<Page>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSACTION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to________________
Commission file number 33-16110-D
SOUTHWESTERN WATER EXPLORATION CO.
(Formerly Star Acquisitions Corporation)
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1062895
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4391 S. PEARL STREET
LAS VEGAS, NEVADA 89121
- -------------------- -----
(Address of principal executives offices) (Zip Code)
(800) 661-9169
--------------
(Issuer's telephone number, including area code)
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 than the registrant required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
As of November 1, 2002, the Registrant had 23,600,012 shares of its common
stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<Page>
SOUTHWESTERN WATER EXPLORATION CO.
FORM 10-QSB
INDEX
<Table>
<Caption>
Page
----
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet - September 30, 2002 (unaudited) and
March 31, 2002 (audited)...................................... 2
Consolidated Statement of Loss and Deficit - Three Months ended
September 30, 2002 and 2001, Six Months ended September 30,
2002 and 2001 and period April 1, 1992 (inception) to
September 30, 2002 (unaudited)................................. 3
Consolidated Statement of Cash Flows - Three Months ended
September 30, 2002 and 2001, Six Months ended
September 30, 2002 and 2001 and period April 1, 1992
(inception) to September 30, 2002 (unaudited).................. 4
Notes to Consolidated Unaudited Financial Statements............. 5
Item 2 - Management's Discussion and Analysis or Plan of Operations...... 11
PART II OTHER INFORMATION....................................................... 15
</Table>
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Consolidated Balance Sheet
(Unaudited)
(Expressed in U.S. Dollars)
<Table>
<Caption>
September 30, March 31,
2002 2002
------------- -----------
(unaudited)
Assets
Current assets:
Cash $ 801,654 $ 1,299,357
Accounts receivable 10,193 10,193
Prepaid to affiliated corporation 54,200 77,000
----------- -----------
866,047 1,386,550
Due from affiliated corporation 22,839 --
Capital assets, at cost less accumulated depreciation
of $17,331 (2002 - $15,254) 21,364 20,109
License and other assets 201 201
----------- -----------
$ 910,451 $ 1,406,860
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 133,616 $ 387,675
Due to affiliated corporation -- 17,303
Minority interest 9,975 9,975
Shares to be issued (note 4(c)) 32,000 763,574
Shareholders' equity:
Share capital (note 4) 5,638,428 4,087,889
Deficit accumulated during development stage (4,612,328) (3,568,316)
Deficit accumulated prior to April 1, 1992 (291,240) (291,240)
----------- -----------
734,860 228,333
----------- -----------
$ 910,451 $ 1,406,860
=========== ===========
</Table>
See accompanying notes to consolidated unaudited financial statements.
2
<Page>
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Consolidated Statement of Loss and Deficit
(Unaudited)
(Expressed in U.S. Dollars)
<Table>
<Caption>
Period from
commencement of
Three months ended Six months ended operations on
September 30, September 30, April 1, 1992 to
------------------------------ ----------------------------- September 30,
2002 2001 2002 2001 2002
----------- ----------- ----------- ----------- -----------
Interest income $ 2,914 $ 1,795 $ 18,563 $ 2,055 $ 44,270
Expenses:
Development 136,853 445 251,729 445 1,957,003
Professional 152,821 12,072 214,840 14,548 570,220
Consulting fees 86,322 51,703 132,322 87,692 439,807
Salary 64,871 -- 113,668 41,273 340,517
Investor relations (recovery) (37,465) 15,000 (37,465) 30,000 22,535
Office expense 13,077 27,225 43,262 72,374 342,704
Travel 11,823 436 33,155 4,704 102,256
Compensation expense
on granting of stock
options 9,975 -- 10,624 -- 118,936
Bank charges 475 300 956 428 10,532
Financing services 145 -- 297,040 117,738 705,588
Miscellaneous 100 50 367 397 4,968
Commission -- -- -- -- 20,055
Business taxes -- -- -- -- 4,146
Depreciation 1,072 872 2,077 1,744 17,331
----------- ----------- ----------- ----------- -----------
440,069 108,103 1,062,575 371,343 4,656,598
----------- ----------- ----------- ----------- -----------
Net loss (437,155) (106,308) (1,044,012) (369,288) (4,612,328)
Deficit, beginning of period (4,175,173) (2,673,342) (3,568,316) (2,410,362) --
----------- ----------- ----------- ----------- -----------
Deficit, end of period $(4,612,328) $(2,779,650) $(4,612,328) $(2,779,650) $(4,612,328)
=========== =========== =========== =========== ===========
Net loss per common share,
basic and fully diluted $ (0.07) $ (0.01) $ (0.18) $ (0.02) N/A
=========== =========== =========== =========== ===========
</Table>
See accompanying notes to consolidated unaudited financial statements.
