PERRYS MAJESTIC BEER INC, 10QSB, 1998-11-12

PERRYS MAJESTIC BEER INC
10QSB, 1998-11-12
MALT BEVERAGES

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549
---------

FORM 10-QSB

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarter ended September 30, 1998 Commission File Number 0-21079

PERRY'S MAJESTIC BEER, INC.
(Exact name of registrant as specified in its charter)

Delaware 11-3314168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

38 West 32nd Street, Suite 801
New York, New York 10001
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (212) 564-2260
---------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 11, 1998 was 3,783,335.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
- ------------------------------------------------------------------------------

INDEX
- ------------------------------------------------------------------------------

Page to Page
Item 1. Financial Statements

Consolidated Balance Sheet as of September 30, 1998
[Unaudited]................................................. 1.....

Consolidated Statements of Operations for the three and
six months ended September 30, 1998 and 1997 [Unaudited].... 2.....

Consolidated Statement of Stockholders' Equity for the six
months ended September 30, 1998 [Unaudited]................. 3.....

Consolidated Statements of Cash Flows for the six months
ended September 30, 1998 and 1997 [Unaudited]............... 4..... 5

Notes to Consolidated Financial Statements [Unaudited]...... 6..... 18

Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations.................. 19..... 24

Signature..................................................... 25.....

. . . . . . . . . . . . . . .

<PAGE>

Item 1:

PERRY'S MAJESTIC BEER, INC.
- ------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998.
[UNAUDITED]
- ------------------------------------------------------------------------------

<TABLE>

Assets:
Current Assets:
<S> <C>
Cash $ 51,239
Accounts Receivable - Net 114,590
Inventory 122,243
Prepaid Insurance 36,291
Note Receivable 70,002
-----------

Total Current Assets 394,365

Furniture, Fixtures and Equipment - Net 51,260
-----------

Other Assets:
Goodwill - [Net of Accumulated Amortization of $59,265] 714,282
Other Assets 2,600
Note Receivable 23,331
Deposit 1,000
-----------

Total Other Assets 741,213

Total Assets $ 1,186,838
===========

Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 102,643
Accrued Expenses 22,293
Note Payable 591,491
-----------

Total Current Liabilities 716,427

Note Payable 15,670

Commitments and Contingencies [15] --

Stockholders' Equity:
Preferred Stock, $.001 Par Value Per Share,
15,000,000 Blank Check Shares Authorized,
Convertible Class A - Issued and Outstanding,
500,000 Shares; Non-Convertible Class B - No Shares
Issued [Aggregate Liquidation Preferences $100,000] 500

Common Stock - $.0001 Par Value, Authorized 25,000,000 Shares,
Issued and Outstanding, 3,783,335 Shares 378

Additional Paid-in Capital 5,357,529

Retained Earnings [Deficit] (3,465,916)

Total 1,892,491
Less: Deferred Compensation (1,437,750)

Total Stockholders' Equity 454,741

Total Liabilities and Stockholders' Equity $ 1,186,838
===========

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
- ------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------

Three months ended Six months ended
September 30, September 30,
------------- -------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------

<S> <C> <C> <C> <C>
Sales - Net $ 274,951 $ 148,726 $ 317,645 $ 447,051

Cost of Goods Sold 199,118 99,214 239,464 333,558
---------- ---------- ---------- -----------

Gross Profit 75,833 49,512 78,181 113,493
---------- ---------- ---------- -----------

Selling, General and Administrative
Expenses:
Selling, Advertisement and
Promotion 17,672 51,057 54,548 95,371
General and Administrative
Expenses 158,182 199,200 300,435 350,555
Amortization of Deferred
Compensation 146,500 146,250 292,750 292,500
Amortization of Goodwill and
Distribution Rights 38,679 41,048 43,296 77,662
---------- ---------- ---------- -----------

Total Selling, General and
Administrative Expenses 361,033 437,555 691,029 816,088
---------- ---------- ---------- -----------

Loss on Related Party Receivable -- -- -- 149,743
---------- ---------- ---------- -----------

[Loss] from Operations (285,200) (388,043) (612,848) (852,338)
---------- ---------- ---------- -----------

Gain on Sale of Post Road Brand -- -- 197,727 --
---------- ---------- ---------- -----------

Other [Income] Expense:
Interest Expense 14,483 -- 15,057 --
Interest Income (2,186) (11,330) (3,734) (24,407)
---------- ---------- ---------- -----------

Other Expense [Income] - Net 12,297 (11,330) 11,323 (24,407)
---------- ---------- ---------- -----------

[Loss] Before Income Taxes (297,497) (376,713) (426,444) (827,931)

Provision for Income Taxes -- -- -- --
---------- ---------- ---------- -----------

Net [Loss] $ (297,497)$ (376,713) $ (426,444) $ (827,931)
========== ========== ========== ===========

Weighted Average Number of Shares 3,783,335 3,708,335 3,783,335 3,708,335
========== ========== ========== ===========

Net [Loss] Per Share $ (.08)$ (.10) (.11) (.22)
========== ========== ========== ===========

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
- ------------------------------------------------------------------------------

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
- ------------------------------------------------------------------------------

Additional Retained Total
Preferred Stock Common Stock Paid-in Earnings Deferred Stockholders'
Shares Amount Shares Amount Capital [Deficit] Compensation Equity

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1998 500,000 $ 500 3,783,335 $ 378 $5,323,329 $(3,039,472) $(1,727,500) $ 557,235

Amortization of Deferred
Compensation -- -- -- -- -- -- 292,750 292,750

Issuance of 750,000 Common Stock
Options Issued in Connection with
the Acquisition of Leroux Creek
Food Corp. - July 1998 [6D] [9D] -- -- -- -- 34,200 -- (3,000) 31,200

Net [Loss] for the six months
ended September 30, 1998 -- -- -- -- -- (426,444) -- (426,444)
-------- --------- --------- -------- ---------- ----------- ---------- ---------

Balance - September 30, 1998
[Unaudited] 500,000 $ 500 3,783,335 $ 378 $5,357,529 $(3,465,916) $(1,437,750) $ 454,741
======== ======== ========= ======== ========== =========== =========== =========

The Accompanying Note are an Integral Part of These Consolidated Financial Statements.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
- ------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------

Six months ended
September 30,
1 9 9 8 1 9 9 7
------- -------

<S> <C> <C>
Net Cash - Operating Activities $ (398,023) $ (436,349)
---------- -----------

