DIPPY FOODS INC, 10KSB, 2000-08-15

DIPPY FOODS INC
10KSB, 2000-08-15
FOOD AND KINDRED PRODUCTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended APRIL 30, 2000
--------------

[ ] TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
--------------- ----------------
Commission file number
-----------------------------

DIPPY FOODS, INC.
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(Name of Small Business Issuer in its charter)

<S> <C>
Incorporated in the State of Nevada 33-076348
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

</TABLE>

16581 Channel Lane, Huntington Beach, California 92649
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(Address of principal executive offices) (Zip Code)

Issuer's telephone number (714) 816-0150
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Securities to be registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED

None N/A
------------------- -----------------------------------------

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

Common Stock - $0.001 par value
-------------------------------
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter
period that the registrant was required to file such reports) YES [ X ] NO [ ],
and (2) has been subject to such filing requirements for the past 90 days.
YES [ ] NO [X]

Check if there is no 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 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. [ ]

State issuer's revenues for its most recent fiscal year. $320,581.00

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DIPPY FOODS, INC. FORM 10-KSB PAGE 2 OF 19

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $9,347,560 AS OF AUGUST 8, 2000

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

CLASS OUTSTANDING AT AUGUST 8, 2000
----- -----------------------------
Common Stock - $0.001 par value 19,579,266

Documents incorporated by reference: NONE

Transitional Small Business Disclosure Format (Check one): YES [X] NO [ ]

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 3 OF 19

INFORMATION REQUIRED IN ANNUAL REPORTS OF

TRANSITIONAL SMALL BUSINESS ISSUERS

FORWARD LOOKING STATEMENTS

Management's discussion and analysis of the Company's financial condition and
the results of its operations and other sections of this report contain forward
looking statements that are based on the current beliefs and expectations of the
Company's management, as well as assumptions made by, and information currently
available to, the Company's management. These statements include those regarding
general economic and food industry trends. Because these statements involve
risks and uncertainties, actual actions and strategies and the timing and
expected results may differ materially from those expressed or implied by the
forward-looking statements, and the Company's future results, performance or
achievements could differ materially from those expressed in, or implied by, any
forward-looking statements. Future events and actual results could differ
materially from those set forth in or underlying the forward-looking statements.

This Annual Report on Form 10-KSB for the year ended April 30, 2000 contains
"forward-looking" statements within the meaning of the Federal securities laws.
These forward-looking statements involve a number of risks and uncertainties,
including the development and market acceptance of products, the ability to
secure additional sources of financing, the ability to reduce operating
expenses, acquisition of processing equipment to reduce cost of sales, and other
factors described in the Company's filing with the Securities and Exchange
Commission. The results that the Company achieves may differ materially from any
forward-looking statements due to these risks and uncertainties. The
forward-looking statements in this annual report on Form 10KSB for the fiscal
year ended April 30, 2000, are subject to risks and uncertainties that could
cause actual results to differ materially from this results expressed in or
implied by the statements contained in this report.

PART I

ITEM 6. DESCRIPTION OF BUSINESS.

(A) BUSINESS DEVELOPMENT

Dippy Foods, Inc. (the "ISSUER") was incorporated as Sweetbrier Corporation
under the laws of Nevada on February 23, 1998, for the purpose of developing
mineral properties. Sweetbrier abandoned its mining claims and changed its name
to Dippy Foods, Inc. on September 17, 1998, upon entering into an agreement of
acquisition with Dippy Foods, Inc., a California corporation in the business of
developing, processing and distributing packaged dipping foods for snacks,
school lunch programs, and disaster relief programs ("DIPPY CA"). Dippy CA was
incorporated under the laws of California on May 30, 1997, and began its
operations in January 1998. The Issuer and Dippy CA together are referred to as
the "COMPANY" in this Form 10-KSB.

The Issuer acquired all of the outstanding 6,638,533 shares of Dippy CA in
exchange for 3,219,266 shares of the Issuer under an agreement dated September
17, 1998. For accounting purposes, the acquisition has been treated as a reverse
acquisition with Dippy CA as the accounting acquirer. In a reverse acquisition,
the stock issued goes to the accounting acquirer. Since reverse acquisition
accounting is the reverse of normal accounting, the fair market value of the
issuer's stock at the date of the acquisition is valued with a write up or write
down of the issuer's net assets depending on whether the stock is trading at
more or less than book value. If the stock's fair market value cannot be
determined, and the cost is based on the fair market value of the issuer's net
assets, then goodwill is not recognized and the transaction is valued at the
issuer's net tangible assets. The Issuer had no tangible assets and a very
limited trading history. The fair market value of the stock issued could not be
determined. Accordingly, goodwill was not recognized and the transaction was
recorded as a recapitalization of Dippy CA.

Neither the Issuer nor Dippy CA have been involved in any bankruptcy,
receivership or similar proceedings, have undergone any material
reclassification, merger or consolidation, or have purchased or sold any
significant assets not in the ordinary course of its business other than as
described in this Form 10-KSB.

(B) BUSINESS OF THE COMPANY

PRINCIPAL PRODUCTS OR SERVICES AND THEIR MARKETS

The Company develops and produces packaged, nutritious, single-serving meals and
sells them to institutional food-service providers, specifically schools. The
meals are packaged in single-serving, heat-sealed, recyclable trays with colored
labels

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DIPPY FOODS, INC. FORM 10-KSB PAGE 4 OF 19

listing the flavor and nutritional information. All meals are shelf-stable for
sixty days and require no freezing, refrigeration, heating or preparation, and
can be eaten without utensils. The products are known as Dippers.

The Company has four Dippers meals--one nacho meal containing corn chips, salsa
and cheese sauce; and three fruit flavored meals containing cinnamon and sugar
corn chips, peanut butter, and a specially blended fruit sauce. See Table 1
below for a list of these products.

The food service directors of each school district must ensure that meals served
under the National School Lunch and Breakfast Programs meet each program's
requirements. Their principal reference for designing the meals is the Food
Buying Guide for Child Nutrition Programs published by the U.S. Department of
Agriculture. The Food Buying Guide is based on the latest federal regulations
and meal pattern requirements. The standards in the guide are based on
laboratory testing performed by the Human Nutrition Information Services and the
U.S. Department of Agriculture, and are consistent with the standards set by the
Food Safety and Inspection Service and the Food and Drug Administration.

Table 1.

Minimum Requirements - Lunch Program Grades 4 - 12
-------------------------------------------------------------------------------------------------------------
Pineapple Cherry Blueberry
Food Item Food Buying Guide* Dive Rapids Surf Santa Fe Nachos
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3 breads per 3 breads per 3 breads per 3 breads per
Bread 8 servings per week serving serving serving serving
Protein 2 oz. 2 oz 2 oz 2 oz 2 oz
Fruit and
Vegetables 3/4 cup 3/8 cup 3/8 cup 3/8 cup 3/8 cup
Dairy+ 1/2 pint 0 0 0 0
-------------------------------------------------------------------------------------------------------------
*These values are from the U.S. Department of Agriculture's Food Buying Guide for Child Nutrition Programs.
+The dairy minimum requirement will be provided by the schools.

</TABLE>

Each of the Company's lunch meals meets the nutritional requirements of the Food
and Drug Administration for three food groups: (1) bread, (2) protein, and (3)
fruits and vegetables. See Table 1 above. Combined with a single serving of
milk, supplied to all children daily as part of the federal program, the meals
are eligible for the National School Lunch Program. (See "Effect of Governmental
Regulation on the Company's Business" below for a detailed discussion of the
National School Lunch Program.) The program sets out weekly nutritional
standards. The schools choose each week's meals to meet these standards. The
Company hopes that its meals will be served at least once a month in this
program.

During 2000, the Company is also designing meals to meet the requirements of
correctional facilities and plans to introduce five new products: three for the
school market and two for the federal, state and county correctional facilities
market. The school breakfasts will contain a breakfast muffin and cereal, each
in a different flavor. For the correctional facilities, one breakfast will
contain a peanut butter and jelly spread, 1/2 cup of cereal, 3 slices of bread,
and a spoon. The other will contain a nutrition bar, 2 hard-boiled eggs and 1
cup of cereal. The Company expects to begin production of the breakfast meals
sometime in August 2000. See "Other Markets" and "Status of Publicly Announced
New Product or Service" below for more information.

The Company plans to develop at least four new products each year. See "Status
of Publicly Announced New Product or Service" under this same item below for
more information.

The Company purchases the separate ingredients from a variety of different
suppliers. The ingredients (fruit blends, peanut butter, chips, salsa and cheese
sauce) and packaging supplies (trays, film, labels, boxes and dividers) are
delivered to the co-packer. The co-packer packs the meals pursuant to the Food
Buying Guide for Child Nutrition Programs. The co-packer packages and boxes the
meals (40 meals per case for Lunches and 50 meals for Breakfasts, 16 cases per
pallet) and shrink wraps the pallets for delivery. The Company sends the
co-packer packing slips that identify each pallet and order and a bill of lading
to be signed by whoever picks up the order. The Company buys the ingredients and
supplies. The co-packer maintains the inventory. The Company and the co-packer
count inventory at each month end. See "Sources, Raw Materials and Principal
Suppliers" for more information.

