<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, For the quarterly period ended September 30, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934.
Commission File Number: 0-27800
Frederick Brewing Co.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Maryland 52-1769647
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4607 Wedgewood Boulevard, Frederick, Maryland 21703
(Address of Principal Executive Offices) (Zip Code)
(301) 694-7899
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $0.0004 par value 8,596,211
(Title of Each Class) (Number of shares outstanding as
of September 30, 1999)
Transitional Small Business Disclosure Format: (check one):
Yes [ ] No [X]
<PAGE>
FREDERICK BREWING CO.
INDEX TO FORM 10-QSB
September 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) - September 30, 1999
Consolidated Statements of Operations (unaudited) -
for the three and nine months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (unaudited) -
for the three and nine months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
2
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
FREDERICK BREWING CO.
Consolidated Balance Sheet
September 30, 1999
September 30,
1999
-------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 69,932
Cash - restricted 312,475
Trade receivables, net of allowance for doubtful
accounts of $31,716 409,901
Inventories, net of reserve for obsolescence of $74,313 545,201
Prepaid expenses and other current assets 258,707
------------
Total current assets 1,596,216
Property and equipment, net of accumulated depreciation of
$1,725,036 7,743,936
Intangibles, net of accumulated amortization of $128,688 524,270
Goodwill, net of accumulated amortization of $9,321 932,140
Other assets 1,460
------------
Total assets $ 10,798,022
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 2,171,691
Capital lease obligations, current portion 44,717
Accounts payable 1,124,159
Accrued liabilities 465,947
------------
Total current liabilities 3,806,514
Long-term debt 84,151
Capital lease obligations 2,618,655
------------
Total liabilities 6,509,320
------------
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares
authorized:
Cumulative, convertible Series A, 1,543 shares issued
and outstanding 581,687
Common stock - $0.0004 par value, 19,000,000 shares
authorized, 8,596,211 shares issued and outstanding 3,439
Additional paid-in capital 23,605,664
Accumulated deficit (19,902,088)
------------
Total stockholders' equity 4,288,702
------------
Total liabilities and stockholders' equity $ 10,798,022
============
The accompanying notes are an integral part of these consolidated
financial statements.
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FREDERICK BREWING CO.
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
------------------ -----------------
1999 1998 1999 1998
----------- ----------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross sales $ 810,014 $1,603,212 $ 2,804,522 $ 4,213,059
Less: Returns and allowances, and excise taxes 441,159 189,595 618,053 490,340
----------- ---------- ----------- ------------
Net sales 368,855 1,413,617 2,186,469 3,722,719
Cost of sales 869,958 1,071,373 2,627,185 2,851,091
----------- ---------- ----------- ------------
Gross profit (loss) (501,103) 342,244 (440,716) 871,628
Selling, general and administrative expenses 935,190 863,277 2,237,781 2,665,688
Impairment of goodwill 1,359,751 -- 1,359,751 --
Minority interest in joint venture -- 4,985 -- 4,985
Amortization of deferred public relations costs -- -- -- 1,089,000
----------- ---------- ----------- ------------
Operating loss (2,796,044) (526,018) (4,038,248) (2,888,045)
Loss on sale of equipment 2,123 -- 2,123 99,545
Interest expense, net 151,996 209,475 502,537 419,910
----------- ---------- ----------- ------------
Loss before extraordinary gain on forgiveness
of debt (2,950,163) (735,493) (4,542,908) (3,407,500)
Extraordinary gain on forgiveness of debt, net 808,929 -- 808,929 --
----------- ---------- ----------- ------------
Net loss (2,141,234) (735,493) (3,733,979) (3,407,500)
Preferred stock deemed dividend requirement -- (247,000) -- (275,627)
----------- ---------- ----------- ------------
Net loss attributable to common stockholders $(2,141,234) $ (982,493) $(3,733,979) $ (3,683,127)
=========== ========== =========== ============
Basic and diluted loss per common share:
Net loss before extraordinary item and
preferred stock dividend requirement $(0.66) $ (0.54) $ (1.70) $ (3.65)
Extraordinary item .18 -- .30 --
Preferred stock dividend requirement -- (0.18) -- (0.29)
----------- ---------- ----------- ------------
Net loss per common share (0.48) $ (0.72) $ (1.40) $ (3.94)
=========== ========== =========== ============
Weighted average common shares (basic
and diluted) 4,490,972 1,356,275 2,670,414 934,672
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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FREDERICK BREWING CO.