Investing Activities:
Purchase of Kegs -- (41,470)
Purchase of Furniture and Fixtures -- (25,855)
Payments for Label and Packaging Design -- (70,688)
Payments for Post Road Brand -- (3,268)
Partial Payment for Leroux Creek Acquisition (62,500) --
Other Deposits (1,000) --
Proceeds from Sale of Post Road Assets 236,667 --
---------- -----------

Net Cash - Investing Activities 173,167 (141,261)
---------- -----------

Financing Activities:
Loan Receivable from Bev-Tyme, Inc. -- (100,000)
---------- -----------

Net [Decrease] in Cash (224,856) (677,610)

Cash - Beginning of Periods 276,095 1,521,203
---------- -----------

Cash - End of Periods $ 51,239 $ 843,593
========== ===========

Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ 10,561 $ --
Income Taxes $ -- $ --

Supplemental Disclosures of Non-Cash Investing and Financing Activities:
In connection with the acquisition of Leroux Creek Food Corporation, Inc. on
July 2,1998, the Company executed a note with the Seller in the amount of
$587,500. In addition, the Company issued options to purchase a total of 750,000
shares of common stock at fair market value at the date of grant. Amortization
of goodwill of $34,060 was recorded related to the acquisition of Leroux Creek
Food Corporation for the three months ended September 30, 1998 [See Notes 6D and
9D].

On May 18, 1998, the Company sold the assets, all rights to licenses, permits
and contracts, and all trademarks, tradenames and processes of the Post Road
Beer brand for $330,000. The Company executed a promissory note for $320,000 and
received $236,667 in payments as of September 30, 1998.

On June 13, 1997, the Company converted a promissory note receivable from
Bev-Tyme, Inc. ["Bev- Tyme"] for $100,000, in consideration for 7,000,000 shares
of the Company's Series B Preferred Stock held by Bev-Tyme. Treasury stock of
$2,000,000 was recorded and the unrealized loss and investment in Bev- Tyme
eliminated. Bev-Tyme filed for bankruptcy on April 9, 1998. The Series B
Preferred Treasury Stock was canceled March 31, 1998.

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>

<PAGE>

PERRY'S MAJESTIC BEER, INC.
- ------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------

Supplemental Disclosures of Non-Cash Investing and Financing Activities
[Continued]: In September 1997, the Company issued 50,000 shares of common stock
to an officer of the Company in connection with the acquisition of Orchard
Annie. Goodwill of $25,000 was recorded as a result of these transactions, which
represents the fair market value of the stock at time of issuance. Related
amortization of $2,500 was recorded for the year ended March 31, 1998.

In November 1997, the Company issued 25,000 shares of common stock to an
employee of the Company for past services rendered. An expense of $14,060 was
recorded as a result of this transaction, which represented the fair market
value of the stock at time of issuance.

In June of 1997, the Company issued options for 200,000 shares of common stock
to consultants and recorded compensation expense of $46,000 for services
rendered.

The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------

[1] Organization and Nature of Business

Perry's Majestic Beer, Inc. a Delaware corporation [the "Company" or "Perry's"],
was formed in December 1995. The Company's main office is in New York, New York.
There were no revenue or expense activities through March 31, 1996. The Company
became a subsidiary of Bev-Tyme, Inc. ["Bev- Tyme"] as of March 29, 1996.
Perry's is no longer a subsidiary of Bev-Tyme, although the two companies
continued to have some common management through July 17, 1997. However, for
accounting purposes Perry's was treated as a subsidiary of Bev-Tyme through June
30, 1997. As a corporation, it was a separate legal entity even when it was a
subsidiary. Bev-Tyme filed for bankruptcy on April 9, 1998.

The Company has completed its transformation from a microbrew beer company to a
natural food company. The Company sold its Post Road line of ales on May 18,
1998. During the second quarter, it ceased brewing the Perry's Majestic line of
organic beers. The Company produces two applesauce brands through two
independent unaffiliated applesauce manufacturers.

The Company's Leroux Creek applesauce line is produced with apples "grown
without pesticides" and is available in ten flavors in both 24 ounce and 4 ounce
cups sold in a four pack. There are currently seven brokers and 21 distributors
selling the Leroux Creek line of applesauces.

The Company's other line of applesauce is Quigley's Orchard, a single serve all
natural applesauce sold in decorated six ounce cups. There are currently 6
brokers and 8 distributors.

[2] Summary of Significant Accounting Policies

[A] Basis of Reporting - The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310(b)of Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such statements include all
adjustments which are considered necessary in order to make the interim
financial statements not misleading. The results of operations for any interim
period are not necessarily indicative of the results for the full year. These
financial statements should be read in conjunction with the financial statements
and notes, thereto, contained in the annual report on Form 10-KSB for the year
ended March 31, 1998.

[B] Principles of Consolidation - The consolidated financial statements include
the accounts of Perry's and its wholly-owned subsidiary. Material intercompany
transactions and balances have been eliminated in consolidation.

[C] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Actual results could differ from those estimates.

[D] Cash and Cash Equivalents - The Company's policy is to classify all highly
liquid investments with a maturity of three months or less when purchased as
cash equivalents. The Company had no cash equivalents at September 30, 1998.

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- ------------------------------------------------------------------------------

[2] Summary of Significant Accounting Policies [Continued]

[E] Goodwill - Amounts paid in excess of the estimated value of net assets
acquired of Riverosa, Old Marlborough, Orchard Annie, Inc. and Leroux Creek
Food, Inc. were charged to goodwill. Goodwill relates to revenues the Company
anticipates realizing in future years. The Company decided to amortize its
goodwill over a period of up to five years under the straight-line method. The
Company's policy is to evaluate the periods of goodwill amortization to
determine whether later events and circumstances warrant revised estimates of
useful lives. The Company will also evaluate whether the carrying value of
goodwill has become impaired by comparing the carrying value of goodwill to the
value of projected undiscounted cash flows from acquired assets or businesses.
Impairment is recognized if the carrying value of goodwill is less than the
projected undiscounted cash flow from the acquired assets or business [See Note
17].

[F] Inventories - Inventories are stated at the lower of cost or market. Cost,
which includes purchases, freight and packaging, raw materials, brew fees, and
finished products is determined on the first-in, first-out basis.

[G] Furniture, Fixtures and Equipment - Furniture, fixtures and equipment are
stated at cost and are depreciated over its estimated useful life of 3 to 5
years. Leasehold improvements are amortized over the lessor of the useful life
of the improvements or the lease term. Depreciation and amortization are
calculated using the straight-line method.

[H] Advertising Expense - Advertising costs are expensed as incurred. For the
six months ended September 30, 1998 and 1997, advertising costs were
approximately $24,274 and $37,450, respectively.