DISTRIBUTION METHODS

The Company has an oral distribution agreement with U.S. Foodservice to
distribute Dippers. Either party can terminate this agreement at any time. U.S.
Foodservice is a major national food distribution company, with sales of
approximately $6 billion

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DIPPY FOODS, INC. FORM 10-KSB PAGE 5 OF 19

per year. U.S. Foodservice has granted the Company slotting status in its
warehouses and stocks the Company's products at its La Mirada branch near Los
Angeles. Slotting (obtaining space on warehouse racks) is a significant
milestone for a food manufacturer, which can take years to obtain. The working
agreement includes the following provisions:

o The Company's sales representative attends monthly U.S. Foodservice local
area sales meetings to generate leads from U.S. Foodservice's agents and to
train the agents in the Company's products. This process began in December
1998, in Southern California and will continue through 2000 for the
remainder of California.

o The Company's sales representative will accompany U.S. Foodservice's agents
on a "ride along" program to make an initial presentation to potential
customers. The Company's sales representative will follow up these
presentations to take orders and will give the purchase orders to the
appropriate U.S. Foodservice agent.

o The Company will charge U.S. Foodservice $0.85 for the fruit meals and
$1.05 for the nachos, FOB the Company's docks. U.S. Foodservice will charge
schools a minimum price equal to the Company's price to U.S. Foodservice
plus 8%. The Company's payment terms are net 14 days of the Company's
shipment to U.S. Foodservice. These arrangements apply to smaller orders,
subject to minimum delivery policies. The price for products delivered on
large orders varies depending on the services rendered and the volume
ordered.

o U.S. Foodservice's sales representative will maintain ongoing service
relationships with Foodservice's directors.

o U.S. Foodservice will pursue other markets, such as hotels, the military,
amusement parks, child care facilities, retail delicatessens and similar
institutions.

U.S. Foodservice has expressed an interest in selling or distributing the
Company's products nationwide. Discussions to define this opportunity have been
on hold until production could match orders from large accounts. The Company
will closely monitor its expected ramp up in sales activity and production
capacity and will ensure that significant increases in capacity are implemented
as seamlessly and with as few bottlenecks as possible.

The ride along program has resulted in sales from as little as six cases to a
delicatessen to more than 1,200 cases (48,000 units) to Bakersfield City
Schools. The program has generated sales of more than 2,100 cases (84,000 meals)
since the first quarter of its implementation.

The Company distributes through ASR Food Service Distributors, Joseph Webb,
Goldstar, Pinco, Otay Distributors, and Giuliano's, all of whom specialize in
school distribution in Southern and Central California. In the school markets,
smaller distributors represent a larger percentage of the industry. These
distribution arrangements are important as major distributors such as U.S.
Foodservice generally focus on the largest customers. Additional arrangements
with smaller regional firms will enable the Company to cover the entire spectrum
of the school system. The Company will deal with distributors as its customers
prefer or require.

The customers choose their distributors and advise the Company of their choice.
The Company then arranges the shipment. The percentage shipped through each
distributor varies each month depending on how often each school district serves
Dippers on its menu. Table 2 sets out the percentages of product shipped through
each distributor for the twelve months ended April 30, 2000.

Table 2.
Percentages Shipped
------------------------------------------------
Distributor Percentage
------------------------------------------------
ASR 26
Self 19
Pinco 23
Gold Star 15
US Foodservice 9
Joseph Webb 4
Otay 2
Giuliano's 2
---------------
Total 100
------------------------------------------------

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DIPPY FOODS, INC. FORM 10-KSB PAGE 6 OF 19

The Company recommends that its customers use distributors, but will handle the
distribution of some smaller orders by having the Company's co-packer ship the
orders directly to the customer. The Company bills these shipping costs to the
customer.

STATUS OF PUBLICLY ANNOUNCED NEW PRODUCT OR SERVICE

The Company has not publicly announced any new products or services. However,
the Company does plan to develop and introduce at least four new products each
fiscal year. The Company is currently developing four new products, (1) animal
crackers and fruit dip, (2) chips and salsa (no cheese), (3) peanut butter and
graham crackers (all for the After School Snack Program), and (4) cereal and
muffin for the School Breakfast Program. See "Effect of Governmental Regulations
on the Company's Business" for more information on these programs. The Company
has not received any purchase orders from schools for this program, but the
Company has sent out samples and displayed the new products at trade shows. The
Company expects to begin production of the new after school snack meals sometime
in August 2000 and begin pursuing purchase orders from school districts shortly
thereafter.

EXPENDITURES ON RESEARCH AND DEVELOPMENT DURING THE LAST TWO FISCAL YEARS

The Company spent approximately $10,078 and $13,535 on research and development
in the fiscal years ended April 30, 2000 and 1999 respectively.

NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES

The Company has a total of three full-time employees.

REQUIREMENT FOR GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES

The Company is not required to obtain any direct government approval of its
products. However, pursuant to the National School Lunch Program, all meals
served under the program must meet minimum standards. It is the sole
responsibility of the school districts to ascertain and determine that the meals
they elect to serve meet the minimum standards set forth by the National School
Lunch Program. The Company's products have been developed and produced to meet
these minimum standards. Using the guidelines set forth in the Food Buying
Guide, the Company produces its products to surpass the minimum standards. The
only minimum standard that the Company does not meet is the dairy requirement,
which the school provides by serving milk. See Table 1 above and "Principal
Products" for more information.

EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON DIPPY FOOD'S BUSINESS

The National School Lunch Program and the Commodity School Program are central
to the Company's business strategy. The elimination of these programs could have
a materially adverse affect on the Company's operations.

The National School Lunch Program began in 1946 after military officials noticed
that some World War II recruits were undernourished. The goal was to make sure
children received one good meal at least once a day. Section 2 of the National
School Lunch Act states:

It is declared to be the policy of Congress, as a measure of national
security, to safeguard the health and well-being of the Nation's
children and to encourage the domestic consumption of nutritious
agricultural commodities and other food, by assisting the States,
through grants-in-aid and other means, in providing an adequate supply
of food and other facilities for the establishment, maintenance,
operation and expansion of nonprofit school lunch programs.

The National School Lunch Program is a program under which participating schools
operate a nonprofit lunch program in accordance with the Code of Federal
Regulations. The Commodity School Program is a program under which a school
operates the same lunch program, but receives donated food assistance in lieu of
general cash assistance. Part 210 of the Code of Federal Regulations sets forth
the requirements for participation in these two programs, specifying
responsibilities of state and local officials in the areas of program
administration, preparation and service of nutritious lunches, payments of
funds, use of program funds, program monitoring, and reporting and record
keeping requirements.

In order to qualify for reimbursement under either program, all lunches offered
by participating schools and served to children two and older must meet the
minimum nutrition standards with respect to the appropriate level of calories
and nutrients as

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DIPPY FOODS, INC. FORM 10-KSB PAGE 7 OF 19

provided in the Code of Federal Regulations. The requirements and
recommendations are designed so that the nutrients of the lunch, averaged over a
period of time, approximate one-third of the Recommended Dietary Allowance for
children.

The Commodity School Program is another federal program whereby the U.S.
Department of Agriculture purchases raw ingredients such as grains, dairy
products, poultry, beef and row crops from farmers in order to maintain price
points and stabilize markets for the producers of such products. The U.S.
Department of Agriculture inventories and warehouses these products at various
locations throughout the country. The school districts submit a request to the
U.S. Department of Agriculture for these raw ingredients based upon prior year
usage. The U.S. Department of Agriculture will distribute the products based on
availability of raw ingredients to school districts according to student
population. School districts can exchange these commodity foods for credits on
finished products. The school districts and companies that participate in the
program both benefit. The school districts receive agricultural commodities for
the cost of the shipping and deliver them to the manufacturer at no cost to the
distributor. The manufacturer sells the finished product back to the school at a
price that is reduced by the amount saved. Some items such as peanut butter have
limited menu-planning alternatives and can be effectively used by the Company,
which can realize significant cost savings under this program. The schools
prefer to buy meals by exchanging commodities because their facilities and
resources are not adequate to handle food storage, preparation and distribution.

The Food and Nutrition Service administers these programs for the Department of
Agriculture. Within each state, the state's educational agency administers these
programs. The state may withhold program payments under any of the programs if
the participating school has failed to comply with all applicable provisions of
the Code of Federal Regulations.

The School Breakfast Program is another federal program that provides states
with cash assistance for non-profit breakfast programs in schools and
residential child care institutions. The School Breakfast Program was
established in 1966 as a two-year pilot project designed to provide categorical
grants to assist schools serving breakfasts to nutritionally needy children. The
School Breakfast Program received permanent authorization in 1975 to carry out
the provisions of Section 4 of the Child Nutrition Act of 1966. The U.S.
Department of Agriculture reports that during the first year of operation, the
School Breakfast Program served approximately 80,000 children at a federal cost
of $573,000. In 1975, approximately two million children participated in the
School Lunch Program on a given day and over the following two decades,
participation increased to seven million.

Under the School Breakfast Program, the objective is to provide one breakfast
per child per day. A school will receive breakfast assistance payments from the
state, if funds are available, for breakfasts served to children. To be eligible
for federal cash reimbursement, a breakfast must contain, at minimum, (i) one
serving of milk, (ii) one serving of fruit or vegetable or both, or full
strength fruit or vegetable juice, and (iii) two servings of bread, bread
alternates, meat or meat alternates, in the quantities specified for each age
group as set out in the Code of Federal Regulations.

The After School Snack Program is a new program under which schools offer an
after school snack in accordance with the Code of Federal Regulations. This
program has been available for quite some time but not until September 1999 did
the federal government begin promoting this program and have approved $3 billion
of funding for this program. The snack to be offered under the program must meet
two out of the four food groups as set out in the Food Buying Guide. For every
student who participates in this program the school receives a $0.52
reimbursement. The Company's products offered in this program will have the same
60 day shelf life, but will be produced at a reduced cost as a result of less
product being put into the snack as compared to the products in the School
Breakfast Program and the National School Lunch Program.