Consolidated Statements of Cash Flows
For the Three and Nine Months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
------------------ -----------------
1999 1998 1999 1998
----------- ----------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,141,234) $(735,493) $(3,733,979) $(3,407,500)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 323,109 270,178 894,139 774,401
Gain on forgiveness of debt (808,929) -- (808,929) --
Goodwill impairment 1,359,751 -- 1,359,751 --
Equity investment in joint venture -- (384) -- (384)
Amortization of deferred public
relations costs -- -- -- 1,089,000
Loss on sale of equipment 2,123 -- 2,123 99,545
Change in operating assets and liabilities:
Trade receivables (34,814) (158,113) 1,082 (495,244)
Inventories 44,355 (75,474) 126,655 (438,301)
Prepaid expenses, and other current assets (100,375) (85,174) (100,801) (221,190)
Other assets 70,936 13,266 197,866 (9,830)
Accounts payable (370,460) 359,647 69,637 931,979
Accrued liabilities 309,354 (190,990) 288,296 (91,076)
----------- --------- ----------- -----------
Net cash used in operating activities (1,346,184) (602,537) (1,704,160) (1,768,600)
----------- --------- ----------- -----------
Cash flows from investing activities:
Change in restricted cash (300,000) -- (300,000) --
Purchase of property and equipment (202,500) (87,123) (354,780) (320,356)
Purchase of intangibles -- (14,463) (2,355) (105,174)
Purchases of business, net of cash acquired -- -- -- (834,611)
Proceeds from sale of equipment 5,250 -- 5,250 94,060
----------- --------- ----------- -----------
Net cash used in investing activities (497,250) (101,586) (651,885) (1,166,081)
----------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 2,204,691 -- 2,815,751 --
Payments on debt obligations and capital
leases (2,139,692) (96,717) (2,326,567) (283,222)
Proceeds from issuance of preferred
stock, net -- 359,100 -- 359,100
Proceeds from issuance of common
stock, net 1,841,856 436,000 1,843,794 436,000
----------- --------- ----------- -----------
Net cash provided by/(used in)
financing activities 1,906,855 698,383 2,332,978 511,878
----------- --------- ----------- -----------
Net increase/(decrease) in cash and cash
equivalents 63,421 (5,740) (23,067) (2,422,803)
Cash and cash equivalents, beginning of period 6,511 195,817 92,999 2,612,880
----------- --------- ----------- -----------
Cash and cash equivalents, end of period $ 69,932 $ 190,077 $ 69,932 $ 190,077
=========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FREDERICK BREWING CO.
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Frederick
Brewing Co. ("Frederick Brewing") have been prepared in accordance with
generally accepted accounting principles for interim financial reporting
and with the instructions of Form 10-QSB and Regulation S-B. As such, they
do not include all information and footnotes required by generally accepted
accounting principles for complete year-end financial reporting. In the
opinion of Frederick Brewing's management, all normal recurring accruals
and other adjustments considered necessary for a fair presentation of an
interim consolidated financial position and the interim consolidated
results of operations have been included.
Operating results for the three and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for
other interim periods within 1999 or for the year ending December 31, 1999.
Information relating to the financial position, results of operations and
cash flows of Frederick Brewing as of and for the year ended December 31,
1998 may be found in the financial statements included in Frederick
Brewing's Annual Report filed on Form 10-KSB for the year ended December
31, 1998.
2. SIBG Investment
Effective August 24, 1999, Frederick Brewing and Snyder International
Brewing Group, LLC ("SIBG"), an Ohio limited liability company that was
founded and is controlled by C. David Snyder, Frederick Brewing's Chairman
and Chief Executive Officer, completed a series of transactions that
resulted in SIBG acquiring approximately 51% of the outstanding common
stock of Frederick Brewing. An overview of these transactions is set forth
below:
. SIBG purchased 4,447,104 newly issued shares of Frederick Brewing's
common stock for $2.0 million in cash.