3
<Page>
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Consolidated Statement of Cash Flows
(Unaudited)
(Expressed in U.S. Dollars)
<Table>
<Caption>
Period from
commencement of
Three months ended Six months ended operations on
September 30, September 30, April 1, 1992 to
------------------------------ ----------------------------- September 30,
2002 2001 2002 2001 2002
----------- ----------- ----------- ----------- -----------
Cash flows from (used in) operating activities:
Operations:
Net loss $ (437,155) $ (106,308) $(1,044,012) $ (369,288) $(4,816,938)
Items not involving cash:
Depreciation 1,072 704 2,077 1,576 17,331
Compensation expense
on granting of stock
options 9,975 -- 10,624 -- 118,287
Stock issued for services (206,240) -- 38,240 120,000 512,760
Warrants issued for
services -- -- 178,750 45,070 391,879
Net change in non-cash
operating working capital:
Accounts receivable -- 243 -- (3,224) (10,193)
Accounts payable and
accrued liabilities (17,628) 15,003 (254,059) 15,097 133,646
Prepaid to affiliated
corporation 11,400 -- 22,800 -- (65,600)
----------- ----------- ----------- ----------- -----------
(638,576) (90,358) (1,045,580) (190,769) (3,718,828)
Financing:
Net advances from (repayment
to) affiliated corporation (12,766) 168,938 (40,142) 120,701 559,895
Advances from shareholder -- -- -- (14,939) 59,846
Repayment of advances
from shareholder -- -- -- -- (59,845)
Issuance of share capital 606,240 1,300,000 575,351 1,300,000 2,748,800
Minority interest -- (10,000) -- (10,000) 601,189
Shares to be issued (40,650) -- 16,000 -- 649,985
----------- ----------- ----------- ----------- -----------
552,824 1,458,938 551,209 1,395,762 4,559,870
Investments:
Purchase of capital assets -- (11,110) (3,332) (11,110) (39,388)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash (85,752) 1,357,470 (497,703) 1,193,883 801,654
Cash, beginning of period 887,406 239,837 1,299,357 403,424 --
----------- ----------- ----------- ----------- -----------
Cash, end of period $ 801,654 $ 1,597,307 $ 801,654 $ 1,597,307 $ 801,654
=========== =========== =========== =========== ===========
</Table>
See accompanying notes to consolidated unaudited financial statements.
4
<Page>
SOUTHWESTERN WATER EXPLORATION CO.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
Period ended September 30, 2002 and 2001
(Unaudited)
(Expressed in U.S. Dollars)
1. INCORPORATION AND BASIS OF PRESENTATION:
Southwestern Water Exploration Co. (the "Corporation") 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.
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. The
financial information included herein is unaudited. These interim financial
statements follow the same accounting policies and methods of application
as the most recent annual audited financial statements dated March 31,
2002, and should be read in conjunction with those financial statements.
The disclosures herein are incremental to those included within the annual
financial statements.
2. ORGANIZATION AND BUSINESS:
These financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which assume that the Corporation
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 September 30, 2002 the Corporation is in the development stage and has
no history of generating cash flow from its operations. The Corporation
intends to develop and market potable water throughout the southwest United
States and has identified a number of sites which it believes will provide
potable water, including a significant water reservoir in Colorado. In
order to develop these sites the Corporation needs to acquire access rights
and raise financing in order to commence drilling. Once developed, it is
the intent of the Corporation to market the water from these sites, or in
the event it is unsuccessful, to sell the water rights.
During its development stage, the Corporation has funded its operating
activities primarily by issuing equity. The Corporation anticipates that it
will be necessary to issue additional equity to fund future activities.
There can be no assurance that the Corporation will be successful in
raising additional equity or of the Corporation's ability to continue as a
going concern. The application of the going concern concept is dependent
upon the Corporation 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.
5
<Page>
3. RELATED PARTY TRANSACTIONS:
From time to time amounts are advanced by AIFE Canada to the Corporation as
and when required for operating purposes. There is, however, no obligation
for AIFE Canada to make future advances. During the six months ended
September 30, 2002, the Corporation repaid $40,142 (2002 - $16,742) net of
advances, to AIFE Canada.