SOURCES, RAW MATERIALS AND PRINCIPAL SUPPLIERS

The Company has agreements with several food suppliers to provide high-quality,
specially blended ingredients required by the Company's recipes. In particular,
the co-branding agreement with Hunt-Wesson, Inc. and ConAgra Brands, Inc.
provides for low prices for peanut butter, fruit blends, and salsa under the
brand names of Peter Pan, Knott's Berry Farm, and Rosarita. See "Patents, Trade
Marks, Licences and other Agreements or Labor Contracts" under this item and
Exhibit 6.4 - License Agreement for more information.

In addition to Hunt-Wesson, the Company's major suppliers include La Tapatia for
corn and cinnamon chips, Gage Industries for trays, Acorn for boxes and
dividers, Multi-Pak for film, Best Labels for labels and Real Fresh for cheese
sauce. To date, these have been the primary suppliers. However, the Company has
used other suppliers, including Pioneer Packing for boxes and dividers,
Ampersand for labels, Associated Bag Company for film, and Warnock Tortillas for
chips. The Company has been using its current suppliers because they provide the
best price and terms. The Company will periodically seek new suppliers in order
to receive competitive prices and terms.

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DIPPY FOODS, INC. FORM 10-KSB PAGE 8 OF 19

With the exception of Hunt-Wesson, the Company has no written agreements or
licensing agreements with any of its suppliers. The Company is currently on a
normal industry standard 30-day account.

The Company no longer uses Feedback Foundation, Inc. as a co-packer as a result
of a dispute over invoices resulting from the spoilage of certain products. See
"Item 2. Legal Proceedings" in Part II for further information.

The Issuer entered into a five month co-packing agreement with Global Food
Management Group, LLC ("GLOBAL"), which expired on March 4, 2000. The agreement
was amended on January 24, 2000, to extend the term to September 1, 2000, and to
grant the Issuer the option to extend the agreement for two additional terms of
three months each. The option is exercisable for $50. The Company expects to
exercise the option. The Company will furnish all of the equipment, raw
materials and supplies to pack its products. Under the terms of the agreement,
Global, a U.S. Department of Agriculture approved co-packer, must provide the
location and labor at a cost of $0.12 per unit. However, the average cost has
been $0.16 per unit due to inefficient production. See Exhibit 6.5 - Co-Packing
Agreement and Exhibit 6.6 - Amendment to Co-Packing Agreement for further
details.

The Company uses an automatic tray heat sealer to seal its products. The
assembly process requires 10 people and produces 20 units per minute. As a
result, the cost of labor averages $0.16 per unit. However, the new horizontal
form fill and seal tray line machine requires no more than 5 people and will
produce 80 units per minute or approximately 1.5 million units a month, assuming
a 16-hour production day. This should reduce production costs, particularly the
cost of trays and labels, by $0.07 per unit, and the cost of cost by $0.06 to
$0.10 per unit The manufacturer has indicated to the Company that the machine
will be ready for installation in August, 2000. When the Company completes the
purchase and installation of its horizontal form fill and seal tray line machine
it can provide meals to schools cost effectively and at an aggressive price
point.

The equipment that the Company must provide to Global under the Co-Packing
Agreement includes the new horizontal form fill and seal tray line machine. The
Company can install this machine Global's plant or another co-packer's plant.
The Company would continue to own the machine wherever it is installed. If the
Company installs the machine at Global's plant, then it would renegotiate its
contract to extend the term of its agreement.

In July 1999, the California Department of Education approved the Company as a
Donated Food Processor for the 1999-2000 school year. See Exhibit #6.15 - Master
Donated Food Processing Agreement for more information. This agreement enables
the Company to participate in the U.S. Department of Agriculture's Commodity
School Program, which donates agricultural commodities to schools participating
in the National School Lunch Program. See "Effect of Governmental Regulations on
the Company" for more information on the National School Lunch Program.

As part of the Commodity School Program, the U.S. Department of Agriculture
purchases raw ingredients such as grains, dairy products, poultry, beef and row
crops from farmers in order to maintain price points and stabilize markets for
the producers of such products. The U.S. Department of Agriculture inventories
and warehouses these products at various locations throughout the country. The
school districts submit a request to the U.S. Department of Agriculture for
these raw ingredients based upon prior year usage. The U.S. Department of
Agriculture will distribute the products based on availability of raw
ingredients to school districts according to student population. School
districts can exchange these commodity foods for credits on finished products.
The school districts and companies that participate in the program both benefit.
The school districts receive agricultural commodities for the cost of the
shipping and deliver them to the manufacturer at no cost to the distributor. The
manufacturer sells the finished product back to the school at a price that is
reduced by the amount saved. Some items such as peanut butter have limited
menu-planning alternatives and can be effectively used by the Company, which can
realize significant cost savings under this program. The schools prefer to buy
meals by exchanging commodities because their facilities and resources are not
adequate to handle food storage, preparation and distribution.

If the Company expands into the national arena, it anticipates signing
agreements with major co-packers. Discussions with large food processors such as
Phillchic, American CoPack, and Overhill Farms have indicated that these major
co-packers would be interested in production contracts once the Company's
production reaches two to three million units per month. There is no guarantee
that the Company can expand into the national arena.

DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS

The Company had three major customers in the fiscal year ended April 30, 2000.
These were the Azuza Unified School District, Bakersfield City Schools and
Covina Unified School District, which generated 13%, 11.2% and 10.3% of the
Company's sales revenue respectively, for a total of 34.5%, down from five major
customers in the prior period. These were
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DIPPY FOODS, INC. FORM 10-KSB PAGE 9 OF 19

Bellflower Unified School District, Carlsbad, Covina Valley School District,
Paramount Unified School District and South Whittier School District, who
generated 91.6% of the Company's sales revenue. The Company has sold its product
to more than 32 customers and is increasing this number and lessening its
dependence on a few major customers. The addition of new product lines will
further lessen dependence on a few major customers.

PATENTS/TRADE MARKS/LICENCES/FRANCHISES/CONCESSIONS/ROYALTY AGREEMENTS OR LABOUR
CONTRACTS

The Company has a licence agreement with ConAgra Brands, Inc. and Hunt-Wesson,
Inc. dated May 19, 1999. See Exhibit #6.4 - License Agreement for more details.
Under the agreement, Hunt-Wesson and ConAgra granted the Company a
non-exclusive, royalty-free licence to use the trademarks PETER PAN(R) and
KNOTT'S BERRY FARMS(R) until December 31, 2008. The Company annually must buy
certain minimum quantities of the licensor's fruit fillings and peanut butter as
set out in Table 3 and use them exclusively in all of its products except those
products destined for the school districts that are part of the Commodity School
Program. The licensor has the right to cancel the contract if the Company does
not buy the minimum amounts.

Table 3.
Minimum Quantities under Licence

-------------------------------------------------------
Calendar year Fruit Peanut butter
-------------------------------------------------------
1999 400,000 lbs 200,000 lbs
2000 600,000 lbs 400,000 lbs
2001 800,000 lbs 500,000 lbs
-------------------------------------------------------

The minimum annual quantity for fruit filling and peanut butter increases 10%
over the previous year in each calendar year after 2001.

If the Company fails to purchase the minimum quantities specified by the
licensing agreement then ConAgra / Hunt-Wesson could terminate the licensing
agreement and not permit the Company to use their logos on its products. The
Company did not purchase the minimum quantities specified by the licensing
agreement for 1999. The Company orders only what is required to fill its orders
and maintain a small inventory of finished product. To date Con Agra /
Hunt-Wesson has not terminated the licensing agreement. However, even though the
Company has not fulfilled its obligations under the licensing agreement, Con
Agra / Hunt Wesson will continue to sell the necessary fruit filling and the
peanut butter to the Company. The Company's account is current and is a sizeable
account for Hunt-Wesson. See "Results of Operations - Cost of Goods" for more
information.

Jon Stevenson registered copyrights to the cover art that the Company uses on
its packaged meals. Mr. Stevenson, a director and the president of both the
Issuer and of Dippy CA, has assigned his interest in the copyright to the Issuer
under a written agreement dated September 18, 1998, and transferred the
registered copyright into the name of the Issuer in consideration of 850,000
shares in the Issuer's common stock. Currently, the copyright is registered in
the name of Jon Stevenson, who is holding the legal interest in the copyright in
trust for the Issuer. See Exhibit 6.2- Assignment of Copyright.

The Company has no other copyrights, patents or trade marks and is not a party
to any other licence or franchise agreements, concessions, or royalty
agreements.

ITEM 7. DESCRIPTION OF PROPERTY.

KNOLLWOOD PROPERTY

The Company has sub-let its warehouse at 1161 Knollwood Circle, Anaheim,
California, from August 1, 2000, to the end of the lease. The Company moved its
administrative office to 16581 Channel Lane in Huntington Beach. The Knollwood
property consists of a concrete tilt-up building of approximately 10,524 square
feet located in a light industrial area. The rent is $5,893 per month and
escalates annually to $5,999 in the final year. The sub-tenant pays $6,314 per
month to the end of the lease, all of which the Company pays to its landlord
under its lease agreement. The lease and the sub-lease expire on December 31,
2001. Management believes that the Company's property is adequate for the
current level of operations.

SIGNAL HILL PROPERTY

The Company opened a 60-day escrow on October 15, 1999, with a refundable
deposit of $20,000. The Company has not been able to complete the acquisition of
the Signal Hill Property and has asked that the escrow be cancelled and the
$20,000

DIPPY FOODS, INC. FORM 10-KSB PAGE 10 OF 19

deposit be returned to the Company. As of the date of this filing, the deposit
has not been returned. The Company is reviewing its options, one of which is to
sue for the return of its deposit and damages on the grounds that the vendor of
the property misrepresented property's qualifications.

