<PAGE> 1
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
(FEE REQUIRED)
For the fiscal year ended MARCH 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
(NO FEE REQUIRED)
For the transition period from ________________ to __________________
Commission file number 33-16110-D
SOUTHWESTERN WATER EXPLORATION CO.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
COLORADO 84-1062895
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
15 MACLEOD TRAIL S.E., SUITE 1100, ROCKY MOUNTAIN PLAZA, CALGARY, ALBERTA T2G 4T8
- ------------------------------------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
</TABLE>
(403) 531-2630
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act: NONE.
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 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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 Form 10-KSB
or any amendment to this Form 10-KSB. [X]
For the fiscal year ended March 31, 1998 the Issuer's revenues were
approximately $87.00
As of March 31, 1998, the aggregate market value of Issuer's voting
stock held by non-affiliates was approximately $5,306.00. No market currently
exists for any of the Issuer's equity securities.
As of March 31, 1998, the Registrant had 5,673,000 shares of common
stock outstanding.
Documents Incorporated by Reference: Exhibits in the Issuer's annual
report on Form 10-KSB dated May 4, 1998.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
================================================================================
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development
Southwestern Water Exploration Co. (the "Company"), formerly Star
Acquisitions Corporation, was incorporated in the State of Colorado on July 10,
1987. The Company's principal offices are located at 1100 Rocky Mountain Plaza,
615 Macleod Trail, S.E., Calgary, Alberta T2G 4T8.
Pursuant to approval of its board of directors, the Company entered into
an Agreement and Plan of Reorganization with American Institute of Formation
Evaluation Co.("AIFE") on October 23, 1993 (the "Plan"). Under the Plan, the
Company acquired all of the issued and outstanding shares of AIFE in exchange
for 4,500,000 shares of restricted common stock of the Company and AIFE became a
wholly owned subsidiary of the Company. On November 12, 1993, the Company filed
Amended and Restated Articles of Incorporation, pursuant to which the Company's
name was changed to Southwestern Water Exploration Co.
Business Description
The Company intends to locate, develop and market potable water throughout
the American Southwest. The Company will do this by acquiring water rights to
deep reservoirs in order to provide supplies of fresh water to cities,
municipalities, and farmers in the Southwest. The Company has acquired a
proprietary copy of a historical computerized database with information
concerning water bearing strata (the "Database"). The Database contains
information concerning over 150,000 computerized drill stem tests. Such
information is not available from any other known sources. A drill stem test is
a test run on a well drilled for hydrocarbons to determine pressures, flow
rates, and chemical properties of fluids, gas, and temperatures. Drill stem
tests are the only type of preliminary test which is run that measures the
actual properties of the reservoir. Information in the Database, which dates to
the 1950's, has been enhanced often. Using information contained in the
Database, the Company has identified a potential drilling site close to the City
of Las Vegas. The Company has also retained a geology firm to undertake a
detailed hydrogeological study of deep water flow patterns to identify drill
sites close to Las Vegas. The study concluded that the site identified by the
Company close to Las Vegas was likely to contain deep water reserves. The
Company believes that the Database will provide information to locate additional
sources of potable water from deep reservoirs.
Projects
Using the information contained in the Database, the Company has
identified what it believes to be preferential drilling sites for significant
reserves of potable water in Lincoln County, Nevada. If significant reserves are
located, the Company intends to deliver water reserves to Clark County, Nevada,
which includes the cities of Las Vegas, Henderson, and Laughlin. The Company
believes that drilling sites in Lincoln County, Nevada (the "Nevada Project")
will be its principal source of revenue initially. The Company intends to pursue
additional projects in the American Southwest with information from the
Database. The Company has identified at least 10,000 potential well sites
throughout the American Southwest. The Company intends to extract water from
some of these well sites and sell water from those sites to large metropolitan
communities.
Competition
The Company has identified a number of other companies, individuals, and
partnerships which market
2
<PAGE> 3
services similar to those of the Company. Many of these competitors are better
capitalized than the Company. Many of the Company's competitors, however, have
advocated strategies which focus on obtaining water from known water sources.
There are relatively few proposals to deliver subsurface water to
municipalities, as planned by the Company. While the Company believes that the
information from the Database provides it with a competitive advantage, there
can be no assurance that the Company will be able to compete effectively with
others to locate sources of potable water or to obtain favorable contracts for
the sale of such water.
Government Regulation
The Nevada Project will be subject to significant government regulation
and a potentially lengthy government approval process. Other future projects may
face comparable government regulation and involve extensive governmental
approvals. Nevada law requires that a permit be issued before any water may be
diverted. The drilling site involved in the Nevada Project is located in an area
which may require the Company to obtain a permit to appropriate water or obtain
permission to drill an exploratory well.