Amounts due to and from AIFE Canada are non-interest bearing with no fixed
terms of repayment and are classed as long-term as the affiliate has agreed
not to demand repayment within the next year.
4. SHARE CAPITAL:
(a) 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
6
<Page>
4. SHARE CAPITAL (CONTINUED):
(b) Issued and outstanding:
<Table>
<Caption>
Number of Subscriptions
shares Amount receivable
----------- ----------- -------------
Issued and outstanding, April 1, 1992 12,300,000 $ 492 $ --
Effect 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 --
Subscriptions received -- 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
Issued on conversion of preferred shares 1,172,000 835,971 --
Issued on conversion of warrants 1,008,120 -- --
Issued for cash 326,000 119,018 --
Subscriptions received -- 60 (60)
Issued in exchange for reduction of amount
due to affiliated corporation 80,000 35,500 --
Issued for services rendered 300,000 -- --
----------- ----------- -----------
Balance, March 31, 1999 8,559,120 991,510 --
Issued for cash 1,200,000 1,200 --
Value attributed to compensation expense
on granting of stock options -- 100,000 --
----------- ----------- -----------
Balance, March 31, 2000 9,759,120 1,092,710 --
Issued for cash 1,500,000 299,000 --
Issued for services rendered 820,000 215,000 --
Issued to correct prior period error 55,200 -- --
Value attributed to warrants issued
for services rendered -- 102,791 --
Stock issuance costs -- (132,979) --
----------- ----------- -----------
Balance, March 31, 2001 12,134,320 1,576,522 --
</Table>
7
<Page>
4. SHARE CAPITAL (CONTINUED):
(b) Issued and outstanding (continued):
<Table>
<Caption>
Number of Subscriptions
shares Amount receivable
----------- ----------- -------------
Issued for cash 4,314,287 1,510,000 --
Issued for services rendered 952,857 381,035 --
Stock options exercised 166,667 50,000 --
Value attributed to warrants issued for
services rendered -- 116,637 --
Issued for cash and services received
in prior year 1,550,000 669,985 --
Issued for cash received subsequent
to year-end 250,000 -- 100,000
Correction of prior year overstatement (15,000) -- --
Stock issuance costs -- (224,602) --
Value attributed to compensation expense
on granting of stock options -- 79,800 --
Deferred compensation expense related to
granting of stock options -- (71,488) --
----------- ----------- -----------
Balance, March 31, 2002 19,353,131 4,087,889 100,000
Issued for cash 100,000 150,000 --
Issued on conversion of warrants 525,000 200,000 --
Issued for services rendered in prior year 342,000 206,240 --
Issued on conversion of long-term debt 2,979,880 655,574 --
Stock options exercised 333,334 100,000 --
Cancellation on exercise of stock options (33,333) (50,000) --
Subscriptions received -- 100,000 (100,000)
Value attributed to warrants issued for
services rendered -- 178,750 --
Value attributed to warrants issued for
services to be rendered -- 217,200 --
Deferred consulting expense related to
issuance of warrants -- (217,200) --
Value attributed to compensation expense
on granting of stock options -- 9,975 --
----------- ----------- -----------
Balance, September 30, 2002 23,600,012 $ 5,638,428 $ --
========== =========== ===========
</Table>
(c) Shares to be issued:
The Corporation authorized for issuance 80,000 shares, with a fair
value of $32,000, for services rendered during fiscal 2002 and 2003
that were not yet issued at September 30, 2002.