[I] Risk Concentrations - Financial instruments that potentially subject the
Company to concentrations of credit risk include cash and cash equivalents and
accounts receivable arising from its normal business activities. The Company
places its cash and cash equivalents with high credit quality financial
institutions located in the New York metropolitan area.

The Company maintains cash and cash equivalent balances at a financial
institution in New York. Accounts at this institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. At September 30, 1998, the Company
had no uninsured cash balance.

The Company performs certain credit evaluation procedures and does not require
collateral. The Company believes that credit risk is limited because the Company
routinely assesses the financial strength of its customers, and based upon
factors surrounding the credit risk of its customers, establishes an allowance
for uncollectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowances is limited. The Company
established an allowance for doubtful accounts at September 30, 1998 of $6,628.
The Company believes any credit risk beyond this amount would be negligible.

The Company sells applesauce brands through a system of independent unaffiliated
brokers and distributors. Food brokers act as agents for the Company within
designated territories or specific channels of trade. The Company has 7 brokers
and 21 distributors for its Leroux Creek brand and 6 brokers and 8 distributors
for its Quigley's Orchard brand. It is continuing to attempt to expand the
brokerage and distribution systems.

[J] Stock Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" for financial reporting
purposes.

[K] Revenue Recognition - Revenue is recognized at the time products are shipped
and title passes.

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
- ------------------------------------------------------------------------------

[2] Summary of Significant Accounting Policies [Continued]

[L] Net [Loss] Per Share -The FASB issued SFAS No. 128, "Earnings Per Share," in
February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"]
calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company has adopted SFAS No. 128, prior period EPS data have been
restated. Basic EPS is based on average common shares outstanding and diluted
EPS include the effects of potential common stock, such as, options and
warrants, if dilutive. The Company has potentially dilutive securities that were
not included in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the periods presented. Such securities may
dilute EPS in future years.

[M] Impairment - Certain long-term assets of the Company are reviewed at least
annually as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Standards ["SFAS"] No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Management considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations
[undiscounted and without interest charges]. If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from related operations. Management also re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. During the year ending March 31, 1998, the
Company determined an impairment of goodwill and intangibles existed [See Note
17].

[N] Income Taxes - The Company accounts for income tax expense and liabilities
under the asset and liability method. Deferred income taxes are provided for
temporary differences between financial and income tax reporting, relating
principally to depreciation, deferred compensation and amortization.

[3] Going Concern

The accompany financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.

The Company incurred a net loss of $2,341,181 and utilized cash of approximately
$1,085,000 for operations for the year ended March 31, 1998. The inability of
the Company to generate projected cash needed for operations, considering
currently available funds, creates an uncertainty about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. The Company is considering the sale of the beer business and
various financing options to raise capital to pursue expansion into the natural
applesauce business. In addition, the Company is exploring new marketing
strategies to improve revenues and also plans to implement a program to cut
administrative costs through the reduction of payroll and reduced promotional
expenditures. The continuation of the Company as a going concern is dependent
upon the success of these plans.

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
- ------------------------------------------------------------------------------

[3] Going Concern [Continued]

There can be no assurances that management's plans to reduce operating losses
and to obtain additional financing to fund operations will be successful. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.

[4] Inventories

The Company's inventory consists of raw materials, packaging and finished
products of $122,243.

[5] Furniture, Fixtures and Equipment and Depreciation

Furniture, fixtures and equipment and accumulated depreciation as of June 30,
1998 are as follows:

Furniture and Fixtures $ 18,566
Transportation Equipment 23,425
Kegs 8,395
Storage Equipment 22,810
Leasehold Improvements 3,500
----------

Total - At Cost 76,696
Less: Accumulated Depreciation 25,436

Net $ 51,260
--- ==========

Depreciation expense for the six months ended September 30, 1998 and 1997 was
$9,345 and $9,304, respectively.

[6] Acquisitions

[A] Riverosa - On March 29, 1996, the Company entered into an agreement to
acquire all of the stock of Riverosa Company, Inc. for $250,000 of which
$150,000 in cash was put into escrow as of March 31, 1996 and a note payable was
issued for $100,000. The note was payable with interest of 8% and was paid in
August of 1996 with proceeds from the Company's initial public offering. The
combination was accounted for by the purchase method. Goodwill of $246,000 was
recorded and was to be amortized over five years under the straight-line method.
Amortization of goodwill of $12,300 was recorded for the three months ended June
30, 1997. As of March 31, 1998, the unamortized balance of $147,600 was written
off [See Note 17].

[B] Old Marlborough Brewing Co., Inc. ["Old Marlborough"] - In September of
1996, the Company acquired Old Marlborough Brewing Co., Inc.'s Post Road
microbeer brand and other assets. The Company paid $172,213, of which $35,513
was for inventory and equipment and $86,700 was to repurchase distribution
rights. In February 1997, the Company issued 25,000 shares of common stock
valued at approximately $214,000 as additional consideration for the acquisition
of Old Marlborough. Goodwill of $264,062 was recorded and was amortized over
five years under the straight-line method. For the three months ended June 30,
1997, amortization of goodwill was approximately $13,203. As of March 31, 1998,
the unamortized balance of goodwill of $184,844 and the unamortized balance of
distribution rights of $60,690 were written-off [See Note 17].

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- ------------------------------------------------------------------------------

[6] Acquisitions [Continued]

[C] Orchard Annie, Inc. - In March 1997, Perry's entered into an agreement to
acquire all of the stock of Orchard Annie, Inc., an all natural apple sauce
company from an officer of the Company for approximately $67,000 in cash and
recorded goodwill for the full value. Additionally, in September of 1997,
Perry's issued 50,000 shares of common stock to the same officer in connection
with the sale. The fair value of these shares of $25,000 is allocated to
goodwill. The combination is accounted for by the purchase method. Amortization
of goodwill of $9,236 was recorded for the six months ended September 30, 1998.
In addition, the Company agreed to pay an officer of the Company, who was also
the sole shareholder of Orchard Annie, Inc., a royalty payment of $.25 for a
case of 12 units for the first 500,000 cases and $.125 for a case of 12 units
thereafter for a period of fifteen years. For the six months ended September 30,
1998 and 1997, royalty expense was $883 and $1,591, respectively.