The Nevada State Engineer (the "State Engineer") may issue a written
waiver to the permit requirements for wells drilled to determine the
availability or quality of water. The State Engineer may grant such a waiver
upon a showing of good cause. The Company believes that good cause exists to
grant such a waiver because it will likely be drilling for water at a depth and
in an area where there has been no prior drilling for deep water reserves of
potable water. After the Company submits its appropriation application, the
State Engineer will publish a notice of the application in a newspaper of
general circulation. The State Engineer would also be required to give notice to
the counties from which water would be diverted and to the counties to which it
would be delivered. County commissioners would then review the application and
provide comments to the State Engineer. Pursuant to Nevada law, comments and
protests could also be submitted by interested persons prior to the granting of
a drilling permit for a development well. This procedure may involve an open
forum consultation process lasting one year or more.
If the proposed use of the discovered unappropriated water does not tend
to impair the value of existing rights and is not detrimental to the public
interest, the State Engineer is required by statute (with some exceptions) to
approve a permit application within one year. The State Engineer, however, may
impose additional requirements. Most of these requirements relate to the
transfer of limited amounts of shallow subsurface groundwater. It is not
anticipated that these requirements will impede the timing of the Nevada Project
because the Company is developing deep water reserves.
Prior to the commencement of work on the Nevada Project, the Company will
have to comply with certain environmental regulations. Commencement of the
Nevada Project may require the completion of an Environmental Impact Study
("EIS"). The Company believes, based on its research, that the drilling program
and the proposed pipeline route of the Nevada Project would cause minimal
environmental impact. The Company may also be required to obtain approval from
the Bureau of Land Management and the U.S. Fish and Game Department, among
others. Construction of the pipeline may also require compliance with numerous
federal laws, including but not limited to the Endangered Species Act.
The construction of a pipeline to deliver water from the well site to the
end user will also be subject to government regulation and approval with regard
to property rights. The Company may need to purchase easements on property owned
by the State of Nevada or the federal government. The purchase of such easements
may require the Company to obtain governmental approvals and to comply with
federal and state regulations, which may result in significant delay. The
Company believes that construction of the pipeline and a pumping station will be
financed by an issuance of public-sector or other securities. The need for
governmental approval and compliance with federal or state regulations for such
financing may result in significant delays or render the
3
<PAGE> 4
Nevada Project or other future projects prohibitively expensive. The failure to
obtain such financing may prevent the Company from completing the Nevada Project
or other future projects. The Company has not yet received a permit to drill for
water for the Nevada Project or to divert water. The Company has not received
any waiver from the aforementioned permit process or any approvals or permits
for the construction of the pipeline for the Nevada Project.
Existing or future state or federal regulations will play a critical role
in the Company's successful completion of the Nevada Project and other future
projects of the Company. Such existing or future legislation could prevent the
Company from undertaking the Nevada Project or other future projects or prohibit
the Company from profitably completing the Nevada Project or other future
projects.
Research and Development
For the period from March 31, 1996 to March 31, 1998, the Company expended
approximately $427,200 on research and development. None of this amount was
borne directly by the Company's customers.
Environmental Compliance
The Company has not previously been subject to any material costs for
compliance with any environmental laws. The Company believes that the cost and
effect of environmental laws upon its proposed operations relating to the Nevada
Project will not be material. The Company does believe, however, that an
Environmental Impact Study ("EIS") will be required for the pipeline route in
the Nevada Project. The cost of the EIS is expected to be approximately $45,000.
Employees
At the present time, the Company has no full-time employees. The Company
plans to retain full-time employees in the future to implement its business
plan. See "Management's Discussion and Analysis or Plan of Operation."
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal place of business is located at Suite 1100, 615
Macleod Trail, S.E., Calgary, Alberta, T2G 4T8. The Company entered into a lease
agreement with the American Institute of Formation Evaluation, Ltd. ("AIFE
Ltd.") effective November 1, 1993, under a month to month lease. The Company
pays $1,000 to AIFE Ltd. for office services. See "Certain Relationships and
Related Transactions." The Company does not own or lease any other property.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which in the opinion
of Company's management are individually or collectively, material to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the 1997-1998 fiscal year, the Company did
not submit any matter to a vote of security holders through the solicitation of
proxies or otherwise.
4
<PAGE> 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no current public trading market for the Company's common stock.