8
<Page>
4. SHARE CAPITAL (CONTINUED):
(d) Warrants:
The warrants issued and outstanding at September 30, 2002 were as
follows:
<Table>
<Caption>
Number of Exercise Expiration
warrants price date
- ------------------ -------- ----------
500,000 0.25 July 11, 2003
1,200,000 0.50 September 15, 2002
100,000 0.50 April 14, 2003
230,000 0.50 February 23, 2004
250,000 1.00 April 14, 2003
1,000,000 1.00 October 1, 2003
500,000 1.00 February 23, 2003
40,000 1.00 February 26, 2003
250,000 1.50 April 14, 2003
1,000,000 1.50 October 1, 2003
4,627,762 1.50 November 1, 2004
28,572 1.50 January 2, 2005
540,000 2.00 November 19, 2003
250,000 2.50 June 28, 2005
600,000 2.50 September 25, 2006
4,285,175 3.00 November 1, 2004
28,572 3.00 January 2, 2005
342,587 3.50 November, 1, 2004
75,000 0.75 Conditional
50,000 1.00 Conditional
----------
15,897,668
==========
</Table>
During the three months ended September 30, 2002, 600,000 warrants, with an
exercise price of $2.50 and an expiry date of September 24, 2006, were
issued for consulting services to be rendered. The fair value of these
warrants at the date of grant was calculated to be $217,200 in accordance
with the Black Scholes option pricing model, using the following
assumptions:
<Table>
Risk free interest rate 4.0%
Volatility 155%
Life of the warrant 4.0 years
Dividend yield 0%
Fair value of common share at date of grant (discounted due to hold period) $0.54
</Table>
9
<Page>
4. SHARE CAPITAL (CONTINUED):
(d) Warrants (continued):
125,000 warrants have conditional expiry dates and all relate to the
drilling and testing of the Corporation's first well in the Hygiene
formation in Colorado. 75,000 warrants (the "$0.75 warrants") with an
exercise price of $0.75 per warrant expire six months following the
exercise of the $0.50 warrants. The remaining 50,000 warrants with an
exercise price of $1.00 per warrant expire six months following the
exercise of the $0.75 warrants.
(e) Stock options:
The Corporation has an incentive stock option plan, which provides for
the granting by the Board of Directors of stock options to directors
and officers for the purchase of authorized but unissued common
shares. On August 1, 2002 the Corporation granted 1,500,000 stock
options to its directors with an exercise price of $0.70 per share.
These options have an exercise price equal to the market price at the
date of grant and are exercisable from the grant date up to August 1,
2012.
Had the Corporation determined compensation costs for options granted
to directors based on the fair value at the date of grant for its
stock options under SFAS 123, the 2002 net loss would have been as
reported in the following table. The Corporation has not recognized in
income any amount for stock-based employee compensation expense. These
pro forma loss amounts reflect compensation cost amortized over the
options' vesting period, and were calculated using the Black-Scholes
option pricing model with the following average assumptions: risk free
interest rate of 4%, expected life of ten years and expected
volatility of 155%.
<Table>
Net loss:
As reported $ 437,155
Pro forma 1,010,645
-------------
Basic and fully diluted loss per common share:
As reported $ 0.07
Pro forma 0.17
-------------
</Table>
10
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the financial statements and accompanying notes appearing elsewhere in this
quarterly report for the period ended September 30, 2002.
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or the Company's
future financial performance. The Company intends the forward-looking statements
throughout this quarterly report and the information incorporated by reference
to be covered by the safe harbor provisions for forward-looking statements. All
projections and statements regarding the Company's expected financial position
and operating results, its business strategy, its financing plans and the
outcome of any contingencies are forward-looking statements. These statements
can sometimes be identified by the use of forward-looking words such as "may,"
"believe," "plan," "will," "anticipate," "estimate," "expect," "intend," and
other words and phrases of similar meaning. Known and unknown risks,
uncertainties and other factors could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on information available as of the date of this report on
Form 10-QSB and on numerous assumptions and developments that are not within our
control. Although the Company believes these forward-looking statements are
reasonable, the Company cannot assure you they will turn out to be correct.
Actual results could be materially different from our expectations due to a
variety of factors, including the following:
o the Company's ability to locate and utilize significant potable water
reserves capable of being transported to the end user;
o the Company's ability to obtain water rights to deep-water reserves;
o the Company's ability to obtain government approvals to drill
exploratory wells, construct pipelines and appropriate water;
o the Company's ability to comply with current and future laws or
regulations that could require material expenditures by the Company;
o the Company's ability to obtain significant additional capital
required to commence drilling, operate the wells, construct pipelines
and storage facilities, and develop a marketing program for the sale
of water to end users;
o water allocation regulations imposed by states that control the amount
of water that the Company can draw from water sources;
o intense competition with government agencies and other companies that
are better
11
<Page>
capitalized than the Company; and
o the Company's status as a development stage company with limited
operating history and continuing losses.
This list is intended to identify some of the principal factors that could
cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report.
OVERVIEW
Southwestern Water Exploration Co. (the "Company"), formerly Star
Acquisitions Corporation, was incorporated in the State of Colorado on July 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 1993, and all expenses incurred were solely
related to maintaining the entity and reviewing potential business
opportunities.
As of September 30, 2002, the Company is in the development stage and has
no history of generating cash flow from its operations. The Company intends to
develop and market potable water throughout the southwest United States and has
identified a number of sites which it believes will provide potable water,
including a significant water reservoir in Colorado and other western states. In
order to develop these sites and commence drilling the Company needs to acquire
access rights and raise additional capital. 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.
