitt is also a member of the Board of Directors of Unisyn Biowaste Technology and Interstate Safety Corporation. Mr. Babbitt obtained an undergraduate degree from Purdue University. Mr. Michael E. Platt was appointed as a member of the Board of the Directors of the Company in August, 1995. Michael E. Platt is President of Fresh Food Ventures, Inc. Mr. Platt co-founded Peerless Industrial Group, Inc. ("Peerless") in 1983, and was responsible for building it to an organization of more than 500 people, raising capital, taking the company public in 1985 and developing 12 Fuddruckers Restaurants in four Midwestern states. In 1994, Peerless sold its Fuddruckers Restaurants and in 1995 completed the acquisition of the Peerless Chain Company, a major domestic marketer of various chain products. Mr. Platt served as a Director of New Products for Kentucky Fried Chicken Corporation, and in various marketing positions at General Foods Corporation. In August, 1995, Edward Wishner and Stephen F. Burg resigned as members of the Board of Directors. Compliance with Section 16 of The Securities Exchange Act 1934 To the Company's knowledge, based on a review of such materials as are required by the SEC, no officer, director, or beneficial holder of more than five percent of the Company's issued and outstanding shares of common stock has filed with the SEC any form or report required to be so filed pursuant to section 16(a) of the Securities Exchange Act of 1934 during the fiscal year ended December 31, 1997 or prior thereto (see Item 11 for a list of the Company's officers, directors and beneficial holders of more than five percent of the Company's issued and outstanding shares of common stock). Based solely on a review of such materials as is required by the SEC, the Company is not aware of any transactions that were not reported. ITEM 10. EXECUTIVE COMPENSATION There was no cash compensation paid by the Company to the executive officers of the Company for the fiscal years ended December 31, 1997 and 1996. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The persons set forth on the chart below are known to the Company to be the beneficial owners of more than five percent of the Company's outstanding voting common stock as of April 20, 1998. Information concerning the number and percentage of shares of voting common stock of the Company owned on record and beneficially by management is set forth on the chart below: Shares of common Percent of Name and Address of stock beneficially common stock beneficial owner owned owned Israel and Ahuva Rubinstein 131,840 10.9% 551 Drift Stone Avenue Las Vegas, Nevada 89123 Yifal Shaham 60,625 5.0% 9720 Holcolm Street Los Angeles, CA 90035 All Directors and Officers 131,840 10.9% as a group (4 persons) (1) Based upon 1,196,342 shares of common stock issued and outstanding as of April 20, 1998. This does not take into account 208,965 shares of Preferred stock representing in the aggregate 24,296,500 common shares votes. Each share of Preferred Stock is convertible into 100 shares of voting common stock. Of the Preferred Stock outstanding, 96,750 shares (46.3%) are held by the Directors of the Company (Dr. Malcolm Currie, 30,000 shares; Richard Babbit, 30,000 shares; Michael Platt, 36,750 shares). ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Exhibits None. A copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any person who was a shareholder of the Company on March 31, 1998 upon receipt from any such person of written request for any such exhibit. Such request should be sent to the Company with the attention directed to the Corporate Secretary. Reports on Form 8-K In April, 1998, the Company entered into a Plan and Agreement of Merger with Infectech, a Delaware Corporation ("Infectech"). The Company will issue approximately 26,320,520 Shares of common stock to Infectech's stockholders so that on the effective date of the merger, the shareholders of Infectech will own, in the aggregate, 85% of the common stock of the Company. Upon closing, the Company will change its name to Infectech, Inc., and the shareholders of Regal One as a group will own 15%. The Board of Directors of Infectech will become the Board of Directors of the Company. For each share of Infectech's issued and outstanding common stock, its stockholders will receive approximately 3.01 shares of Regal One common stock, subject to further adjustment downward for issuances of securities by Infectech pursuant to stock options, consulting agreements or other private offerings. The Company must cause holders of its Preferred Stock to convert their shares into an aggregate of not more than 3,447,923 shares of common stock, which together with a current 1,196,342 Shares of