[D] Acquisition of Leroux Creek Food Corporation, Inc. - On July 2, 1998, the
Company acquired the rights, title and interest, customer lists, distribution
rights and related recipes for applesauce and applesauce blends of Leroux Creek
applesauce brand for the sum of $650,000 from the Leroux Creek Food Corporation
and recorded the full amount as goodwill to be amortized over 5 years. On June
2, 1998, the Company paid $62,500 and on July 2, 1998 executed a note with the
seller in the amount of $587,500 with 9% interest payable on or before January
2,1999. The parties agreed that the $62,500 would be liquidated damages in the
event the Company is not able to locate adequate financing. In the event the
Company cannot make the payment when due the ownership of the Leroux Creek brand
will revert to the seller. The Company does not presently have funds available
to pay the note in full and has not identified any potential source for such
funds. The Company's ability to pay the note and retain ownership of the Leroux
Creek brand will be dependent upon its success in identifying sources for such
financing, on a timely basis, and on terms acceptable to the Company. The
Company also issued options to purchase 250,000 shares of common stock at fair
market value at the date of the grant valued at $31,200. Amortization of
goodwill of $34,060 was recorded related to the acquisition of Leroux Creek Food
Corporation for the three months ended September 30, 1998.

[7] Related Party Transactions

[A] Investment - On March 29, 1996, the Company issued to Bev-Tyme, Inc. [a
public corporation] 500,000 shares of convertible Class A Preferred Stock and
7,000,000 shares of non-convertible Class B Preferred Stock for 400,000 shares
of Series C Preferred Stock of Bev-Tyme, Inc. [valued at $2,000,000 at March 31,
1996] and $150,000. Each share of Series C Preferred Stock paid an annual
dividend of $0.50 per share and was convertible at the option of the holder into
1.8 shares of Bev-Tyme, Inc. common stock. On April 9, 1998, Bev-Tyme filed for
bankruptcy and no dividends were received for the year ended March 31, 1998. As
of March 31, 1996, $75,000 of cash was collected and the balance of $75,000 was
received on April 4, 1996. Each share of Class A Preferred Stock may be
convertible by the holder into one [1] share of Common Stock. Each share of
Class A Preferred Stock has attached to it the right to vote on all matters
submitted to the Company.

In October of 1996, Bev-Tyme, Inc. sold the 500,000 shares of Convertible
Class A Preferred Stock.

In January 1997, Perry's received a dividend of 524,000 shares of Bev-Tyme
common stock on the investment of 400,000 shares of Bev-Tyme Series C Preferred
Stock.

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------

[7] Related Party Transactions [Continued]

[A] Investment [Continued] - On April 17, 1997, the Company loaned to Bev-Tyme
$100,000 in the form of a promissory note. Bev-Tyme was required to repay the
entire principal plus interest on or before April 16, 1998. The Company retained
the right to convert the promissory note into the 7,000,000 shares of the
Company's Series B Preferred Stock held by Bev-Tyme. On June 13, 1997, the
Company converted the promissory note receivable from Bev-Tyme, Inc.
["Bev-Tyme"] for $100,000, into the 7,000,000 shares of the Company's Series B
Preferred Stock held by Bev-Tyme. Treasury stock of $2,000,000 was recorded and
the unrealized loss and investment in Bev-Tyme has been eliminated. The Series B
Preferred Treasury Stock was canceled March 31, 1998. The 400,000 shares of
Series C Preferred of Bev-Tyme and the 524,000 shares of Bev-Tyme common stock
received as a dividend on the investment in Bev-Tyme are still held by Perry's
and are accounted for with no value on the financial statements. As a result of
the June 13, 1997 transaction, Perry's was no longer a subsidiary of Bev-Tyme,
although the two companies continued to have some common management through July
7, 1997. However, for accounting purposes Perry's was treated as a subsidiary of
Bev-Tyme through June 30, 1997.

[B] Loss on Related Party Receivable - In 1997, the Company had a receivable for
$149,742 from it's former parent for beer sales distributed by Mootch and Muck,
Inc. Due to the financial condition of Bev- Tyme this receivable was written
off.

[8] Income Taxes

Income tax at the federal statutory rate reconciled to the Company's effective
rate is as follows:

March 31,
1 9 9 8

Federal Statutory Rate (34.0)%
Non-Deductible Expenses (10.4)
Net Operating Loss For Which No Tax Benefit was Received 44.4

Effective Rate -- %

The Company has net operating loss carryforwards of approximately $1,600,000 all
of which will expire in 2012 through 2013.

The major components of deferred income tax assets and liabilities are as
follows:

March 31,
1 9 9 8
Deferred Tax Liabilities
Accelerated Depreciation $ (2,250)
=========

Deferred Tax Assets:
Net Operating Loss $ 720,311
Excess Book Amortization Over Tax 27,910
Reserves 6,750
Book Writedown of Goodwill 201,452
Deferred Compensation 324,900
---------

Total $1,281,323

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- ------------------------------------------------------------------------------

[8] Income Taxes [Continued]

Net Deferred Tax Asset:
Before Valuation Allowance $1,279,073
Valuation Allowance 1,279,073

Net Deferred Income Tax Asset $ --
----------------------------- ==========

The Company recorded a valuation allowance of $1,279,073, an increase of
$732,059 over the preceding year, due to the uncertainty that the Company will
generate income in the future sufficient to fully or partially utilize these
carryforwards.

[9] Stock Options

[A] In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of the 1996 Stock Option Plan.
The maximum number of shares of common stock with respect to which awards may be
granted pursuant to the 1996 Plan is initially 2,000,000 shares. No options are
outstanding under this plan.

[B] In connection with the initial public offering, the Company issued to its
underwriter in July 1996 an option to purchase 58,333 shares of common stock at
a purchase price of $7.20 per share exercisable commencing July 1997 and
expiring July 2001.

[C] During the year ended March 31, 1998, the Company issued a total of
1,425,000 options to purchase common stock with an exercise price equal to fair
market value at time of issuance to certain officers, directors and employees.
The Company recorded compensation expense of $46,000 for 200,000 common stock
options issued to consultants for services rendered during the year.

[D] In July 1998, the Company issued an option to purchase 250,000 shares of
common stock at fair market value at the date of grant in connection with the
acquisition of Leroux Creek Food Corporation. In addition, the Company entered
into a consulting agreement for services to be provided over the next 3 years
with the former owner of the Leroux Creek brand. The former owner received an
option to acquire 500,000 shares of the Company's common stock, at fair market
value as follows: 200,000 options exercisable immediately, and 100,000 options
exercisable per year for the following three years. This agreement was value at
$3,000 and recorded as deferred compensation. Amortization of $250 was recorded
for the three months ended September 30, 1998.

There was no stock option activity during the year ended March 31, 1997.