ITEM 8. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

(A) IDENTIFY DIRECTORS AND EXECUTIVE OFFICERS

Jon Stevenson and Munjit Johal are the directors of the Issuer. Jon Stevenson
and Erin Stevenson are the directors of Dippy CA. The Company's management and
development teams are listed in Table 4.

Table 4.
Officers

--------------------------------------------------------------------------------
Office
----------------------------------------------------------
Officer The Issuer Dippy, CA
--------------------------------------------------------------------------------
<S> <C> <C>
Jon Stevenson CEO, President, Chairman CEO, President, Chairman
Munjit Johal Chief Financial Officer, Treasurer, Chief Financial Officer
Corporate Secretary
Erin Stevenson Corporate Secretary, Executive VP,
Director of Trade Show Services.
--------------------------------------------------------------------------------
</TABLE>

Jon Stevenson, 38, has been with the Company since its inception. He is involved
in all aspects of product development and packaging. His responsibilities
include direct sales, sales development, public relations and developing the
marketing program for the Company. He is also responsible for the training
program developed for the distributors' representatives and the sales broker
representatives contracted to the Company.

Mr. Stevenson has been in the food service industry for more than sixteen years.
He was formerly employed by Rykoff and U.S. Foodservice Company, one of the
largest broadline distribution companies in the world. Jon left U.S. Foodservice
in November 1997, to focus his full energies on Dippy CA.

Munjit Johal, 45, has been with the Company since September 1998, and is
responsible for all aspects of the Company's financial management. He has a
Master of Business Administration degree from the University of San Francisco
and a Bachelor of Arts degree from the University of California, Los Angeles.
Mr. Johal was the chief financial officer of Bengal Recycling, Inc., a
California corporation, from February, 1996, to July, 1997; an executive vice
president and compliance officer and an asset manager for Pacific Heritage Bank
in Torrance, California, from 1990 to 1995; a vice president and compliance and
consulting associate for banks in Glendale and Newport Beach, California; and an
analytical manager and financial analyst for Federal Home Loan Bank of San
Francisco from 1981 to 1987.

Erin Stevenson, 36, has been with the Company since inception. She worked in
sales and marketing with major retail stores for ten years from 1982 to 1992, as
a manager or owner of small retailers from 1992 to 1994, and as a self-employed
massage therapist from 1994 to 1997. She is responsible for show selections and
product sales and participates in designing the customer service program for the
Company.

(B) IDENTIFY SIGNIFICANT EMPLOYEES

No other employees are expected to make significant contributions to the
business of the Company.

Erin Stevenson is Jon Stevenson's sister.

(D) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None of the Company's directors, officers, promoters or control persons, during
the past five years:

1. were a general partner or executive officer of a business that had a
bankruptcy petition filed by or against it either at the time of the
bankruptcy or within the two years before the bankruptcy, except for
Munjit Johal, who was the chief financial officer for seventeen months
until July 1997, of Bengal Recycling, Inc., a California corporation
that filed under chapter 7 of the United States Bankruptcy Code on
September 4, 1998;

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 11 OF 19

2. were convicted in a criminal proceeding or been subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);

3. were subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting his involvement in any type of business, securities or banking
activities, except for (1) Erin Stevenson who voluntarily petitioned
into bankruptcy in February 1998 and was discharged in April 1998; or

4. were found by a court of competent jurisdiction (in a civil action),
the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended, or
vacated.

ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS.

Table 5.
------------------------------------------------------------
Name and capacity Aggregate remuneration
------------------------------------------------------------
Jon Stevenson, President, CEO $46,000
------------------------------------------------------------

The Company does not have formal employment agreements with any of its officers
but may in the future.

The Company has no arrangements with any of its directors to compensate them for
their services as directors.

Except for the oral agreements with the officers for the compensation listed in
Table 5, the Company has no employment agreement or other compensation plan or
arrangement with any executive officer that provides for specific compensation
in the event of a resignation, retirement or other termination of employment, or
on a change of control of the Company or of an executive officer's
responsibilities following a change in control.

ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS.

Table 6
Security Ownership of Management and Certain Securityholders

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
(1) (2) (3) (4)
Number and Nature of Percent
Title of Class Name and Address of Owner Beneficial Ownership of Class*
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Jon Stevenson 4,000,000 20.43
379 Newport Avenue #9
Long Beach, California 90814
Common Stock Munjit Johal 0 0.00
42 Rockwood
Irvine, California 92614
Common stock Erin Stevenson 0 0.00
1948 Lave Avenue
Long Beach, California 90815
-------------------------------------------------------------------------------------------
</TABLE>

*The listed beneficial owner has no right to acquire any shares within 60 days
of the date of this Form 10-KSB from options, warrants, rights, conversion
privileges or similar obligations.

NON-VOTING SECURITIES

Dippy Foods Inc. has not issued any of its non-voting securities.

OPTIONS, WARRANTS AND RIGHTS

Since Dippy Foods Inc.'s incorporation, no stock options, stock appreciation
rights, or long-term incentive plans have been granted, exercised or repriced.

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 12 OF 19

ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS.

(A) RELATIONSHIPS WITH INSIDERS

No member of management, executive officer or security holder has had any direct
or indirect interest in any transaction to which the Company was a party.

(B) TRANSACTIONS WITH PROMOTERS

Mr. Jon Stevenson is the only promoter of the Company. Mr. Stevenson has not
received anything of value from the Company nor is he entitled to receive
anything of value from the Company for services provided as a promoter of the
Company.

PART II

ITEM 1. MARKET PRICE OF DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS.

(A) MARKET INFORMATION

The Issuer's common stock has been quoted on the NASD OTC Bulletin Board since
September 1998, under the symbol "DPPI". Table 7 gives the high and low bid
information for each fiscal quarter since the Issuer's common stock has been
quoted. The bid information was obtained from mytrack.com, and StockWatch.com,
the Internet site of Track Data Corporation, and reflects inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.

Table 7.
High & Low Bids
---------------------------------------------------------------------
Period ended High Low Source
---------------------------------------------------------------------
31 July, 1998 1.25 0.65 My Track.com
31 October, 1998 0.99 0.65 My Track.com
31 January 1999 0.77 0.38 StockWatch.com
30 April 1999 1.03 0.25 StockWatch.com
31 July 1999 1.22 0.44 StockWatch.com
31 October 1999 0.68 0.26 StockWatch.com
31 January 2000 1.22 0.44 StockWatch.com
30 April 2000 1.07 0.44 StockWatch.com
8 August 2000 0.75 0.45 StockWatch.com
---------------------------------------------------------------------

(B) HOLDERS

The Issuer has approximately 1,200 registered holders of shares of common stock.

The Issuer has declared no dividends on its common stock and is not subject to
any restrictions that limit its ability to pay dividends on its Shares of common
stock.

ITEM 2. LEGAL PROCEEDINGS.

The Company is not a party to any pending legal proceedings and, to the best of
the Company's knowledge, none of the Company's property or assets are the
subject of any pending legal proceedings, except for the following:

FEEDBACK FOUNDATION, INC.

A dispute has arisen between the Company and its former co-packer, Feedback
Foundation, Inc., regarding two invoices totaling $49,620. The dispute arises
from the spoilage of salsa used in the production of Nacho Dippers. The
Company's investigation revealed that the spoilage occurred while the salsa was
being prepared for production. As a result of the quality control standards of
the Company, there was no consumption of the defective product. In the opinion
of management, the

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 13 OF 19

preparation of the ingredients and the production of product is within the scope
of the co-packer's control and responsibility. The Company and Feedback have not
been able to reach an amicable agreement. On March 6, 2000, Feedback filed a
lawsuit claiming breach of contract, fraud and non-payment of invoices. Feedback
is suing for not less than $149,620. The Company intends to file a counter suit
for an unspecified amount. Management is confident that the Company will prevail
in the lawsuit.

AL DIAMOND

The Company believes Mr. Diamond failed to perform his obligations under the
Settlement and has taken the position that the Settlement Agreement with Mr.
Diamond is null and void. Management is deciding whether to take action against
Mr. Diamond for the return of the remaining corporate materials and for the
return of any monies paid to Mr. Diamond under the Settlement Agreement.

ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.

The Company's first independent certified public accountants, Andersen Andersen
& Strong, were appointed by the former management of the Issuer. The Company's
current independent certified public accountants, BDO Seidman, LLP, were
appointed by the current management in August 1999.

The Issuer has had no disagreements with Andersen Andersen & Strong within the
meaning of Item 304 of Regulation SB on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure in
connection with the audit of the Issuer's financial statements for the year
ended April 30, 1999, and the period from February 23, 1998 (the date of the
Issuer's formation) to April 30, 1998, that would have caused Andersen Andersen
& Strong to issue an adverse opinion or disclaimer of opinion, or to modify
their report as to uncertainty, audit scope or accounting principles if the
disagreements had not been resolved to their satisfaction.

No reportable events (as defined in Item 304 or Regulation SB) occurred with
Andersen Andersen & Strong during the period audited. The Company has not
consulted with BDO Seidman, LLP regarding the application of accounting
principles to a specific transaction or the type of audit opinion that might be
rendered on the financial statements during the period audited by Andersen
Andersen & Strong.

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

No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of the fiscal year covered by
this report.

ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The Company is not aware of any failures to file a required Form during the
period covered by this report. All reports were filed with the SEC on a timely
basis.

ITEM 6. REPORTS ON FORM 8-K.