On March 31, 1998, there were approximately 143 shareholders of record of
the Company's common stock and 5,673,000 shares of common stock
outstanding.
To date, the Company has not paid or declared any dividends with respect
to its common stock. The current policy of the Board of Directors is to retain
earnings, if any, in order to provide for growth of the Company. Consequently,
no cash dividend or any other dividend is expected to be paid on the common
stock in the foreseeable future. Furthermore, there can be no assurance that the
future operations of the company will generate the revenues and cash flow
necessary to declare a cash dividend or that the Company will have legally
available funds to pay dividends.
The Company's Transfer Agent is Securities Transfer Corporation located in
Dallas, Texas.
Recent Sales of Unregistered Securities
From March 31, 1995 to March 31, 1998, the Company issued approximately
651,000 Units to certain sophisticated individuals at a price per Unit of $1.00
for a total offering of $651,000. Each Unit consisted of one share of its $.001
par value common stock; a warrant to purchase one share of common stock of the
Company at an exercise price of $2.00 which expired on April 30, 1998; and a
redeemable preferred share in the Company's subsidiary, AIFE. The preferred
share is redeemable at the option of the Company at any time or from time to
time at the discretion of AIFE's Board of Directors at a price of $1.00 per
share. An overwhelming majority of investors were residents of Canada. The
securities comprising the Units were issued with a Rule 144 restrictive legend.
Each purchaser of a Unit was informed and advised about certain matters
concerning the Company including its business and financial affairs. No general
form of advertising was used in connection with the placement of such
securities. No underwriters were used in connection with the issuance of these
securities and no commissions were paid to any person. The Company relied on the
exemptions from registration contained in Sections 4(2) and 3(b) of the 1933 Act
and Regulation S and Regulation D promulgated under the 1933 Act.
5
<PAGE> 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
Southwestern Water Exploration Co. (the "Company"), formerly Star
Acquisitions Corp., was incorporated in the State of Colorado on June 10, 1987.
The Company's activities from inception consisted primarily of reviewing
possible business opportunities and acquisitions, and maintaining the business
entity. The Company had only nominal net assets and no operational activities
from the fiscal years 1987 through 1995 and all expenses incurred were solely
related to maintaining the entity and reviewing potential business
opportunities.
The Company intends to develop and market potable water throughout the
American Southwest. During its development stage, the Company acquired the
Database which it believes will provide surface drilling locations to mine deep
(below 2,000 ft) subsurface aquifers. The Database provides specific information
including surface location, depth(s) of aquifers, temperature, production
capability, and mineral properties from wells previously drilled for
hydrocarbons and subsequently abandoned.
The Company has identified a number of sites which it believes will
provide potable water, including a significant water reservoir in Nevada, by
utilizing the Database. Once developed, it is the intent of the Company to
market the water from these sites. If the marketing effort is unsuccessful, the
Company intends to sell the water rights to these sites.
Management believes that the Company can satisfy its cash requirements
from existing funds for another three months. The Company intends to raise
additional funds to meet is cash requirements through a private placement of its
securities. The Company anticipates that funding of future operations will be
provided by the completion of a private placement for a minimum of $1.5 million.
There can be no assurances, however, that the Company will be successful in the
completion of the private placement. In the event the private placement is not
successful or fails to raise sufficient funds, the Company may seek alternative
financing in the form of short-term or long-term debt or securities convertible
into common stock of the Company.
In the event the private financing is successful, the Company intends to
engage Messrs. Misner and Webb as full-time employees and pay them monthly
salaries of approximately $5,000 per month respectively. Even if the amount
raised in the private placement meets expectations, the Company does not plan to
hire additional employees or purchase or acquire plant or significant equipment.
The Company will meet its personnel, drilling and pipeline requirements by
contracting for these services with third parties.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are filed as a part of this Form 10-KSB:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors Report 14
Consolidated Balance Sheets 15
Consolidated Statements of Loss and Deficit 16
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Financial Statements Page
<S> <C>
Consolidated Statements of Cash Flow 17
Notes to Consolidated Financial Statements 18
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the last two fiscal years there have been no changes in or
disagreements with the Company's principal independent accountant on accounting
or financial disclosure. No principal independent accountant or subsidiary's
independent accountant on whom the principal accountant has expressed reliance
has resigned or been dismissed.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Officers and Directors
The Officers and Directors of the Company are:
<TABLE>
<CAPTION>
Officer and/or
Name and Addresses Age Position Director Since
------------------ --- -------- --------------
<S> <C> <C> <C>
Steven B. Misner 38 President and Director 1993
Suite 1100
615 MacLeod Trail, S.E.
Calgary, Alberta
Barbara J. McAllister 61 Secretary, 1993
Suite 1100 Chief Financial Officer,
615 MacLeod Trail, S.E. and Director
Calgary, Alberta
Arthur Webb 58 Vice-President of 1993
Suite 1100 Operations and Director
615 MacLeod Trail, S.E.
Calgary, Alberta
</TABLE>
All directors hold office until the next annual meeting of stockholders,
and until they or their successor have been elected and qualified. Officers
serve at the discretion of the Board of Directors.