12
<Page>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
The Company has incurred operating losses and negative cash flow each
quarter and each year since 1993. The Company incurred a net loss of $437,155
for the three month period ending September 30, 2002, as compared to a net loss
of $106,308 for the same period in 2001. This increased loss is due primarily to
an increase in operating expenses in the fiscal year 2003 as the Company has
significantly increased its level of activity.
The Company incurred $136,853 in development expenses for the three months
ended September 30, 2002, as compared to development expenses of $445 during the
same period in 2002. The increase in the Company's development expense consisted
primarily of additional drilling and lab evaluation costs related to the
drilling of the Company's exploratory well, which was commenced in the fourth
quarter of the Company's 2002 fiscal year, and the acquisition and processing of
new well information to update the Company's informational database.
Travel expenses increased to $11,823 during the three months ended
September 30, 2002, as compared to $436 in the same period in 2001. The increase
in travel resulted primarily from the Company's expanded level of operations in
Colorado.
Professional expenses increased to $152,821 during the three months ended
September 30, 2002 as compared to professional expenses of $12,072 during the
same period in 2001. The increase in professional expenses is primarily due to
the Company's continuing initiative to bring its taxation and securities filings
up to date.
The Company also experienced increased consulting fee and salary expenses
during the three months ended September 30, 2002. Consulting fee expenses
increased during the three months ended September 30, 2002 to $86,322 compared
to consulting fee expenses of $51,703 in the same period in 2001. Salary
expenses increased during the three months ended September 30, 2002 to $64,871
compared to $0 in the same period in 2001.
Office expenses decreased to $13,077 during the three months ended
September 30, 2002 as compared to office expenses of $27,225 in the same period
in 2001.
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
The Company incurred a net loss of $1,044,012 for the six month period
ending September 30, 2002, as compared to a net loss of $369,288 for the same
period in 2001. This increased loss is due primarily to an increase in operating
expenses in the fiscal year 2003 as the Company significantly increased its
level of activity.
The Company incurred $251,729 in development expenses for the six months
ended September 30, 2002, while the Company incurred development expenses of
$445 during the same period in 2002. The Company's total development expense
consisted primarily of additional drilling and lab evaluation costs related to
the drilling of the Company's exploratory
13
<Page>
well, which was commenced in the fourth quarter of the Company's 2002 fiscal
year, and the acquisition and processing of new well information to update the
Database.
Travel expenses increased to $33,155 during the six months ended September
30, 2002, as compared to $4,704 in the same period in 2001. The increase in
travel resulted primarily from the Company's expanded level of operations in
Colorado.
Professional expenses increased to $214,840 during the six months ended
September 30, 2002 as compared to $14,548 in the same period in 2001. The
increase in professional expenses is primarily due to the Company's continuing
initiative to bring its taxation and securities filings up to date.
The Company also experienced increased consulting fee and salary expenses
during the six months ended September 30, 2002. Consulting fee expense increased
to $132,322 in this period compared to $87,692 in the same period in 2001.
Salary expense increased to $113,668 in this period compared to $41,273 in the
same period in 2001.
The Company experienced a decrease in its office expense during the six
months ended September 30, 2002. Office expense decreased to $43,262 during this
period compared to $72,374 in the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the net proceeds generated from the sale of its common stock and through loans
and advances from stockholders and American Institute of Formation Evaluation,
Ltd. ("AIFE Canada"), a Canadian corporation controlled by Steven Misner and
Barbara McAllister, each of whom are officers and directors of the Company.
During the three months ended September 30, 2002, the Company received $12,530
from AIFE Canada and advanced $25,296 to AIFE Canada. During the same period in
2001, the Company received $168,938 from AIFE Canada in advances. See Note 3 to
the Consolidated Unaudited Financial Statements - "Related party transactions."
As of September 30, 2002, the Company's working capital was $732,431 as
compared to $988,875 as of March 31, 2002. The Company's anticipated immediate
liquidity and capital needs relate primarily to working capital, development
costs, securing ground water leases, seeking buyers for the water and / or water
rights and other general corporate requirements. Based on current plans,
management believes the Company will meet its obligations and expenditure plans
for the next year from existing capital resources.
Substantial financial, operational and management resources are needed
for the exploration and utilization of deep-water reservoirs to provide potable
water to municipalities. As a result, the Company's ability to locate
substantial deep-water reservoirs capable of being utilized or sold is unknown.