There were no reports on Form 8-K filed by the Company during the quarter ended
April 30, 2000.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 14 OF 19

including the development and market acceptance of products, the ability to
secure additional sources of financing, the ability to reduce operating
expenses, acquisition of processing equipment to reduce cost of sales, and other
factors described in the Company's filing with the Securities and Exchange
Commission. The results that the Company achieves may differ materially from any
forward-looking statements due to these risks and uncertainties. The
forward-looking statements in this annual report on Form 10KSB for the fiscal
year ended April 30, 2000, are subject to risks and uncertainties that could
cause actual results to differ materially from this results expressed in or
implied by the statements contained in this report.

THE FOLLOWING PRESENTATION OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF DIPPY
FOODS, INC. SHOULD BE READ IN CONJUNCTION WITH DIPPY FOODS CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED HEREIN.

Dippy has targeted the school food-services market, which enables it to take
advantage of the National School Lunch Program offered by the United States
Department of Agriculture. The Company is intending to expand into the National
School Breakfast and After School Snack Programs.

The Company's initial school lunch product "Dippers" consists of four
combinations of corn chips and various dips. Dippers can be eaten without
utensils, are packaged in single-serving, heat-sealed, recyclable trays, are
shelf-stable for sixty days and require no freezing, refrigeration, heating or
preparation. Each lunch meal combined with a single serving of milk meets the
nutritional requirements of the Food and Drug Administration. The Company has
designed three new types of dippers to meet the standards of the National School
Breakfast program.

The Company derives revenue from the sale of lunch Dippers. Dippy currently
makes $0.11 per unit on the Nachos and $0.09 per unit on the fruit Dippers. This
is expected to change to $0.29 per unit for both the Nachos and Fruit Dippers
upon the purchase and installation of new processing equipment. The Company
expects to make $0.14 per unit on the breakfast Dippers.

The Company has three full-time employees.

Dippy has incurred significant losses since inception, and as of April 30, 2000
had accumulated net losses of $1,353,774. Included in this accumulated deficit
is $472,000 in non-cash expenses related to the recording the fair value of a
directors' uncompensated services of $100,000 and a $372,000 settlement payable
to a former director.

CONSOLIDATED RESULTS OF OPERATIONS FOR THEYEARS ENDED APRIL 30, 2000 AND 1999

Table 8.
Actual Results For Fiscal 2000 Compared to Fiscal 1999
--------------------------------------------------------------------------------
Fiscal 2000 Fiscal 1999 Percentage
$ $ change
--------------------------------------------------------------------------------
Revenues 320,581 191,933 67 %
Costs of goods sold 247,239 183,512 35
Gross Profit 73,342 8,421 770
Selling, general, & administrative expenses 503,455 802,916 (37)
Interest expense 49,129 4,822 919
Net loss (479,242) (799,317) (40)
--------------------------------------------------------------------------------

REVENUES

Revenue increased $128,648 or 67% from $191,933 in fiscal 1999 to $320,581 in
fiscal 2000 primarily due to the reopening of schools from the winter vacations
and concerns with Year 2000 issues. The Company was also able to further
penetrate the National School Lunch Program market.

Revenue is expected to increase during fiscal 2001 due to the introduction of a
new breakfast line and the development of a retail strategy for inventory that
is not sold to schools. The first of the breakfast meals were already delivered
at the end of July 2000, as well, there have been requests from various schools
for samples of the breakfast meal in order to appraise the new product.

<PAGE>
DIPPY FOODS, INC. FORM 10-KSB PAGE 15 OF 19

COST OF SALES

Cost of sales increased $63,727 or 35% from $183,512 in fiscal 1999 to $247,239
in fiscal 2000. As a percent of revenue, the gross margin increased from 4% in
fiscal 1999 to 23% in fiscal 2000. These changes were primarily due to the
increase in sales, which required the purchase of more ingredients. The Company
also retained a new co-packer that is more efficient and has reduced the waste
of ingredients, therefore reducing the cost of sales and increasing the gross
margin.

Accordingly, cost of sales as a percent of sales is expected to decrease due to
the installation of the new horizontal form, fill and seal tray-line machine.
The new tray line will produce 80 units per minute or approximately 1.5 million
units a month assuming a 16 hour production day. This should reduce production
costs, particularly the cost of trays and labels, by $0.07, and labor costs from
between $0.06 and $0.10 per unit, depending upon production levels.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased in fiscal 2000 from
fiscal 1999 by $299,461 or 37% due primarily to (1) a one time cost of $100,000
of non-cash compensation to Jon Stevenson, which represented 12 % of the
Company's fiscal 1999 administrative costs, (2) a one time settlement of $96,000
in cash and in stock valued at $276,000, which represented 46% of the Company's
fiscal 1999 administrative costs, (3) an increase in professional fees during
fiscal 2000 of $133,905 primarily due to the filing of the Form 10-SB -
Registration Statement with the SEC, (4) an increase in rent of $46,255 due to
the leasing of the premises at 1161 Knollwood Circle, Anaheim, CA, for a full
year whereas fiscal 1999 only consisted of four months, (5) an increase in
payroll of $21,927 due to a complete year of full time employees.

With the exception of an increase in advertising expense for the launch of the
new breakfast program, the Company believes that its selling, general and
administrative costs can remain fairly static and will decrease as a percentage
of revenue as its sales volume grows.

DEFERRED TAX ASSETS

The Company has deferred tax assets of $361,182 at April 30, 2000, and $183,131
at April 30, 1999. Management has established a valuation allowance equal to the
full amount of the deferred tax assets because the Company's ability to use
these losses is uncertain.

Depreciation is expected to increase in future periods primarily due to the
acquisition of new processing equipment.

The net operating losses incurred by Dippy CA before the reverse merger on
September 17, 1998, are limited annually due to the change of ownership (as
defined in Section 382 of the Internal Revenue Code) that resulted from the
reverse merger.

The Issuer's unused annual limitations may be carried over to future years until
the net operating losses expire.

INTEREST EXPENSE

Interest expense increased from fiscal 1999 to fiscal 2000 by $44,307 or 919%
due primarily to interest accrued on notes payable.

LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2000, the Company had $4,635 cash and a working capital deficit
of $929,531. During the year ended April 30, 2000, cash increased by $4,635 and
the Company used $492,557 in operations, primarily due to the operating loss of
the Company of $479,242 and a decrease in working capital of $720,559. This
decrease in working capital was primarily due to a $39,572 decrease in accounts
receivable, $50,245 increase in inventory, $89,579 increase in deposits for the
new horizontal form, fill and seal tray-line machine, and a $79,451 increase in
accounts payable and accruals. The Company used $2,248 in investing activities,
primarily due to the purchase of equipment. The Company generated $499,440 in
financing activities, primarily due to net proceeds from issuance of notes
payable, an increase in the line of credit and repayment of related party loans.
However, the Company has accumulated a deficit of $1,353,774 since inception and
has a stockholders' deficit of $907,641 at April 30,2000. Based on these
factors, the Company's independent certified public accountants included an
uncertainty paragraph in their report indicating there is substantial doubt
about the Company's ability to continue as a going concern.

The Company anticipates funding its working capital needs for the next twelve
months through (1) the equity capital markets, (2) increased sales particularly
with the addition of the breakfast line, (3) further reductions in overhead and
cost of sales.
<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 16 OF 19

Although the foregoing actions are expected to cover the Companies anticipated
cash needs for working capital and capital expenditures for at least the next
twelve months, no assurance can be given that the Company will be able to raise
sufficient cash to meet these cash requirements.

Management plans to improve its cash flow and operating results by raising
additional capital through private placements of stock and by increasing sales
to a number of new school districts. The Company cannot ensure, however, that
these plans will be successful.

The new horizontal form, seal and fill tray-line will be purchased for a price
of $161,000. The Company has $75,600 on deposit, and expects to raise the
balance in capital markets. The Company will install the machine at the Global
Food Management Group's "Global" facility. Global is the Company's co-packer.
The Company believes that the new machine will enable it to produce more
efficiently.

The Company is involved in two separate matters of litigation or potential
litigation. The Company believes that it will prevail in these matters. The
Company lawyers estimate the potential costs associated with the litigation to
be $35,000.00. Included in the cost of litigation is the settlement agreement
with a former director. If the Company does not prevail in this matter, cash
flow will be immediately impaired by $100,000.

The Company is considering employment contracts with its three full-time
employees that could result in its payroll doubling.

INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY

The Company has funded its operations principally from borrowings secured by
notes payable.

DEBT INSTRUMENTS

The Company borrowed $583,380.95 from the lenders set out in the table 9.

Table 9.
Promissory Notes
Payee Date Principle Sum
--------------------------------------------------------------------------------
Bellevue Investments Ltd. June 2, 1999 $200,000.00
Silverado Farms Inc. August 20, 1999 15,000.00
Silverado Farms Inc. September 9, 1999 50,000.00
Silverado Farms Inc. October 12, 1999 50,000.00
Silverado Farms Inc. November 8, 1999 10,000.00
Silverado Farms Inc. November 9, 1999 10,000.00
Silverado Farms Inc. November 18, 1999 10,000.00
Silverado Farms Inc. November 19, 1999 13,380.95
Silverado Farms Inc. November 29, 1999 25,000.00
Silverado Farms Inc. December 1, 1999 100,000.00
Money Layer Ltd February 26, 2000 100,000.00
-----------
$583,380.95
--------------------------------------------------------------------------------

The Company gave a promissory note to each of the payees as evidence of the
debt. The principal sum is due in 12 months from the date of the loan together
with interest accrued on the outstanding principal balance at the rate of 12%
per annum. The Company may pay the interest on the first day of the following
month or may accrue the interest and pay it with the principal sum on the
maturity date. The Company may repay the principal sum and any accrued interest
in whole or in part at any time without penalty. With any payment made, the
funds will be applied first to unpaid interest. If the Company becomes bankrupt
or insolvent, or sells all its assets, or if a corporate event occurs (as
defined in the promissory note) the debt is due and payable without demand. The
lender may convert any portion of the outstanding debt or any portion of accrued
interest into shares of the Company at a price per share that is equal to the
average closing price of the Company's common stock from the date of the
promissory note to the date of conversion.