A summary of stock option activity is as follows:
Weighted Average
Common Exercise Price
Stock Common Stock

Outstanding and Exercisable on April 1, 1997 -- --
Granted 1,625,000 $ 0.48
Exercised -- --
Forfeited/Expired -- --
--------- ---------

Outstanding and Exercisable on March 31, 1998
Forward 1,625,000 $ 0.48

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
- ------------------------------------------------------------------------------

[9] Stock Options [Continued]
Weighted Average
Common Exercise Price
Stock Common Stock

Outstanding and Exercisable on March 31, 1998
Forwarded 1,625,000 $ 0.48

Granted 750,000 0.13
Exercised -- --
Forfeited/Expired -- --
--------- ---------

Outstanding on September 30, 1998 $2,375,000 $ 0.40
--------------------------------- ========== =========

Exercisable on September 30, 1998 $2,075,000 $ 0.13
--------------------------------- ========== =========

The following table summarizes information about stock options outstanding at
June 30, 1998. The common stock options issued to officers, directors and
employees do not expire and may be exercised at anytime. The 200,000 common
stock options issued to consultants at an exercise price of $0.875 have a
weighted average remaining contractual life of 3 years. The 750,000 options
issued at an exercise price of $0.13 have a weighted average remaining
contractual life of 4.75 years. All other options expire in 9.5 years.
Common Stock
Exercise Price Shares

$ 0.13 750,000
$ 0.16 750,000
$ 0.50 300,000
$ 0.875 575,000
---------

Total 2,375,000

[10] Common Stock

[A] In January 1996, the Company issued 2,500,000 shares of common stock to
seven [7] parties for a total consideration of $50,000. At March 31, 1996,
$45,200 was collected and the balance of $4,800 was received April 4, 1996.

[B] The Company's registration statement for 583,335 shares of common stock at
$6.00 per share was declared effective in July of 1996 and net proceeds of
approximately $2,475,000 were received in August of 1996.

[C] In September 1997, the Company issued 50,000 shares of common stock to an
officer of the Company in connection with the acquisition of Orchard Annie, Inc.
Goodwill of $25,000 was recorded [See Note 6C].

[D] In November 1997, the Company issued 25,000 shares of common stock to an
employee of the Company for past services rendered. An expense of $14,060 was
recorded as a result of this transaction, which represents the fair market value
of the stock at time of issuance.

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[UNAUDITED]
- ------------------------------------------------------------------------------

[11] Bridge Loan

On March 31, 1996, the Company borrowed an aggregate of $150,000 from seven [7]
unaffiliated lenders [the "Bridge Lenders"]. In exchange for making loans to the
Company, each Bridge Lender received a promissory note [the "Bridge Note"]. Each
of the Bridge Notes bear interest at the rate of eight percent [8%] per annum.
As of March 31, 1996, $90,000 was received in cash from the bridge loan and
$60,000 was received April 4, 1996. The principal balance of $150,000 and
interest for $4,208 was paid August 5, 1996.

[12] Note Payable

Debt as of September 30, 1998 consists of the following:

Note payable - due in October 2002 with interest at
10.79% per annum $ 19,661

Note payable - due on or before January 2,1999 with
interest at 9% per annum 587,500

Total 607,161
Less: Current Portion 591,491

Non-Current Portion $ 15,670
------------------- ==========

Maturities of the notes payable as of September 30, 1998 are as follows:

September 30,
1999 $ 591,491
2000 3,340
2001 4,838
2002 5,392
2003 2,100
Thereafter --
---------

Total $ 607,161
----- =========

[13] New Authoritative Pronouncements

The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. The Company expects to adopt the provisions
of SFAS No. 131 in its annual financial statements.

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[UNAUDITED]
- ------------------------------------------------------------------------------

[13] New Authoritative Pronouncements [Continued]

In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15,1997. The modified disclosure requirements will not
have a material impact on the Company's results of operations, financial
position or cash flows.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.

SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.

[14] Financial Instruments

Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.

For certain instruments, including cash and cash equivalents, accounts
receivable and accounts payable, it was assumed that the carrying amount
approximated fair value because of the short maturities of these instruments.
The fair value of long-term debt is estimated based on rates at which the
Company could borrow funds with similar remaining maturities. The fair value of
the Company's debt approximates its carrying value.

[15] Commitments and Contingencies

[A] Employment Agreements - As of September 30, 1998, the Company has 2
employment agreements with executives of the Company that expire in the year
2001. The annual commitments for compensation are approximately$230,000 each
year. In addition, the Company has agreed to grant to an executive 20,000 common
stock options each year as a bonus for the next three years, exercisable at
$6.00 per share for a period of four years. The 20,000 common stock options,
exercisable at $6.00 were not issued. On January 16, 1998, the Company issued
100,000 common stock options exercisable at $0.875 to this same executive. The
Company also agreed to grant to another executive 100,000 common stock options
on each of March 31, 1998 and March 31, 1999, exercisable at fair market value
at date of grant. The options relating to this agreement were issued on January
16, 1998 at fair market value [See Note 9].

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[UNAUDITED]
- ------------------------------------------------------------------------------

[15] Commitments and Contingencies [Continued]

[A] Employment Agreements [Continued] - During February 1997, Perry's issued a
total of 400,000 shares of Perry's common stock to two officers as consideration
for extending their employment agreements through 2001. As a result of this
agreement, deferred compensation of $2,000,000 was recorded and related
amortization of $237,500 was expensed for both of the six months ended September
30, 1998 and 1997.

[B] Consulting Agreements - In February 1997, Perry's issued 200,000 shares of
Perry's common stock to a consultant for services to be performed over the next
three years. On June 4,1997, this agreement was amended extending the period of
service one additional year. This agreement was valued at $450,000 and recorded
as deferred compensation. Amortization of $55,000 was recorded as amortization
expense for both the six months ended September 30, 1998 and 1997.

[C] Consulting Agreement - On May 23, 1997, the Company entered into a
consulting agreement whereby the Consultant agrees to provide the Company with
consulting services in connection with financial management and other general
consulting as required by the Company. In consideration for these services, the
Company issued in June of 1997 an option to purchase 100,000 shares of the
Company's common stock at an exercise price of $0.875 per share valued at
$16,000. In addition, the agreement also calls for a per diem payment of $300,
whenever the consultant's services are requested by the Company.

[D] Royalty Agreements - In connection with the acquisition of Orchard Annie,
Inc., the Company has agreed to pay a royalty payment of $0.25 for a 12 pack
case for each of the first 500,000 cases sold and $0.125 per case thereafter for
a period of fifteen years. Royalty expense of $883 and $1,591 was recorded for
the six months ended September 30, 1998 and 1997, respectively.