Steven B. Misner
Mr. Misner has served as the President and as a Director of the Company
since October, 1993. During
7
<PAGE> 8
the past five years, Mr. Misner has served as the President of AIFE. In 1989,
Mr. Misner initiated research into the viability of utilizing underground water
reservoirs which could meet the water requirements of the American Southwest. In
1986, Mr. Misner negotiated the acquisition of the Petroleum Research
Corporation's database of the United States. In 1985, he initiated a
Hydrodynamics Division to study underground waterflow patterns. In 1983, Mr.
Misner spearheaded the acquisition of the Canadian database. In 1978, Mr. Misner
joined the Research and Project Team where he initiated the creation of a
database containing historical drill stem test data on federal and provincial
lands of Canada. Mr. Misner has also served as a director of several Canadian
companies involved in Canadian data sales, oil and gas exploration, and real
estate development.
Barbara J. McAllister
Ms. McAllister has served as the Secretary, Chief Financial Officer, and
as a Director of the Company since October, 1993. During the past five years,
Ms. McAllister has also been the Executive Vice President and Treasurer of AIFE.
Ms. McAllister has been active in all areas of running the Company. Ms.
McAllister has participated in the gathering of drill stem test data and in
negotiating contracts with clients and others who utilize information from the
Company's Database. She administers a staff which analyzes data and maintains
the Company's Database. Ms. McAllister has a wide range of administrative skills
acquired through former employment as an educator, businesswoman, and realtor.
She has worked extensively overseas during her involvement in the petroleum
industry. Ms. McAllister received her graduate degrees from the University of
Calgary, in Calgary, Alberta.
Arthur Webb
Mr. Webb has been a director of the Company since October, 1993 and Vice
President of Operations since 1995. Mr. Webb has over 35 years of experience in
the oil business including, drilling, geological and land negotiation. During
the past twenty-five years, Mr. Webb has been the owner and served as the
President of A.J. Webb Oilfield Consultants and A&M Enterprises, Inc. During the
past five years, he served as a Director and Vice President of Craft Energy
Ltd., Director and Chief Financial Officer of St. Jude Resources, which is
listed on the Vancouver Stock Exchange, and Director and President of S.A.W.
Holdings Ltd.
ITEM 10. EXECUTIVE COMPENSATION.
No compensation was paid to any officer or director for the last three
fiscal years.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number of shares of the Company's
common stock beneficially owned by each person who, as of the date hereof, was
known by the Company to own beneficially more than five percent (5%) of its
common stock, all directors and nominees, each of the named executive officers
as defined in Item 402(a)(2), and directors and officers as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
<S> <C> <C>
Steven B. Misner 1,210,176 21.3%
Suite 1100
615 MacLeod Trail, S.E.
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
<S> <C> <C>
Calgary, Alberta
Barbara J. McAllister 1,303,507 23.0%
Suite 1100
615 MacLeod Trail, S.E.
Calgary, Alberta
Arthur Webb 359,999(1) 6.34%
Suite 1100
615 MacLeod Trail, S.E.
Calgary, Alberta
Landmark Corporation 966,667 17.03%
Suite 1710, Bow Valley 2
Calgary, Alberta T2P 2V7
Officers and Directors
As a Group (3 persons) 3,840,349 67.7%
</TABLE>
(1) 200,000 of the 359,999 shares listed as held by Mr. Webb have not been
issued, but are subject to Mr. Webb's right to acquire such shares within
60 days from the date hereof. 33,333 of the 359,999 shares listed as held
by Mr. Webb are owned by his spouse. 116,666 of the 359,999 shares listed
as held by Mr. Webb are owned by Mr. Webb through A&M Enterprises, Inc.,
Suite 1100, 615 MacLeod Trail, S.E.,Calgary, Alberta.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company and its subsidiary, American Institute of Formation Evaluation
Co. ("AIFE"), share office space, telephone and certain office personnel with
AIFE Ltd., a Canadian company ("AIFE Ltd."). Mr. Misner and Mrs. McAllister are
controlling shareholders of AIFE Ltd. The Company and AIFE pay $1,000 per month
to AIFE Ltd. in exchange for office space, use of telephones and certain
personnel.