common stock outstanding, will result in a total of 30,964,785 shares to be outstanding upon closing of the merger. The transaction is contingent upon the approval of the shareholders of both companies, upon certain regulatory approvals and other conditions. One condition of the merger is that the Securities and Exchange Commission must declare effective the Company's registration of the Shares of common stock to be issued to Infectech. Another condition of the merger is that Infectech raise a minimum of $300,000 through an offering or other funding source prior to June 30, 1998. The companies anticipate that a merger will be completed prior to year end; however, if the merger is not completed by December 31, 1998, either the Company or Infectech may terminate and abandon the merger. The companies are currently exploring different structures of this transaction which may be more time and cost efficient. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGAL ONE CORPORATION Date:_________________ /s/ Israel Rubinstein Israel Rubinstein, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities end on the dates indicated. Signatures Title Date /s/ Israel Rubinstein President, Principal ____ Israel Rubinstein Executive Officer and a Director /s/ Malcolm R. Currie Chairman of the Board, ____ Dr. Malcolm R. Currie and a Director /s/ Richard Babbitt Secretary, Treasurer and ____ Richard Babbitt a Director /s/ Michael E. Platt Director ____ Michael E. Platt Albright, Persing & Associates, Ltd. CERTIFIED PUBLIC ACCOUNTANTS 1025 Ridgeview Dr., Suite 300 Reno, Nevada 89509 Phone (702) 826-5432 FAX (702) 826-5510 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT Board of Directors Regal One Corporation We have audited the accompanying balance sheets of Regal One Corporation as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Regal One Corporation as of December 31, 1997 and 1996 and the results of its operation and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Regal One Corporation will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's ability to generate sufficient cash flows to meet its obligations, either through future revenues and/or additional debt or equity financing, cannot be determined at this time. In addition, the Company has suffered recurring losses and at December 31, 1997 and 1996, has a stockholders' deficit. These uncertainties raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Reno, Nevada May 20, 1998 REGAL ONE CORPORATION BALANCE SHEETS December 31, 1997 and 1996 (See Accountants' Audit Report) 1997 1996 ASSETS Current Assets Cash $ 55 $ 15,150 ======== ========== 55 15,150 Other Assets Deferred tax asset, net (Note 8) - - ========= =========== Total Assets $ 55 $ 15,150 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Due to stockholders $ 2,411 $ - Accounts payable and accrued liabilities 106,398 71,928 Total Current Liabilities 108,809 71,928 Stockholders' Equity (Deficit) (Note 6) Preferred stock, no par value. Authorized 50,000,000 shares; issued and outstanding 208,965 shares in 1997 and 1996 500 500 Common stock, no par value. Authorized 50,000,000 shares; issued and outstanding 1,196,342 shares in 1997 and 1,196,875 shares in 1996 5,941,113 5,941,113 Accumulated deficit (6,050,367) (5,998,391) Net Stockholders' Equity (Deficit) (108,754) (56,778) =========== =========== Total Liabilities and Stockholders' Equity (Deficit) $ 55 $ 15,150 REGAL ONE CORPORATION STATEMENTS OF OPERATIONS Years Ended December 31, 1997 and 1996 (See Accountants' Audit Report) 1997 1996 Expenses: Consulting and outside services $ 14,575 $ 10,000 Professional services 48,674 16,694 Research and development - 3,500 Other, selling, general and administrative expenses 4,417 560 ------ ------ 67,666 30,754 Operating Loss (67,666) (30,754) Other income (expense): Gain on disposal of Carbonex Systems (Note 2) - 295,803 Non-refundable deposit income - 30,000 Equity earnings (loss) of subsidiary sold (Note 2) - (246,227) ------ --------- - 79,576 Net income (loss) before extraordinary item (67,666) 48,822 Extraordinary item - gain on extinguishment of debt (net of income tax of $0) 15,690 - ======== ======= Net Income (Loss) $ (51,976) $ 48,822 Earnings per common share: Income (loss) from continuing operations before extraordinary items $ (.05) $ .04 Extraordinary items $ .01 $ - ======= ======= Net income $ (.04) $ .04 Earnings per common share - assuming dilution: Income (loss) from continuing operations before extraordinary items $ (.05) $ .00 Extraordinary items $ .00 $ - ======= ======= Net income $ (.04) $ .00 REGAL ONE CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT Years Ended December 31, 1997 and 1996 (See Accountants' Audit Report)