In addition, the Company has agreed to pay to a graphic design firm a royalty of
$0.0125 for a 12 pack case sold for design services rendered. Royalty expense of
$442 was recorded for the six months ended September 30, 1998 under this
agreement.

[E] Loan Guarantee - During the year, the Company recognized a preexisting lien
on the assets of Old Marlborough to guarantee a loan of the previous owner of
Old Marlborough, a former employee of the Company. On May 14, 1998, a lien on
Perry's assets was issued. All the assets of Perry's guarantees the debt of
approximately $70,000 at September 30, 1998. The debt is being paid by the
previous owner of Old Marlborough.

[F] Pledged Inventory - In October of 1996, the Company's former Parent entered
into a loan and pledged all assets, including Perry's finished goods inventory,
as collateral.

[16] Leases

[A] Future minimum payments under non-cancelable operating leases for
transportation equipment and office space are as follows at September 30, 1998:

1999 $ 18,719
2000 12,626
2001 --
2002 --
2003 --
Thereafter --
---------

Total Minimum Lease Payments $ 31,345

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[UNAUDITED]
- ------------------------------------------------------------------------------

[16] Leases [Continued]

[B] Rent expense for the six months ended September 30, 1998 and 1997 was $7,392
and $3,940, respectively. During the year ended March 31, 1997, rent of $750 was
paid on a monthly basis to an officer of the Company for use of office space.
This arrangement was terminated in June of 1997, when the Company moved its
office to its current address.

[C] Rental Agreement - In May of 1997, the Company entered into a three year
lease for office space with monthly rent of $1,200 for the first year, $1,248
and $1,297 for each of the two years thereafter.

[17] Impairment of Long-Lived Assets

During the fiscal year ending March 31, 1998, the Company recorded an impairment
loss of $545,764 from the write down of goodwill and other intangibles. As a
result of the current year's loss and the necessary revisions to the projected
future undiscounted cash flows, there is no longer justification for the
carrying value of the goodwill and intangibles allocated to Riverosa and Old
Marlborough Brewing Co., Inc., including unamortized distribution rights and the
unamortized balance of intangible assets related to design work done for Perry's
and Post Road beer brands. Fair value of goodwill and intangibles was based on
the present value of estimated expected future cash flows from the related
assets. As of June 30, 1998, goodwill of $92,348 and related accumulated
amortization of $20,587 relates to the purchase of Orchard Annie, Inc. and is
expected to be fully recoverable.

The following table presents the write down of good will and other intangible
assets at March 31, 1998:

Accumulated
Cost Amortization Writedown

Goodwill Riverosa $ 246,000 $ 98,400 $ 147,600
Goodwill Old Marlborough $ 264,062 $ 79,218 184,844
Other Intangible Assets $ 166,264 $ 13,634 152,630
Distribution Rights $ 86,700 $ 26,010 60,690
----------

Total $ 545,764
----- ==========

[18] Letter of Intent

On May 14, 1998, the Company entered into a letter of intent with Village
Cannery of Vermont, Inc. The Company was granted an option to acquire all of the
assets for $2,000,000 in cash. This option is valid through September 1, 1998.
Village Cannery of Vermont, Inc. is a producer of organic and all natural
applesauce under the tradename of Vermont Village and Village Company as well as
a producer of sauces, salsas, jams and other such products. The option expired
without the Company exercising the option.

[19] Post Road Sale

On May 18, 1998, the Company sold the assets, all rights to licenses, permits
and contracts, and all trademarks, tradenames and processes of the Post Road
beer brand with a net book value of approximately $131,500 to the Brooklyn
Brewery Corporation ["BBC"] for consideration of $330,000 of which $10,000 is in
cash. The Company executed a secured promissory note for the balance of $320,000
and has received $236,667 on this note as of September 30, 1998. In addition,
the purchaser put $35,000 into escrow to satisfy the outstanding tax liability
for an executive of Old Marlborough. As of September 30, 1998, $93,333 remains
outstanding.

<PAGE>

PERRY'S MAJESTIC BEER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
[UNAUDITED]
- ------------------------------------------------------------------------------

[20] Subsequent Event

On October 22, 1998, the Company entered into a letter of intent to acquire a
minimum of 80% of the capital stock of a beverage company through an exchange
with the shareholders of this company of up to 93% of the issued and outstanding
shares of Perry's capital stock as of the closing of the exchange transaction,
whereby this company will become a subsidiary of Perry's. Scheduled to be
completed by November 30, 1998, the transaction is subject to the successful
closing of at least $500,000 financing, the proceeds of which will be used for
additional operating capital.

The Company produces and markets a line of "microbrewed" fruit drinks, lemonades
and ready-to-drink teas.

. . . . . . . . . . . . . . . . .

<PAGE>

Item 2:

PERRY'S MAJESTIC BEER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------

For the six months ended September 30, 1998 compared with the six months ended
September 30, 1997.

The following discussion of the Company's financial condition as of September
30, 1998 and results of operations for the six months ended September 30, 1998
and 1997 includes Perry's Majestic Beer, Inc. and its subsidiary [collectively,
the "Company"] and should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this 10-QSB.

OVERVIEW

Perry's Majestic Beer, Inc. [the "Company" or "Perry's"] was formed in December
of 1995. There were no operations prior to the formation of Perry's for the
period December 1995 to March 1996 nor any revenue or expense activities for
Perry's through March 31, 1996. The primary activities for Perry's prior to the
proposed acquisition of Riverosa Company, Inc. ["Riverosa"] were investing and
financing activities through March 31, 1996 [See "Liquidity and Capital
Resources"]. In March of 1996, the Company entered into an agreement to acquire
Riverosa, which was formed in November of 1993. Riverosa was engaged in the
manufacture and distribution of microbrewed beers and ales.

The Company of Leroux Creek applesauce line is produced with apples "grown
without pesticide" and is available in ten flavors in both 24 ounce and 4 ounce
cups sold in a four pack. There are currently seven brokers and 21 distributors
selling the Leroux Creek line of applesauces.

The Company's other line of applesauce is Quigley's Orchard, a single serve all
natural applesauce sold in decorated six ounce cups. There are currently 6
brokers and 8 distributors.

In September 1996, the Company acquired the Post Road Beer brand and other
assets from the Old Marlborough Brewing Company, Inc. On May 18, 1998, the
Company sold the Post Road brand to the Brooklyn Brewery Corporation for
consideration of $330,000.