On August 4, 2000, Bellevue Investments Ltd. elected to convert the $200,000 due
on its June 2, 1999 note plus $25,384 of accrued interest into 145,328 shares of
the Company's common stock.

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 17 OF 19

INFLATION

The Company does not believe that inflation will have a material impact on the
Company's future operations.

PART F/S

See Index to Financial Statements on page F-1.

PART III

ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS.

EXHIBIT DESCRIPTION STATUS
<S> <C> <C>
2.1 Corporate Charter filed as an Exhibit to Dippy Food's registration statement on Form 10-SB filed Filed
on April 17, 2000, and incorporated herein by reference.

2.2 Articles of Incorporation filed as an Exhibit to Dippy Food's registration statement on Form Filed
10-SB filed on April 17, 2000, and incorporated herein by reference.

2.3 Certificate of Amendment to Articles of Incorporation changing the Issuer's name to Dippy Foods, Filed
Inc. filed as an Exhibit to Dippy Foods Inc.'s registration statement on Form 10-SB filed on
April 17, 2000, and incorporated herein by reference.

2.4 Bylaws filed as an Exhibit to Dippy Foods Inc.'s registration statement on Form 10-SB filed on Filed
April 17, 2000, and incorporated herein by reference.

3 Instruments defining the rights of security holders None

5 Voting Trust Agreement None

6.1 Amended Exchange Agreement dated September 17, 1998, among Dippy Foods, Inc. (Nevada), Dippy Filed
Foods, Inc. (California) and the shareholders of Dippy Foods, Inc. (California) for the Issuer's
acquisition of Dippy Foods, Inc., (California) filed as an Exhibit to Dippy Foods Inc.'s
registration statement on Form 10-SB filed April 17, 2000, and incorporated herein by reference.

6.2 Assignment of Copyright dated September 18, 1998 between Jon Stevenson, as assignor, and Dippy Filed
Foods, Inc. (Nevada), as assignee filed as an Exhibit to Dippy Foods Inc.'s registration
statement on Form 10-SB filed on April 17, 2000, and incorporated herein by reference.

6.3 Standard Industrial/Commercial Single--tenant Lease-Gross dated December 16, 1998, between Ae Sil Filed
Park as lessor and Dippy Foods, Inc. as lessee for the lease of the Knollwood Circle property
filed as an Exhibit to Dippy Foods Inc.'s Form 10-SB filed on April 17, 2000, and incorporated
herein by reference.

6.4 License Agreement dated May 19, 1999, between ConAgra Brands, Inc. and Hunt-Wesson, Inc. as Filed
licensor and Dippy Foods, Inc. as licensee filed as an Exhibit to Dippy Foods Inc.'s Form 10-SB
filed on April 17, 2000, and incorporated herein be reference.

6.5 Co-Packing Agreement dated October 4, 1999, between Dippy Foods, Inc. (Nevada) and Global Food Filed
Management Group, LLC filed as an Exhibit to Dippy Foods Inc.'s Form 10-SB filed on April 17,
2000, and incorporated herein by reference.

6.6 Amendment to Co-Packing Agreement dated January 24, 2000, between Dippy Foods, Inc. (Nevada) and Filed
Global Food Management Group, LLC filed as an Exhibit to Dippy Foods Inc.'s registration
statement on Form 10-SBA filed on April 17, 2000, and incorporated herein by reference.

</TABLE>

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 18 OF 19

EXHIBIT DESCRIPTION STATUS
<S> <C> <C>
6.7 Form of Subscription Agreement used in March 7, 1998 Reg D Rule 504 private placement of Filed
6,000,000 shares at $0.003 per share filed as an Exhibit to Dippy Foods Inc.'s registration on
Form 10-SB filed on April 17, 2000, and incorporated herein by reference.

6.8 Form of Subscription Agreement used in April 16, 1998 Reg D Rule 504 private placement of 30,000 Filed
shares at $0.01 per share filed as an Exhibit to Dippy Foods Inc.'s Form registration statement
on Form 10-SB filed on April 17, 2000, and incorporated herein by reference.

6.9 Blank Form of Subscription Agreement used in March 31, 1999 Reg D Rule 504 private placement of Filed
4,980,000 shares at $0.05 per share filed as an Exhibit to Dippy Foods Inc.'s registration
statement on Form 10-SB filed on April 17, 2000, and incorporated herein by reference.

6.10 Settlement Agreement dated February 1, 1999, between Dippy Foods, Inc. (California) and Filed
Alexander Diamond as an Exhibit to Dippy Foods Inc.'s registration statement on Form 10-SB filed
on April 17, 2000, and incorporated herein by reference.

6.11 Blank Form of convertible promissory note given by Dippy Foods, Inc. (Nevada) payable in 12 Filed
months and bearing interest at 12% per annum as an Exhibit to Dippy Foods Inc.'s registration
statement on Form 10-SB filed on April 17, 2000, and incorporated herein by reference.

6.12 Distributorship Agreement dated July 8, 1999, between Dippy Foods, Inc. and International Foam Filed
Solutions, Inc. filed as an Exhibit to Dippy Foods Inc.'s registration statement on Form 10-SB
filed on April 17, 2000, and incorporated herein by reference.

6.13 Brokerage Agreement dated March 25, 1999, between Dippy Foods and Anderson Chamberlin, Inc. Filed
filed as an Exhibit to Dippy Foods Inc.'s registration statement on Form 10-SB filed on April
17, 2000, and incorporated herein by reference.

6.14 Blank Form of Subscription Agreement for Dippy CA Shareholders filed as an Exhibit to Dippy Filed
Foods Inc.'s registration statement on Form 10-SB filed on April 17, 2000, and incorporated
herein by reference.

6.16 Master Donated Food Processing Agreement dated June 30, 1999, between Dippy Foods, Inc. Filed
(California) and California Department of Education filed as an Exhibit to Dippy Foods, Inc.'s
registration statement on Form 10-SB filed on April 17, 2000, and incorporated herein be
reference.

7 Material Foreign Patents None

12 Additional Exhibits None

27 Financial Data Schedule Included

</TABLE>

<PAGE>

DIPPY FOODS, INC. FORM 10-KSB PAGE 19 OF 19

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
Dippy Foods, Inc. has caused this report to be signed on its behalf by the
undersigned, who is duly authorized.

DIPPY FOODS, INC.

By: "JON STEVENSON"
-----------------------------------------------------------

Name and Title: JON STEVENSON - DIRECTOR AND PRESIDENT
------------------------------------------------

Dated: AUGUST 10, 2000
---------------------------------------------------------

In accordance with the Securities Exchange Act of 1934, this report to be signed
below by the following persons on behalf of Dippy Foods, Inc. and in the
capacities and on the dates indicated.

By: "JON STEVENSON"
-----------------------------------------------------------

Name and Title: JON STEVENSON - DIRECTOR AND PRESIDENT
------------------------------------------------

Dated: AUGUST 10, 2000
---------------------------------------------------------

By: "MUNJIT JOHAL"
------------------------------------------------------------

Name and Title: MUNJIT JOHAL - DIRECTOR, SECRETARY AND TREASURER
------------------------------------------------

Dated: AUGUST 10, 2000
---------------------------------------------------------

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED APRIL 30, 2000 AND 1999

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants F-2

Consolidated Balance Sheets F-3

Consolidated Statements of Operations F-4

Consolidated Statements of Stockholders' Deficit F-5

Consolidated Statements of Cash Flows F-6

Notes to Consolidated Financial Statements F-7

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Dippy Foods, Inc.

We have audited the accompanying consolidated balance sheets of Dippy
Foods, Inc. (formerly Sweetbrier Corporation) as of April 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the years in the two-year period ended April 30, 2000.
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 statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dippy Foods,
Inc. as of April 30, 2000 and 1999, and the results of its operations and its
cash flows for each of the years in the two-year period ended April 30, 2000, in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 of
the consolidated financial statements, the Company has limited operating history
resulting in an accumulated deficit of $1,353,774 since inception, negative
working capital of $929,531, and a stockholders' deficit of $907,641 at April
30, 2000. These conditions 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 consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

BDO SEIDMAN, LLP

Los Angeles, California
June 15, 2000, except for Note 10,
which is as of August 4, 2000.