AIFE Ltd. has provided updates to the Company for the Database. Since
April 1996, AIFE Ltd. has charged the Company $427,200 for such updates. AIFE
Ltd. has billed the Company for these updates at the same rate as charged to
third parties.
AIFE Ltd. has from time to time advanced funds to the Company which were
used for working capital. Since March 31, 1997, AIFE Ltd. has advanced $7,852
to the Company. As of March 31, 1998, the Company was indebted to AIFE Ltd. in
the amount of $622,029. The amounts advanced by AIFE Ltd. are not evidenced by a
written instrument, do not bear interest and have no fixed maturity date.
On September 1, 1993, AIFE entered into a license agreement with AIFE Ltd.
whereby AIFE Ltd. granted to AIFE a non-exclusive license to use certain drill
stem test reports and other oil and gas and water information until August 31,
2013 (the "License Agreement"). The license fee is 10% of the annual net cash
flow profits of AIFE with a one year maximum of $150,000 and a maximum
cumulative fee over the license term of $1,500,000. Neither AIFE nor the Company
have paid any amounts to AIFE Ltd. in connection with the License Agreement
during the fiscal years ended March 31, 1997 and March 31, 1998. The Company
intends to use the drill stem reports and other information subject to the
License Agreement to locate subterranean water in
9
<PAGE> 10
the American Southwest.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
- ------ -------- -------
<S> <C>
2.1 Agreement and Plan of Reorganization between Star Acquisitions
Corporation and Southwestern Water Exploration Co., dated October 23,
1993, incorporated by reference to Exhibit 2.1 of registrant's Annual
Report on Form 10-KSB dated May 4, 1998.
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 of registrant's Annual Report on Form 10-KSB
dated May 4, 1998.
3.2 By-laws, incorporated by reference to Exhibit 3.2 of registrant's
Annual Report on Form 10-KSB dated May 4, 1998.
10.1 License Agreement between American Institute of Formation Evaluation
Ltd. and American Institute of Formation Evaluation Co., dated
September 1, 1993, incorporated by reference to Exhibit 10.1 of
registrant's Annual Report on Form 10-KSB dated May 4, 1998.
21.1 A description of the Registrant's subsidiary, incorporated by
reference to Exhibit 21.1 of registrant's Annual Report on Form
10-KSB dated May 4, 1998.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the fourth quarter of the fiscal year ended March 31, 1998.
10
<PAGE> 11
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Southwestern Water Exploration Co.
Date: July 13, 1998 By: /s/ Steven B. Misner
---------------------
Steven B. Misner
President
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: July 13, 1998 By: /s/ Steven B. Misner
----------------------------
Steven B. Misner
President and Director
Date: July 13, 1998 By: /s/ Barbara J. McAllister
----------------------------
Barbara J. McAllister
Secretary, Chief Financial Officer
and Director
Date: July 13, 1998 By: /s/ Arthur Webb
----------------------------
Arthur Webb
Vice-President of Operations
and Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
The issuer has not furnished any annual reports or proxy statements to its
security holders.
11
<PAGE> 12
[KPMG LOGO]
Consolidated Financial Statements of
SOUTHWESTERN WATER
EXPLORATION CO.