In March 1997, the Company acquired all the outstanding stock of Orchard Annie,
Inc., a manufacturer of natural applesauces. The Company introduced its first
four flavors of applesauce under the brand name Quigleys. Quigleys is produced
by an independent unaffiliated manufacturer. The Company has entered into
arrangements with six brokers to sell Quigley's. Additionally, there are
currently eight distributors of Quigley's. The Company expects to add more
distributors and brokers over the next 6-12 months.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------

For the six months ended September 30, 1998 compared with the six months ended
September 30, 1997

OVERVIEW [CONTINUED]

On May 18, 1998, the Company sold the assets, all rights to licenses, permits
and contracts, and all trademarks, tradenames and processes of the Post Road
beer brand with a net book value of approximately $131,500 to the Brooklyn
Brewery Corporation ["BBC"] for consideration of $330,000 of which $10,000 was
in cash. The Company executed a secured promissory note for the balance of
$320,000. In addition, the purchaser put $35,000 into escrow to satisfy the
outstanding tax liability for an executive of Old Marlborough.

On July 2, 1998, the Company acquired the rights, title and interest, customer
lists, distribution rights and related recipes for applesauce and applesauce
blends of Leroux Creek applesauce brand for the sum of $650,000 from the Leroux
Creek Food Corporation. On June 2, 1998, the Company paid $62,500 and on July 2,
1998 executed a note with the seller in the amount of $587,500 with 9% interest
payable on or before January 2,1999. The parties agreed that the $62,500 would
be liquidated damages in the event the Company is not able to locate adequate
financing. In the event the Company can not make the payment when due the
ownership of the Leroux Creek brand will revert to the seller. The Company does
not presently have funds available to pay the note in full and has not
identified any potential source for such funds. The Company's ability to pay the
note and retain ownership of the Leroux Creek brand will be dependent upon its
success in identifying sources for such financing, on a timely basis, and on
terms acceptable to the Company. The Company also issued options to purchase
250,000 shares of common stock at fair market value at the date of the grant. As
of September 30, 1998, the Company has entered into arrangements with seven
brokers and twenty-one distributors to sell the Leroux Creed brand.

During July 1998, the Company entered into a consulting agreement with
Edward Tuft, the former owner of the Leroux Creek brand. Mr. Tuff's company will
continue to produce Leroux Creek applesauces for the Company. Mr. Tuft received
an option to acquire 500,000 shares of the Company's common stock, at fair
market value as follows: 200,000 options immediately, and 100,000 options per
year for the following three years.

The Company produces and markets a line of "microbrewed" fruit drinks, lemonades
and ready-to-drink teas.

RESULTS OF OPERATIONS

The Company had a loss from operations of $612,848 and a net loss of $426,444
for the six months ended September 30, 1998 as compared to a loss from
operations of $852,338 and a net loss of $827,931 for the six months ended
September 30, 1997. The loss from operations for the six months ended September
30,1998 is primarily due to insufficient gross profit to support selling,
general and administrative expenses of $354,983 and amortization of $336,046.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------

For the six months ended September 30, 1998 compared with the six months ended
September 30, 1997

RESULTS OF OPERATIONS [CONTINUED]

The net sales for the Company for the six months ended September 30, 1998 were
$317,645 as compared to $447,051 for the six months ended September 30, 1997.
This decrease is due to the consolidation of the beer industry and the fact that
the Company was in the process of selling its Post Road brand. The Company has
changed the focus of its business from a micro brew beer company to an
applesauce and natural food company. Consistent with this change of focus was
the acquisition of the Leroux Creek brand in July 1998.

The Company had a gross profit of $78,181 or 24.6% as compared to a gross profit
of $113,493 or 25.4% for the six months ended September 30, 1998 and 1997,
respectively. The slight reduction in the gross profit percent is due to the
change in the focus of the business from microbrewed beer to the applesauce and
natural food business.

The Company's selling, general and administrative expenses for the six months
ended September 30, 1998 and 1997 were $691,029 and $816,088, respectively. The
decrease is due to a reduction of goodwill amortization of $34,366 due to the
write off of goodwill related to Riverosa and Old Marlborough Brewing Company,
Inc. during the year ended March 31,1998, a decrease in selling, advertising and
promotion expenses of $40,823 which resulted from fewer price support promotions
necessary to promote sales of the natural applesauce in comparison to the
microbeer products and a decrease in general and administrative expenses of
$50,120 which is due to the general downsizing that has taken place over the
last year.

The Company earned interest income of $3,734 and $24,407 for the six months
ended September 30, 1998 and 1997, respectively. Interest charges of $15,057
were incurred on the notes payable related to the purchase of transportation
equipment and the acquisition of the Leroux Creek Food Corporation during the
six months ended September 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

Perry's had a working capital deficit at September 30, 1998 of $322,062
resulting primarily from the note payable entered into to acquire Leroux Creek
Food Corp., which is due on or before January 2, 1999. For the six months ended
September 30, 1998, the Company utilized $398,023 in cash for operating
activities as compared to $436,349 for the six months ended September 30, 1997.
The decrease is primarily due to the sale of the Post Road Beer brand. The
Company utilized $62,500 in cash for investing activities as a deposit for the
Leroux Creek acquisition and the Company received $236,667 in cash from the sale
of Post Road assets for the six months ended September 30, 1998. The cash
balance at September 30, 1998 was $51,239.

Perry's had working capital at September 30, 1997 of $937,323. For the six
months ended September 30, 1997, the Company utilized $436,349 in cash for
operating activities primarily resulting from the Company's net loss of
$827,931. The Company utilized $141,261 in cash for investing activities for the
purchase of kegs, furniture and equipment and for label and packaging design for
new beer styles. The Company utilized $100,000 in cash for financing activities
for the six months ended September 30, 1997 for a loan to Bev-Tyme on April 13,
1997 and the subsequent reacquisition of the Company's 7,000,000 non-convertible
Class B Preferred Stock, as settlement in full of the promissory note, on June
13, 1997.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------

For the six months ended September 30, 1998 compared with the six months ended
September 30, 1997

LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]

As of September 30, 1998, the Company has 2 employment agreements with
executives of the Company that expire in the year 2001. The annual commitments
for compensation are approximately $230,000 each year. In addition, the Company
has agreed to grant to an executive 20,000 common stock options each year as a
bonus for the next three years, exercisable at $6.00 per share for a period of
four years. The 20,000 common stock options, exercisable at $6.00 were not
issued. On January 16, 1998, the Company issued 100,000 common stock options
exercisable at $0.875 to this same executive. The Company also agreed to grant
to another executive 100,000 common stock options on each of March 31, 1998 and
March 31, 1999, exercisable at fair market value at date of grant. The options
relating to this agreement were issued on January 16, 1998 at fair market value.