F-2

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

CONSOLIDATED BALANCE SHEETS

April 30,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
ASSETS (Note 1)

Current assets:
Cash ...................................................................................... $ 4,635 $ --
Restricted cash (Notes 2 and 6) .......................................................... 60,000 10,000
Accounts receivable ....................................................................... 9,280 48,852
Inventory ................................................................................. 56,394 6,149
Prepaid expenses .......................................................................... 2,353 2,572
----------- --------
Total current assets .................................................................. 132,662 67,573
----------- --------
Fixed assets, net (Notes 3, 4 and 6) ......................................................... 24,385 29,404
Deposits (Note 8) ............................................................................ 102,111 12,532
----------- --------
$ 259,158 109,509
=========== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Line of credit (Notes 2 and 6) ............................................................ $ 44,500 --
Bank overdraft ............................................................................ -- 9,229
Accounts payable .......................................................................... 124,508 107,571
Accrued expenses .......................................................................... 72,768 10,254
Loans from related parties (Note 4) ....................................................... -- 30,698
Convertible notes payable (Notes 5 and 10) ................................................ 583,381 --
Current portion of long-term debt (Note 6) ................................................ 3,036 1,793
Current portion of settlement payable (Note 4) ............................................ 234,000 117,000
----------- --------

Total current liabilities .................................................................... 1,062,193 276,545

Long-term debt, net of current portion (Note 6) .............................................. 10,606 14,363

Settlement payable, net of current portion (Note 4) .......................................... 94,000 247,000
----------- --------
Total liabilities ............................................................................ 1,166,799 537,908
----------- --------

Commitments and contengencies (Notes 4 and 8)

Stockholders' deficit:
Common stock, authorized 200,000,000 shares, at $0.001 par value; 19,579,266
and 4,264,597 common shares subscribed or issued and
outstanding ............................................................................. 19,579 19,579
Additional paid-in capital ................................................................ 426,554 426,554
Accumulated deficit ....................................................................... (1,353,774) (874,532)
----------- ---------

Total stockholders' deficit .................................................................. (907,641) (428,399)
----------- ---------

$ 259,158 109,509
=========== =========

</TABLE>

See accompanying summary of accounting policies and notes to
consolidated financial statements.

F-3

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended
April 30,
--------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues ....................................................................... $ 320,581 $ 191,933

Cost of goods sold ............................................................. 247,239 183,512
------------ ------------

Gross profit ................................................................ 73,342 8,421

Selling, general and administrative expenses ................................... 503,455 802,916
------------ ------------

Loss from operations ........................................................ (430,113) (794,495)

Interest expense ............................................................... (49,129) (4,822)
------------ ------------

Net loss ....................................................................... $ (479,242) $ (799,317)
============ ============

Basic and diluted weighted average shares outstanding .......................... 19,579,266 11,644,580
============ ============

Basic and diluted loss per share ............................................... $ (.02) $ (.07)
============ ============

</TABLE>

See accompanying summary of accounting policies and notes to
consolidated financial statements.

F-4

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED APRIL 30, 2000 AND 1999

Common Stock Issued Common Stock Subscription
----------------------------------- -------------------------
Number Additional Number Total
of Common Paid-In of Accumulated Stockholders'
Shares Stock Capital Shares Amount Deficit Deficit
--------- -------- ---------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>

BALANCES, April 30, 1998 .... 4,264,597 $ 4,265 $ 42,298 -- $ -- $ (75,215) $ (28,652)

Issuance of common
stock ................. 304,669 304 50,266 -- -- -- 50,570

Effect of reverse merger.. 10,030,000 10,030 (10,030) -- -- -- --

Common stock
subscribed ............ -- -- -- 4,980,000 249,000 -- 249,000

Contributed services ..... -- -- 100,000 -- -- -- 100,000

Net loss ................. -- -- -- -- -- (799,317) (799,317)
---------- ------- -------- ---------- --------- ----------- ---------

BALANCES, April 30, 1999 .... 14,599,266 14,599 182,534 4,980,000 249,000 (874,532) (428,399)

Issuance of common
stock ................. 4,980,000 4,980 244,020 (4,980,000) (249,000) -- --

Net loss -- -- -- -- -- (479,242) (479,242)
---------- -------- -------- ---------- --------- ----------- ---------

BALANCES, April 30, 2000 .... 19,579,266 $ 19,579 $426,554 -- $ -- $(1,353,774) $(907,641)
========== ======== ======== ========== ========= =========== =========

</TABLE>

See accompanying summary of accounting policies and notes to
consolidated financial statements.

F-5

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended
April 30,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $(479,242) $(799,317)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................... 7,267 7,863
Non-cash settlement payable to former director (Note 4) ......................... -- 372,000
Non-cash compensation ........................................................... -- 100,000

Increase (decrease) from changes in:
Accounts receivable ............................................................. 39,572 (26,588)
Inventory ....................................................................... (50,245) 247
Prepaid expenses ................................................................ 219 (2,572)
Deposits ........................................................................ (89,579) (12,532)
Accounts payable and accruals ................................................... 79,451 55,579
--------- ---------
Net cash used in operating activities ................................................ (492,557) (305,320)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................ (2,248) (26,614)
--------- ---------

Net cash used in investing activities ................................................ (2,248) (26,614)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash ................................................................... (50,000) (10,000)
Bank overdraft .................................................................... (9,229) 9,229
Increase in line of credit ........................................................ 44,500 --
Due to related parties ............................................................ (30,698) 30,698
Proceeds from stock issuance ...................................................... -- 299,570
Proceeds from issuance of notes payable ........................................... 583,381 17,862
Principal payments of notes payable ............................................... (2,514) (9,706)
Settlement payments ............................................................... (36,000) (8,000)
--------- ---------
Net cash provided by financing activities ............................................ 499,440 329,653
--------- ---------
Increase (decrease) in cash .......................................................... 4,635 (2,281)
Cash, beginning of period ............................................................ -- 2,281
--------- ---------
Cash, end of period .................................................................. $ 4,635 $ --
========= =========
SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
Cash paid during the year for:
Interest ........................................................................ $ 2,864 $ 4,822
========= =========

NON-CASH FINANCING ACTIVITIES:

On September 19, 1998, the Company exchanged 6,638,538 shares of stock for 4,569,266 shares of Dippy-NV stock pursuant to a share
exchange agreement.

On October 11, 1998, the Company acquired a vehicle for a note payable in the amount of $17,862 (Note 5).

On February 1, 1999, the Company accrued a settlement payable to a former director in the amount of $372,000 consisting of
$276,000 payable in common shares and $96,000 payable in cash. (Note 4).

During 1999, the Company recorded non-cash compensation of $100,000 in respect of a director's uncompensated services.

During 2000, the Company issued the 4,980,000 subscribed shares.

</TABLE>

See accompanying summary of accounting policies and notes to
consolidated financial statements.

F-6

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Dippy Foods, Inc. ("Dippy" or "Dippy-CA"), a California corporation, was
incorporated on May 30, 1997. Dippy is in the business of developing, processing
and distributing, packaged dipping foods and snacks, for school lunch programs,
sport complexes and disaster relief programs. Dippy commenced operations from
its California offices in January 1998. The Company currently distributes
products to customers in California.

On September 17, 1998, the Company merged with and into Sweetbrier Corporation
("Sweetbrier") (see "Merger"). Sweetbrier was incorporated in Nevada on February
23, 1998 for the purpose of developing mineral properties. Sweetbrier abandoned
its mining claims after completing the merger with Dippy-CA.

During fiscal 1999, subsequent to the merger, the Company raised $249,000
through the sale of 4,980,000 shares of common stock.

MERGER

On September 17, 1998, Sweetbrier entered into a share exchange agreement
whereby it acquired all of the outstanding common stock of Dippy. Total
consideration for the acquisition was a share exchange of 6,638,533 shares of
Dippy for 4,569,266 shares of Sweetbrier. For accounting purposes the
acquisition has been treated as a reverse acquisition with Dippy as the
accounting acquirer. In a reverse acquisition, the stock issued goes to the
accounting acquirer. Since reverse acquisition accounting is the reverse of
normal, it is the fair market value ("FMV") of the issuer's stock at date of
acquisition that is valued with a write up (write down) of the issuer's net
assets depending on whether the stock is trading in excess (less than) book
value. If a FMV cannot be determined for the stock, and cost is determined based
on the FMV of the issuer's net assets, then goodwill is not recognized and the
transaction is valued at the issuer's net tangible assets. Sweetbrier had no
tangible net assets and very limited trading history. The FMV of the stock
issued could not be determined. Accordingly, goodwill was not recognized and the
transaction was recorded as a recapitalization of Dippy-CA. The 10,030,000
shares held by Sweetbrier shareholders at the time of the reverse acquisition
are reflected as consideration for the transaction. Upon consummation of the
merger, Sweetbrier changed its name to Dippy Foods, Inc. ("Dippy-NV").

GOING CONCERN UNCERTAINTY

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of the assets and the satisfaction of liabilities in the normal
course of business. The carrying amounts of assets and liabilities presented in
the financial statements do not purport to represent realizable or settlement
values. However, the Company has limited operating history resulting in an
accumulated deficit of $1,353,774 since inception, negative working capital of
$929,531, and a stockholders' deficit of $907,641 at April 30, 2000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of those uncertainties.

Management is planning to improve cash flow and operating results in two ways.
First, by raising additional capital through private placements of stock, which
will be used to fund its operations and for the purchase of the new equipment
(see Note 8). Second, by increasing sales arising from sales to a number of new
school districts, correctional facilities and the introduction of new products.
However, there is no assurance that such plans will be successful.

F-7

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION,
CONTINUED

PRINCIPLES OF CONSOLIDATION

The accompanying financial statements include accounts of Dippy-CA for all
periods presented and the accounts of Dippy-NV subsequent to September 17, 1998.
Pro forma information giving effect to the merger is not presented because the
historical operating results of Sweetbrier prior to September 17, 1998 were not
material. All significant intercompany accounts and transactions have been
eliminated in consolidation.

REVENUE RECOGNITION

Revenue is recorded when products are shipped to customers.

INCOME TAXES

The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". SFAS
109 requires a company to use the asset and liability method of accounting for
income taxes.

Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
A valuation allowance is provided when management cannot determine whether it is
more likely than not that the deferred tax asset will be realized.

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or market (net
realizable value).

FIXED ASSETS

Fixed assets are stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives, which are generally not greater than
five years. Fixed assets are reviewed each year to determine whether any events
or circumstances indicate that the carrying amount of the assets may not be
recoverable.