. Holders of Frederick Brewing's Series F and G convertible preferred
stock converted their shares of preferred stock into an aggregate of
2,155,140 shares of Company common stock.
. A number of Frederick Brewing's creditors agreed to forgive
approximately $0.9 million of aggregate indebtedness in order to
facilitate SIBG's investment in Frederick Brewing (See note 3).
. Frederick Brewing entered into transition agreements with Kevin Brannon,
the former Chairman and Chief Executive Officer of Frederick Brewing,
and Marjorie McGinnis, the former President of Frederick Brewing,
pursuant to which
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Mr. Brannon and Ms. McGinnis are bound by non-compete provisions through
2001 and will receive in the aggregate $300,000 in severance payments.
As of October 1, 1999, Mr. Brannon and Ms. McGinnis were no longer
employees of Frederick Brewing.
In addition, in connection with its investment in Frederick Brewing, SIBG
purchased all of the outstanding equity interests in Blue II, LLC ("Blue
II"), the entity that owns Frederick Brewing's 5.5 acre site and brewing
facility. SIBG will cause Blue II to continue to lease the brewing
facility to Frederick Brewing.
In connection with SIBG's investment and the related transactions,
Frederick Brewing paid Westfinance Corporation an aggregate amount of
$135,600 for (i) assisting Frederick Brewing in obtaining SIBG's equity
investment, (ii) assisting Frederick Brewing in implementing the creditor
and vendor debt forgiveness plan and (iii) issuing a fairness opinion to
the Board of Directors of Frederick Brewing. The fees paid to Westfinance
Corporation were recorded as a deduction from additional paid-in capital.
3. Extraordinary Gain on Forgiveness of Debt
On August 24, 1999, in order to facilitate SIBG's investment in Frederick
Brewing, a number of Frederick Brewing's creditors forgave amounts owed to
Frederick Brewing totaling $902,231. One of the creditors was a financial
institution for which Frederick Brewing had unamortized debt costs of
$93,302 that were expensed. The net amount of $808,929 of debt forgiveness
has been recorded in the statement of operations for the period ended
September 30, 1999 as an extraordinary gain on forgiveness of debt.
4. Related Parties
Frederick Brewing currently leases its operating facilities from Blue II,
which is wholly-owned by SIBG. The lease is recorded and accounted for as
a capital lease in accordance with SFAS 13 (See note 14). Total payments
made to Blue II pursuant to this lease were $32,184 for the period ended
September 30, 1999.
Effective August 24, 1999, Frederick Brewing executed a demand promissory
note in favor of SIBG that enables Frederick Brewing to borrow from SIBG on
a revolving basis up to $5.0 million in aggregate principal amount (See
note 13). Total interest accrued to SIBG as of September 30, 1999 was
$16,992.
Effective August 24, 1999, Frederick Brewing entered into a one year
management agreement with SIBG whereby SIBG provides to Frederick Brewing
administrative, financial, operational, sales and marketing and strategic
planning services. Under this agreement, Frederick Brewing pays SIBG
$30,000 per month for these services. For the period ended September 30,
1999, Frederick Brewing paid SIBG $30,000 in the aggregate for these
services.
In addition, effective August 24, 1999, Frederick Brewing entered into a
production agreement with Crooked River Brewing Company, LLC pursuant to
which Frederick
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Brewing has agreed to produce and package draft beer for Crooked River for
up to four years, which includes automatic renewals. Crooked River is
controlled and predominantly owned by C. David Snyder, Frederick Brewing's
Chief Executive Officer and Chairman. For the period ended September 30,
1999, sales to Frederick Brewing totaled $14,561 under this agreement.
5. Principles of Consolidation
The consolidated financial statements of Frederick Brewing for the three
and nine months ended September 30, 1999 include the accounts of Frederick
Brewing and its wholly-owned subsidiaries Wild Goose Brewery, Inc. ("Wild
Goose") and Brimstone Brewing Company ("Brimstone") since their
acquisitions on January 28, 1998 and January 15, 1998, respectively.
Frederick Brewing plans to merge these subsidiaries into Frederick Brewing
before December 31, 1999.
6. Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair
value, and consists of amounts on hand. The restricted cash balance of
$312,475 consists of (i) a $300,000 escrow fund established at a financial
institution for the purpose of making payments to Kevin Brannon, former
Chairman and Chief Executive Officer of Frederick Brewing, and Marjorie
McGinnis, former President of Frederick Brewing, under the terms of their
transition agreements, which contain non-compete provisions through 2001
(See note 2), and (ii) a short-term investment of $12,475, which is in a
highly liquid short term investment account as required by the Frederick
County government.
7. Trade Receivables
Trade receivables result primarily from product sales to wholesale
distributors. Frederick Brewing periodically reviews the financial
strength of its distributors and provides allowances for anticipated losses
as necessary. At September 30, 1999, there was $31,716 in allowance for
doubtful accounts.
8. Inventories
Inventories consist of raw ingredients, work in process, packaging
materials and finished goods, and are valued at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO) method.
Frederick Brewing periodically reviews the age and marketability of its
inventory and provides obsolescence reserves as necessary. Net inventories
at September 30, 1999 are as follows:
8
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Raw ingredients........... $ 77,590
Work in process........... 87,136
Packaging materials....... 174,306
Finished goods............ 280,482
--------
Inventory, gross.......... 619,514
Reserve for obsolescence.. (74,313)
--------
Inventory, net............ $545,201
9. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include brewery merchandise,
points of sale promotional items, prepaid keg deposits and miscellaneous
prepaid expenses consisting of pallet deposits, prepaid taxes and
insurance. The composition of the prepaid expenses and other current
assets at September 30, 1999 is as follows:
Merchandise inventory........... $ 25,983
Promotional and marketing
inventory................... 103,773
Prepaid keg deposits............ 28,530
Miscellaneous prepaid expenses.. 100,421
--------
Total $258,707
10. Property and Equipment
Property and equipment are recorded at cost and depreciated over the
estimated useful lives of the individual asset groups. Straight-line
depreciation is used for financial reporting, and accelerated depreciation
methods are used for tax reporting. The estimated useful lives used for
financial reporting are as follows: brewing equipment, seven to 20 years;
automobiles and trucks, five years; furniture and fixtures, three to seven
years. Leasehold improvements are recorded at cost and amortized over the
shorter of the terms of the related lease or over the estimated useful life
of the improvement. On retirement or disposition of property and
equipment, the cost and accumulated depreciation of the property or
equipment are removed from the accounts and any resulting gain or loss is
reflected in operations. Repair and maintenance costs to property and
equipment are expended in the year incurred. Property and equipment at
September 30, 1999 are as follows:
Brewing equipment.............. $ 4,511,273
Brewery building............... 3,000,000
Leasehold improvements......... 1,663,683
Automobiles and trucks......... 155,621
Furniture and fixtures......... 138,395
-----------
Property and equipment, gross.. 9,468,972
Accumulated depreciation....... (1,725,036)
-----------
Property and equipment, net.... $ 7,743,936
9
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Depreciation expense for the three and nine months ended September 30,
1999 was $193,323 and $622,802, respectively. As of September 30,
1999, Frederick Brewing has a commitment to construct improvements to its
wastewater treatment facility at a cost of approximately $125,000. The
construction is scheduled to be completed by November 30, 1999.
11. Intangible Assets
Intangible assets consist of trademarks, copyrights and loan origination
costs related to existing debt obligations. Trademarks and copyrights are
amortized over five years on the straight-line basis. Loan origination
costs are amortized over the term of their related loan. Intangible asset
amortization expense for the three and nine months ended September 30, 1999
was $33,411 and $79,741, respectively. For the quarter ended September 30,
1999, the amount of $93,302 was expensed as an offset to the extraordinary
gain on the forgiveness of debt (See note 3). This amount represented
loan origination costs on loans repaid in August 1999, in connection with
SIBG's equity investment in Frederick Brewing.
12. Goodwill
Frederick Brewing acquired Wild Goose in January 1998 and recognized
goodwill of $2,734,113 associated with the acquisition. During the three
months ended September 30, 1999, Frederick Brewing's management determined
that the goodwill associated with this acquisition will not be fully
recovered. Frederick Brewing has experienced lower than expected sales
volume of certain Wild Goose products. Frederick Brewing has estimated
that it can recover $941,461 of the remaining value of its goodwill based
on a future cash flows analysis. Accordingly, Frederick Brewing has taken
a charge of $1,359,751 in its statements of operations for the three months
ended September 30, 1999 reflecting this impairment of the goodwill
associated with the Wild Goose acquisition.