(A Development Stage Enterprise)
Years ended March 31, 1998 and 1997
(Expressed in U.S. dollars)
<PAGE> 13
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Southwestern Water
Exploration Co. as at March 31, 1998 and 1997 and the related statements of
income, retained earnings, and cash flows for the years then ended and for the
period from commencement of operations on April 1, 1992 to March 31, 1998. 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 United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southwestern Water Exploration
Co. as at March 31, 1998 and 1997, and the results of its operations and its
cash flows for the year then ended and for the period from commencement of
operations on April 1, 1992 to March 31, 1998 in conformity with United States
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are disclosed in note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG
Chartered Accountants
Calgary, Canada
June 26, 1998
<PAGE> 14
<TABLE>
<CAPTION>
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Consolidated Balance Sheets
March 31, 1998 and 1997
(Expressed in U.S. Dollars)
==========================================================================================
1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ - $ 1,473
Prepaid expenses 698 -
- ------------------------------------------------------------------------------------------
698 1,473
Property, plant and equipment, at cost less accumulated
depreciation 5,249 5,844
License and other assets 201 201
- ------------------------------------------------------------------------------------------
$ 6,148 $ 7,518
==========================================================================================
Liabilities
Current liabilities:
Cash overdraft $ 175 $ -
Accounts payable and accrued liabilities 30,991 33,599
- ------------------------------------------------------------------------------------------
31,166 33,599
Due to affiliated company (note 3) 622,029 496,008
Minority interest (note 4) 860,946 735,072
Shareholders' equity:
Share capital (note 5) 961 835
Deficit accumulated during development stage (1,217,714) (966,756)
Deficit accumulated prior to April 1, 1992 (291,240) (291,240)
- ------------------------------------------------------------------------------------------
(1,507,993) (1,257,161)
- ------------------------------------------------------------------------------------------
$ 6,148 $ 7,518
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the board:
___________________________ Director
___________________________ Director
<PAGE> 15
<TABLE>
<CAPTION>
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Years ended December 31, 1998, with comparative figures for 1997
Consolidated Statements of Loss and Deficit
(Expressed in U.S. Dollars)
===========================================================================================
Period from
commencement
of operations on
Years ended March 31, April 1, 1992
---------------------- to March 31,
1998 1997 1998
- -------------------------------------------------------------------------------------------
(note 2)
<S> <C> <C> <C>
Interest revenue $ 87 $ 61 $ 427
Expenses:
Development 213,600 213,600 960,805
Professional 21,041 15,793 98,585
Office expense 14,433 12,786 93,502
Miscellaneous 466 250 7,256
Bank charges 327 420 2,004
Travel - - 16,569
Consulting fees - - 30,217
Depreciation 1,178 1,420 9,203
- ------------------------------------------------------------------------------------------
251,045 244,269 1,218,141
- ------------------------------------------------------------------------------------------
Net loss (250,958) (244,208) (1,217,714)
Deficit, beginning of period (966,756) (722,548) -
- -------------------------------------------------------------------------------------------
Deficit, end of period $(1,217,714) $ (966,756) $(1,217,714)
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 16
<TABLE>
<CAPTION>
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Years ended December 31, 1998, with comparative figures for 1997
Consolidated Statements of Cash Flow
(Expressed in U.S. Dollars)
===========================================================================================
Period from
commencement
of operations on
Years ended March 31, April 1, 1992
--------------------- to March 31,
1998 1997 1998
- -------------------------------------------------------------------------------------------
(note 2)
<S> <C> <C> <C>
Cash provided by (used in):
Operations:
Loss for the period $ (250,958) $ (244,208) $(1,217,714)
Item not involving cash:
Depreciation 1,178 1,420 9,203
- ------------------------------------------------------------------------------------------
(249,780) (242,788) (1,208,511)
Net change in non-cash operating working capital:
Prepaid expenses (698) 1,000 (698)
Accounts payable and accrued liabilities (2,608) 14,515 30,992
- ------------------------------------------------------------------------------------------
(253,086) (227,273) (1,178,217)
Financing:
Increase (decrease) in cash overdraft 175 (16) 175
Issuance of share capital 126 145 41,109
Advances from affiliated company 126,021 84,097 535,889
Shares issued to minority interest 125,874 144,855 616,189
- ------------------------------------------------------------------------------------------
252,196 229,081 1,193,362
Investing:
Purchase of capital assets (583) (335) (15,145)
- ------------------------------------------------------------------------------------------
Cash provided (used) during the period (1,473) 1,473 -
Cash, beginning of the period 1,473 - -
- ------------------------------------------------------------------------------------------
Cash, end of period $ - $ 1,473 $ -
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Notes to Consolidated financial Statements
Years ended March 31, 1998 and 1997
(Expressed in U.S. Dollars)
===============================================================================
INCORPORATION AND BASIS OF PRESENTATION:
The Company is incorporated under the laws of the State of Colorado and is
planning to develop projects for the production of water reservoirs in the
United States but has not commenced active business.
These financial statements are presented using U.S. dollars as the functional
and reporting currency and have been prepared in accordance with generally
accepted accounting principles in the United States. They include the accounts
of the Company and its wholly owned subsidiary, American Institute of Formation
Evaluation Co. (AIFECO).
1. ORGANIZATION AND BUSINESS:
These financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which assume that the Company will
continue in operations for the foreseeable future and will be able to
realize its assets and discharge its obligations in the normal course of
operations.
At March 31, 1998 the Company is in the development stage, has a working
capital deficiency, and has no history of generating cash flow from its
operations. The Company intends to develop and market potable water
throughout the United States southwest. During the development stage of the
Company it has acquired the rights to a proprietary computerized drill stem
test database (the "Database") which it believes will provide surface
drilling locations to access deep (below 2,000 ft) subsurface aquifers. The
Database provides specific information including surface location, depth(s)
of aquifers, temperature, production capability, and mineral properties from
wells previously drilled for hydrocarbons and subsequently abandoned.