Maintenance and repairs are charged to expense as incurred. Major renewals and
improvements are capitalized. At the time of retirement or other disposition of
property and equipment the cost and accumulated depreciation are removed from
the accounts and any resulting gains or losses are reflected in income.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
contingent liabilities, revenues, and expenses at the date of the consolidated
financial statements and for the periods that the consolidated financial
statements are prepared. Actual results could differ from those estimates.

F-8

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION,
CONTINUED

CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK

See Note 9, Major Customers and Suppliers. The Company primarily sells to school
districts. These school districts are located throughout California. The Company
conducts business based on periodic evaluations of its customers' financial
condition and generally does not require deposits. The Company does not believe
a significant risk of loss from concentration of credit exists because these
customers are funded by the State of California or one of its counties.

The Company primarily deals with a few suppliers for purchases of its products
and supplies. The Company does not believe a significant risk of loss exists
because it can obtain these products and supplies from other sources at
comparable prices.

The Company's products meet the standards of the National School Lunch Program
and the Company has been approved for participation in the Commodity School
Program. The National School Lunch Program and the Commodity School Program are
central to the Company's business strategy. The elimination of these programs
could have a materially adverse effect on the Company's operations.

NET LOSS PER SHARE

Basic loss per share includes no dilution and is computed by dividing net loss
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could occur if securities or other contracts (such
as stock options and warrants) to issue common stock were exercised or converted
into common stock. The Company has no outstanding stock options or warrants.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations in the year incurred.
During fiscal 2000 and 1999, $10,078 and $13,535 in research and development
costs were charged to operations.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.

NOTE 2--RESTRICTED CASH

Based on a sales agreement, the Company invests $10,000 in certificates of
deposit with maturities of less than one year, as security in the event of the
loss of inventory supplied to the Company by the customer.

The Company also invested $50,000 in a certificate of deposit which matures July
2, 2000 and is used as security against the revolving line of credit (Note 6).

F-9

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3--FIXED ASSETS

Fixed assets are summarized as follows:

April 30,
--------------------
2000 1999
------ ------

Vehicles $ 20,862 $ 20,862
Equipment 18,653 16,405
---------- ----------

39,515 37,267
Less accumulated depreciation and amortization 15,130 7,863
---------- ----------

$ 24,385 $ 29,404
========== ==========

During the years ending April 30, 2000 and 1999, the Company recorded
depreciation expense of $7,267 and $7,863, respectively.

NOTE 4--RELATED PARTY TRANSACTIONS

During fiscal 2000, the Company repaid $30,698 of loans to four shareholders.

On February 1, 1999, the Company entered into a settlement agreement with a
former director whereby the Company agreed to pay the director $96,000 at $4,000
per month for 24 months, plus interest at 5% payable on the final payment. The
Company also agreed to issue 400,000 shares to the former director at 100,000
shares per year for four years. None of these shares have been issued. In
respect of this stock award, the Company recorded a liability and compensation
expense of $276,000, based on the then current fair value of the promised stock.
During 2000 and 1999, the Company paid $36,000 and $8,000, respectively, of such
settlement, however, has ceased making payments due to a violation of the
settlement agreement by the former director.

During fiscal 1999, the Company recognized $100,000 in compensation expense
arising from services contributed by a significant shareholder.

One of the Company's stockholders immediate family is a member of the Company's
outside legal firm. The Company incurred legal fees to that law firm during 2000
and 1999 totaling approximately $57,000 and $0, respectively.

The Company has reflected as a fixed asset the financed purchase of a vehicle
(see Notes 3 and 6) and as an operating lease the lease of another vehicle (see
Note 8) that are not held in the Company's name. The Company has agreed with the
owner/lease holder to assume the obligations therewith.

NOTE 5--CONVERTIBLE DEBT

Convertible debt consists of $583,381 in notes payable bearing interest at 12%,
payable monthly, unsecured, due at various dates between June 2, 2000 and
February 25, 2001, convertible at the option of the payee into shares of the
Companies' common stock at a per share price equal to the average closing price
of the Company's stock from the date of the note to the date of conversion. See
Note 10.

F-10

<PAGE>
DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6--LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
April 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Note payable to bank, interest at 22%, secured by vehicle, payable in sixty
monthly payments of $493, including principal and interest $ 13,642 $ 16,156
---------- ----------

13,642 16,156
Less: current portion (3,036) (1,793)
---------- ----------

Note payable due after one year $ 10,606 $ 14,363
========== ==========

Annual future minimum payments under note payable consist of:

<CAPTION>
Amount
----------

2001 $ 3,036
2002 3,801
2003 4,726
2004 2,079
----------
$ 13,642
==========
</TABLE>

At April 30, 2000, the Company had a line of credit with a bank for borrowings
up to $44,500. The line of credit bears interest at 6.6% per annum. The line of
credit is collateralized by a $50,000 certificate of deposit (Note 2). The line
of credit expired on July 2, 2000 and was paid off with the certificate of
deposit.

The following summarizes information on short-term borrowings for the year ended
April 30, 2000:

<TABLE>
<CAPTION>
<S> <C>
Average month end balance $ 37,083
Maximum balance outstanding at any month end $ 44,500
Weighted average interest rate (computed by dividing interest expense by average monthly balance) 6.56%
Interest rate at year end 6.60%

</TABLE>

NOTE 7--INCOME TAXES

As of April 30, 2000 and 1999, deferred tax assets consist of the following:

<TABLE>
<CAPTION>
April 30,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Federal loss carryforwards $ 308,284 $ 145,342
State loss carryforwards 52,898 37,789
---------- ----------

361,182 183,131
Less: valuation allowance (361,182) (183,131)
---------- -----------

$ -- $ --
========== ===========
</TABLE>
F-11
<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7--INCOME TAXES (CONTINUED)

At April 30, 2000 and 1999, the Company has net operating loss carryforwards
(NOL's) of approximately $907,000 and $427,000, respectively, for both federal
and state tax purposes.

At April 30, 2000 and 1999, the Company has deferred tax assets of approximately
$361,182 and $183,131, respectively, which primarily relate to net operating
losses. A 100% valuation allowance has been established as management cannot
determine whether it is more likely than not that the deferred tax assets will
be realized.

The federal and state NOL's begin to expire on April 30, 2018 and April 30,
2013, respectively.

The Company's valuation allowance increased during 2000 by $178,051.

NOL incurred prior to September 19, 1998 are subject to an annual limitation due
to the ownership change (as defined under Section 382 of the Internal Revenue
Code of 1986) which occurred as a result of the merger. Unused annual
limitations may be carried over to future years until the net operating losses
expire. Utilization of net operating losses may also be limited in any one year
by alternative minimum tax rules.

NOTE 8--COMMITMENTS

LEASE OBLIGATIONS

The Company leases premises for $5,893 per month. This lease escalates annually
to $5,999 in the final year and expires December 31, 2001. (see Note 10)

Annual future minimum lease payments under operating lease commitments as of
April 30, 2000 are as follows:

FISCAL YEAR Amount
----------- ----------

2001 $ 71,140
2002 47,992
----------
Total minimum lease payments $ 119,132
==========

Rent expense was $69,876 and $22,686 for the years ended April 30, 2000 and
1999, respectively.

On May 19, 1999, the Company entered into a license agreement with a supplier.
The Company was granted a non-exclusive, royalty-free license to use certain
trademarks until December 31, 2008. The Company annually must buy a minimum of
400,000 pounds of fruit and 200,000 pounds of peanut butter during 1999; 600,000
pounds of fruit and 400,000 pounds of peanut butter during 2000; and 800,000
pounds of fruit and 500,000 pounds of peanut butter during 2001. Purchases of
fruit and peanut butter are to increase by 10% per year between 2002 and 2008,
and the Company must use them exclusively in all of its products except those
products destined for the school districts that are part of the Commodity School
Program. The licensor has the right to cancel the contract if the Company does
not buy the minimum amounts. The Company has not fulfilled its obligations under
the licensing agreement. However, the licensor has continued to sell to the
Company and has allowed the Company to continue with its trademarks.

F-12

<PAGE>

DIPPY FOODS, INC.
(FORMERLY SWEETBRIER CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8--COMMITMENTS (CONTINUED)

On August 24, 1999, the Company entered into an agreement to purchase a form
fill and seal machine for $161,000. At April 30, 2000, the Company had paid a
deposit of $75,600 and the balance is due upon delivery, which is expected to be
during the second quarter of fiscal 2001.

On March 6, 2000, the Company's previous co-packer filed an action against the
Company claiming damages in the amount of $149,620. The Company plans to
vigorously defend this action. The likelihood of an unfavorable outcome cannot
be determined at this time.

NOTE 9--MAJOR CUSTOMERS AND SUPPLIERS

The following table is a listing of all customer with sales exceeding 10% of
total revenue.

Year Ended Year Ended
Customer April 30, 2000 April 30, 1999
---------------------------------------------------------------------

A 13.0% --%
B 11.2 --
C 10.3 --
D -- 29.2
E -- 14.7

The following table is a listing of all vendors with purchases exceeding 10% of
total cost of goods sold.

Year Ended Year Ended
Vendor April 30, 2000 April 30, 1999
---------------------------------------------------------------------

A 30.6% 27.6%
B 19.4 16.8
C 17.2 13.0
D 12.8 12.7

NOTE 10--SUBSEQUENT EVENT

On August 1, 2000, the Company subleased its building for the remaining term of
the lease.

On August 4, 2000, a debt holder of $200,000 of convertible debt and $25,384 of
accrued interest elected to convert the amounts into 145,328 shares of the
Company's common stock.

F-13