During February 1997, Perry's issued a total of 400,000 shares of Perry's common
stock to two officers as consideration for extending their employment agreements
through 2001. As a result of this agreement, deferred compensation of $2,000,000
was recorded and related amortization of $237,500 was expensed for both the six
months ended September 30, 1998 and 1997.

In February 1997, Perry's issued 200,000 shares of Perry's common stock to a
consultant for services to be performed over the next three years. On June
4,1997, this agreement was amended extending the period of service one
additional year. This agreement was valued at $450,000 and recorded as deferred
compensation. Amortization of $55,000 was recorded as amortization expense for
both the six months ended September 30, 1998 and 1997, respectively.

In March 1997, Perry's entered into an agreement to acquire all of the stock of
Orchard Annie, Inc., an all natural apple sauce company from an officer of the
Company for approximately $67,000 in cash and recorded goodwill for the full
valued. Additionally, in September of 1997, Perry's issued 50,000 shares of
common stock to the same officer in connection with the sale and the fair value
of these shares of $25,000 is allocated to goodwill. The combination is
accounted for by the purchase method. In addition, the Company agreed to pay an
officer of the Company, who was also the sole shareholder of Orchard Annie,
Inc., a royalty payment of $.25 for a case of 12 units for the first 500,000
cases $.125 for a case of 12 units thereafter for a period of fifteen years. For
the six months ended September 30, 1998 and 1997, royalty expense was $883 and
$1,591, respectively.

On May 23, 1997, the Company entered into a consulting agreement whereby the
Consultant agrees to provide the Company with consulting services in connection
with financial management and other general consulting as required by the
Company. In consideration, the Company issued in June of 1997 an option to
purchase 100,000 shares of the Company's common stock at an exercise price of
$0.875 per share valued at $16,000. In addition, the agreement also calls for a
per diem payment of $300, whenever the consultant's services are requested by
the Company.

In November 1997, the Company issued 25,000 shares of common stock to an officer
of the Company for past services rendered. An expense of $14,060 was recorded as
a result of this transaction, which represents the fair market value of the
stock at time of issuance.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------

For the six months ended September 30, 1998 compared with the six months ended
September 30, 1997

LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]

On July 2, 1998, the Company acquired the rights, title and interest, customer
lists, distribution rights and related recipes for applesauce and applesauce
blends of Leroux Creek applesauce brand for the sum of $650,000 from the Leroux
Creek Food Corporation and recorded the full amount as goodwill to be amortized
over 5 years. On June 2, 1998, the Company paid $62,500 and on July 2, 1998
executed a note with the seller in the amount of $587,500 with 9% interest
payable on or before January 2,1999. The parties agreed that the $62,500 would
be liquidated damages in the event the Company is not able to locate adequate
financing. In the event the Company cannot make the payment when due the
ownership of the Leroux Creek brand will revert to the seller. The Company does
not presently have funds available to pay the note in full and has not
identified any potential source for such funds. The Company's ability to pay the
note and retain ownership of the Leroux Creek brand will be dependent upon its
success in identifying sources for such financing, on a timely basis, and on
terms acceptable to the Company. The Company also issued options to purchase
250,000 shares of common stock at fair market value at the date of the grant
valued at $31,200. Amortization of goodwill of $34,060 was recorded related to
the acquisition of Leroux Creek Food Corporation for the three months ended
September 30, 1998.

In connection with the acquisition of Leroux Creek Food Corporation, the Company
entered into a consulting agreement for services to be provided over the next 3
years with the former owner of the Leroux Creek brand. The former owner received
an option to acquire 500,000 shares of the Company's common stock, at fair
market value as follows: 200,000 options exercisable immediately, and 100,000
options exercisable per year for the following three years. Amortization of $250
was recorded for the three months ended September 30, 1998.

The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. In May 1998, the
Company sold the assets of the Post Road Beer brand and is considering various
financing options to raise capital to pursue expansion into the natural
applesauce business. In addition, the Company is exploring new marketing
strategies to improve revenues and continues to explore options to cut
administrative costs. There can be no assurance that management's plans to
reduce operating losses and to obtain additional financing to fund operations
will be successful. The absence of such additional financing on terms favorable
to the Company could have a material adverse effect on the business and
operations of the Company.

YEAR 2000

The Company has evaluated the impact of the year 2000 issue on its business and
does not expect the amounts to be expensed over the next 15 months to be
material. No such costs have been expensed to date, since the Company utilizes
an off the shelf software package which is year 2000 compliant.

Currently, the Company is in the process of communicating with its significant
vendors and customers to determine the extent that year 2000 compliance issues
of such parties may affect the Company. At this time, the Company believes that
there will be no disruption in business due to its customers' or vendors' year
2000 readiness. The Company has not established a contingency plan. There can be
no guarantee that the systems of such other companies will be timely converted
without a material adverse effect on the Company's business, financial condition
or results of operations.

<PAGE>

PERRY'S MAJESTIC BEER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------

NEW AUTHORITATIVE PRONOUNCEMENTS

IMPACT OF INFLATION

The Company does not believe that inflation has had a material adverse effect on
sales or income during the past periods. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.

<PAGE>

SIGNATURE
- ------------------------------------------------------------------------------

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereon duly authorized.

PERRY'S MAJESTIC BEER, INC.

November 12, 1998 By:/s/ Robert J. Sipper
--------------------------------------
Robert J. Sipper, President, Chief Executive
Officer, Chief Financial Officer and Chief
Principal Accounting Officer

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations
and is qualified in its entirety by reference to such schedules.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 51,239
<SECURITIES> 0
<RECEIVABLES> 121,218
<ALLOWANCES> 6,628
<INVENTORY> 122,243
<CURRENT-ASSETS> 394,365
<PP&E> 76,696
<DEPRECIATION> 25,436
<TOTAL-ASSETS> 1,186,838
<CURRENT-LIABILITIES> 716,427
<BONDS> 0
0
500
<COMMON> 378
<OTHER-SE> 453,863
<TOTAL-LIABILITY-AND-EQUITY> 1,186,838
<SALES> 317,645
<TOTAL-REVENUES> 317,645
<CGS> 239,464
<TOTAL-COSTS> 239,464
<OTHER-EXPENSES> 691,029
<LOSS-PROVISION> (4,184)
<INTEREST-EXPENSE> 15,057
<INCOME-PRETAX> (426,444)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (426,444)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0

</TABLE>