The Company's inability to locate and utilize significant water reserves capable
of being transported to the end user in a financially viable fashion would have
a material adverse effect on the Company's operations and financial condition.
The Company's ability to pursue its current projects in Nevada and Colorado
and other
14
<Page>
projects and implement its business strategy is substantially dependent upon its
ability to locate additional financing in significant quantities. The exact
amount of additional financing required will depend on various factors including
the following: the ability of the Company to enter into an agreement with a
municipality or water provider, the speed with which the water extraction can be
completed, the ability of the Company to arrange for transport of the water to
the end user and the ability of the Company to obtain local, state and federal
approvals. There can be no assurance that the Company will be able to obtain the
funds necessary to exploit the Database, complete the Nevada and Colorado
Projects or otherwise conduct its business.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that management
believes to be material, and there are no such proceedings that are known to be
contemplated.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2002, both Steven Misner and
Barbara McAllister, current directors of the Company, exercised options to each
purchase 166,667 (333,334 total) shares of the Company's common stock for total
proceeds to the Company of $100,000. Barbara McAllister exercised her option by
cashless exercise, exchanging 33,333 of her then-existing shares at a fair
market value of $1.50 on the day of exercise.
During the three months ended September 30, 2002, the Company sold 100,000
shares of its common stock to an accredited investor, Steven Antebi, at a price
of $1.50 per share for a total offering proceeds of $150,000. The Company also
granted Steven Antebi warrants to purchase 600,000 shares of its common stock at
$2.50/share, such warrant exercisable until September 25, 2006, in exchange for
consulting services to be provided to the Company. The fair market value of such
warrants at the date of grant is calculated to be $217,200.
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and
Regulation D adopted thereunder. No broker/dealers were involved in the sales
and no commissions were paid. All purchasers represented that they purchased the
securities for investment, and all certificates issued to the purchasers
contained a restrictive legend advising that the shares represented by the
certificates may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None during this reporting period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during this reporting period.
15
<Page>
ITEM 5. OTHER INFORMATION
None during this reporting period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
<Caption>
Exhibit
Number Title of Exhibit
- ------- ----------------
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 for fiscal year ended March 31, 1997, filed 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
for fiscal year ended March 31, 1997, filed May 4, 1998.
3.2 By-laws, incorporated by reference to Exhibit 3.2 of registrant's
Annual Report on Form 10-KSB for fiscal year ended March 31, 1997,
filed 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 for fiscal year ended March
31, 1997, filed May 4, 1998.
10.2 1999 Performance Stock Option Plan, incorporated by reference to
Exhibit 10.2 of registrant's Annual Report of Form 10-KSB for fiscal
year ended March 31, 2001, filed August 8, 2002.
10.2(a) Amendment No. 1 to 1999 Performance Stock Option Plan, incorporated by
reference to Exhibit 10.2(a) of registrant's Annual Report of Form
10-KSB for fiscal year ended March 31, 2001, filed August 8, 2002.
10.3 Employment Agreement dated October 10, 2001, by and between the
registrant and Thomas Lenney incorporated by reference to Exhibit 10.3
of registrant's Annual Report of Form 10-KSB for fiscal year ended
March 31, 2001, filed August 8, 2002.
10.3(a) Amendment to the Employment Agreement by and between the registrant
and Thomas Lenney, effective June 29, 2002, incorporated by reference
to Exhibit 10.3(a) of registrant's Annual Report of Form 10-KSB for
fiscal year ended March 31, 2001, filed August 8, 2002.
</Table>
16
<Page>
<Table>
99.1 Miscellaneous Exhibit.
99.2 Miscellaneous Exhibit.
</Table>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2002.
17
<Page>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Southwestern Water Exploration Co.
Date: November 12, 2002 /s/ Steven B. Misner
-------------------------------------
Steven B. Misner
Chief Executive Officer and Director
/s/ Barbara J. McAllister
-------------------------------------
Barbara J. McAllister
Chief Financial Officer (Principal
Accounting Officer) and Director
18
<Page>
CERTIFICATIONS
I, Steven B. Misner, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Southwestern Water
Exploration Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Steven B. Misner
-----------------------
Steven B. Misner
Chief Executive Officer
<Page>
CERTIFICATIONS
I, Barbara J. McAllister, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Southwestern Water
Exploration Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Barbara J. McAllister
---------------------------
Barbara J. McAllister
Chief Financial Officer