The Company has identified a number of sites which it believes will provide
potable water, including a significant water reservoir in Nevada, by
utilizing the Database. In order to develop these sites the Company needs to
acquire access rights and raise financing in order to commence drilling.
Once developed , it is the intent of the Company to market the water from
these sites, or in the event it is unsuccessful, to sell the water rights.
During its development stage, the Company has funded the acquisition of the
Database and its operating activities primarily by issuing equity and other
financial instruments. The Company anticipates that funding of future
activities will be provided by the completion of a private placement of
common stock for a minimum of $1.5 million. There can be no assurances,
however, that the Company will be successful in completing the private
placement.
<PAGE> 18
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Notes to Consolidated financial Statements, page 2
Years ended March 31, 1998 and 1997
(Expressed in U.S. Dollars)
===============================================================================
1. ORGANIZATION AND BUSINESS, CONTINUED:
In the event the private placement is not completed, the Company may incur
additional short or long term debt, or seek to sell additional shares of
common stock or stock purchase warrants, as deemed necessary by the Company,
to generate working capital. There can be no assurance of the Company's
ability to continue as a going concern. The application of the going concern
concept is dependent upon the Company receiving the continued support of its
shareholders, its ability to raise new capital and its ability to achieve a
commercial level of production and sales and profitable operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Property, plant and equipment:
Property, plant and equipment are stated at cost. Depreciation is
provided using a rate of 20% on a declining balance.
(b) Development costs:
Costs incurred in the development of water projects are expensed in the
period incurred.
(c) Foreign currency translation:
The functional currency of the company is the U.S. dollar. Monetary
assets and liabilities expressed in other currencies are translated at
the year end rate and the resulting translation adjustments are
recognized in income. Operating statement items are translated at the
exchange rate in effect at the transaction date.
(d) Use of estimates:
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 revenue and expenses
during the period. Actual results could differ from these estimates.
(e) Period from commencement of operations:
April 1, 1992 is considered the commencement of the current development
stage activities of the Company. Prior to this date, the subsidiary was
involved in other unrelated activities. Accordingly, cumulative amounts
from April 1, 1992 to March 31, 1998 have been reported in the
statements of loss and deficit, cash flow and the share capital note.
<PAGE> 19
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Notes to Consolidated financial Statements, page 3
Years ended March 31, 1998 and 1997
(Expressed in U.S. Dollars)
===============================================================================
3. RELATED PARTY TRANSACTIONS:
AIFE, American Institute of Formation Evaluation Ltd. ("AIFE Canada"), an
affiliate, provides updates to the Company's licensed proprietary data base.
During 1998 $213,600 (1997 - $213,600) was charged by AIFE Canada for the
updates, which costs are included in development expenses of the Company. In
addition, $12,000 (1997 - $12,000) of office expenses were allocated by AIFE
Canada to the Company. These transactions are in the normal course of
operations and are measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties.
From time to time amounts are also advanced by AIFE Canada to the Company as
and when required for operating purposes. There is, however, no obligation
for AIFE Canada to make future advances. During 1998 a net amount of $7,852
was advanced (1997 - $3,007 repaid).
On September 1, 1993 the Company acquired an exclusive 20 year license to
use data owned by AIFE Canada to explore for water in the Continental United
States. The license was acquired for $1 plus a license fee of 10% of the
annual net cash flow from operations of the Company, to a maximum aggregate
license fee of $1.5 million over the license term.
The amount due to affiliate (AIFE Canada) of $622,029 (1997 - $496,008) is
non-interest bearing with no fixed terms of repayment and is classed as long
term as the affiliate has agreed not to demand repayment within the next
year.
4. MINORITY INTEREST:
The minority interest consists of preferred shares issued by the Company's
operating subsidiary. Subsequent to year end, all except 25,000 preferred
shares with a value of $24,975 were converted to common shares (note 5). The
outstanding preferred shares are redeemable at the discretion of the
subsidiary at the issued value of $1 per share and dividends are payable at
the discretion of the subsidiary.
<PAGE> 20
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Notes to Consolidated financial Statements, page 4
Years ended March 31, 1998 and 1997
(Expressed in U.S. Dollars)
===============================================================================
5. SHARE CAPITAL:
The following share capital of Southwestern Water Exploration Co. was
authorized, issued and outstanding as at March 31, 1998:
Authorized:
50,000,000 preferred shares with a par value of $.001 per share
150,000,000 common shares with a par value of $.001 per share
Issued and outstanding:
<TABLE>
<CAPTION>
==============================================================================================
Number of Subscriptions
shares Amount receivable
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issued and outstanding, April 1, 1992 12,300,000 $ 492 $ -
Effective of reverse split,
October 23, 1993 (11,808,000) - -
Elimination of deficit - (492) -
Shares issued in reverse takeover 4,500,000 325 15
- ----------------------------------------------------------------------------------------------
Balance, March 31, 1994 4,992,000 325 15
Issued for cash 30,000 30 -
Amounts receivable collected - 15 (15)
- ----------------------------------------------------------------------------------------------
Balance March 31, 1995 5,022,000 370 -
Issued for cash and subscriptions receivable 235,000 220 15
- ----------------------------------------------------------------------------------------------
Balance March 31, 1996 5,257,000 590 15
Issued for cash and subscriptions receivable 265,000 245 20
- ----------------------------------------------------------------------------------------------
Balance, March 31, 1997 5,522,000 835 35
Issued for cash and subscriptions receivable 151,000 126 25
- ----------------------------------------------------------------------------------------------
Balance, March 31, 1998 5,673,000 $ 961 $ 60
==============================================================================================
</TABLE>
Amounts receivable are not included in share capital on the balance sheet
until settled.
Subsequent to year end the Company offered its shareholders the opportunity
to convert their preferred shares in AIFE to Class `A' Common voting shares
in Southwestern Water Exploration Co., and to convert their Warrants of
Southwestern Water Exploration Co. to Class `A' Common voting shares in
Southwestern Water Exploration Co.
This resolution was passed by the Board of Directors, June 19, 1998, and
will have the effect of increasing the number of common shares in
Southwestern Water Exploration Co. by 1,744,160. 896,000 preferred shares
will be exchanged for 896,000 common shares, increasing the value attributed
to share capital by $835,971. 1,116,000 warrants will be converted for a
total of 848,160 common shares, at nil value. The minority interest in the
balance sheet will decrease to $24,975 representing those shareholders who
do not wish to convert their AIFE preferred shares. The option attached to
the outstanding warrants of the minority interest shares expired April 30,
1998, no options were exercised.
<PAGE> 21
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Notes to Consolidated financial Statements, page 5
Years ended March 31, 1998 and 1997
(Expressed in U.S. Dollars)
===============================================================================
5. SHARE CAPITAL (CONTINUED):
Subsequent to year end the Directors resolved that a further 116,000 common
shares be issued with preferred shares and warrants attached. Upon
conversion of the preferred shares and warrants, an additional 204,160
common shares will be issued. In total 320,160 common shares will be issued.
6. INCOME TAXES:
The Company has loss carry forwards for income tax purposes approximating
its cumulative deficit. However, these may be subject to change following
filing and assessment of current and prior year income tax returns with US
tax authorities.
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
- ------ -------- -------
<S> <C>
2.1 Agreement and Plan of Reorganization between Star Acquisitions
Corporation and Southwestern Water Exploration Co., dated October
23, 1993, incorporated by reference to Exhibit 2.1 of
registrant's Annual Report on Form 10-KSB dated May 4, 1998.
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 of registrant's Annual Report on Form
10-KSB dated May 4, 1998.
3.2 By-laws, incorporated by reference to Exhibit 3.2 of registrant's
Annual Report on Form 10-KSB dated May 4, 1998.
10.1 License Agreement between American Institute of Formation
Evaluation Ltd. and American Institute of Formation Evaluation
Co., dated September 1, 1993, incorporated by reference to
Exhibit 10.1 of registrant's Annual Report on Form 10-KSB dated
May 4, 1998.
21.1 A description of the Registrant's subsidiary, incorporated by
reference to Exhibit 21.1 of registrant's Annual Report on Form
10-KSB dated May 4, 1998.
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 698
<PP&E> 14,452
<DEPRECIATION> (9,203)
<TOTAL-ASSETS> 6,148
<CURRENT-LIABILITIES> 31,166
<BONDS> 0
0
0
<COMMON> 961
<OTHER-SE> (1,508,954)
<TOTAL-LIABILITY-AND-EQUITY> 6,148
<SALES> 0
<TOTAL-REVENUES> 87
<CGS> 0
<TOTAL-COSTS> 213,600
<OTHER-EXPENSES> 37,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (250,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (250,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (250,958)
<EPS-PRIMARY> (4.47)
<EPS-DILUTED> (4.47)
</TABLE>