13. Debt
On August 30, 1999, Frederick Brewing executed a promissory note in favor
of SIBG that is due on demand with an interest rate per annum equal to the
prime rate of a regional financial institution (7.8% at September 30, 1999)
plus one percent. Interest on the principal balance of the note is payable
monthly. Under the note, Frederick Brewing may obtain loan advances from
SIBG as needed up to an aggregate principal amount of $5.0 million. At
September 30, 1999, Frederick Brewing had outstanding borrowings from SIBG
of $2,171,691 under the note.
In August, 1999, Frederick Brewing repaid the remaining outstanding balance
of its bank debt and its loan from the United States Small Business
Administration that was not forgiven (See note 3) with borrowings from SIBG
under the SIBG note.
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The aggregate amount of $111,060 remains outstanding on the note payable to
Frederick County for sewer connections, and the terms of this note have not
changed. The payment of this note is secured by a second mortgage on the
brewery building and property.
14. Capital Leases
Frederick Brewing leases the land and building containing its brewery
operations from Blue II, which is wholly-owned by SIBG. The lease
qualifies for capital lease treatment. The current and long-term portion
of the capital lease is $2,663,372 at September 30, 1999. Frederick
Brewing has the option to purchase the land and building after March 1,
2008.
15. Stockholders' Equity
During the three months ended September 30, 1999, Frederick Brewing issued
6,750,452 shares of common stock. The additional shares consisted of (i)
4,447,104 shares issued to SIBG, (ii) 1,552,000 shares issued to former
Series F preferred stockholders upon conversion of their preferred stock,
(iii) 603,140 shares issued to former Series G preferred stockholders upon
conversion of their preferred stock and (iv) 148,208 shares issued to
former employees of Frederick Brewing. Total weighted common shares for
the three and nine months ended September 30, 1999 were 4,490,072 and
2,670,414, respectively.
16. Income Taxes
Frederick Brewing accounts for income taxes under the asset and liability
method. Deferred income taxes are recognized for their tax consequences in
future years by the differences between the tax basis of assets and
liabilities and their financial reporting values at each year-end. This is
based on enacted tax laws and statutory rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established as necessary to reduce deferred tax assets to
the amount they may realize if disposed. Income tax expense represents the
current tax provision for the period plus the change during the period in
deferred tax assets and liabilities. Net operating losses have been
incurred in the three and nine months ended September 30, 1999 and 1998,
and Frederick Brewing has not recorded a provision for income taxes
payable. The utilization of the net operating loss carry forward to future
periods may be limited under Section 382 of the Internal Revenue Code.
17. Basic and Diluted Loss per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
requires the presentation of basic (loss) per share and diluted (loss) per
share. Basic (loss) per share is based on the weighted-average number of
outstanding common shares for the period. Diluted (loss) per share adjusts
the weighted average common shares for any potential dilution that could
occur if stock options, warrants or other convertible securities were
11
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exercised or converted into common shares. There is no difference between
basic and diluted loss per share for the three and nine months ended
September 30, 1999 because the effects of Frederick Brewing's outstanding
options, warrants and convertible preferred stock were anti-dilutive.
18. Returns and Allowances
For the three months ended September 30, 1999, returns and allowances
includes a charge of $350,000 for a potential loss related to allegedly
out-of-code product that was exported to, and is currently warehoused in, a
non-U.S. market. Frederick Brewing's management is currently reviewing the
situation and is in discussions with the relevant authorities in the non-
U.S. market.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of Frederick Brewing for the three and nine months ended
September 30, 1999 and 1998. This discussion should be read in conjunction with
the Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto included
in Frederick Brewing's Form 10-KSB for the fiscal year ended December 31, 1998.
Overview
Effective August 24, 1999, SIBG purchased 4,447,104 newly issued shares of
the Company's common stock for $2.0 million in cash, representing approximately
51% of the outstanding common stock of Frederick Brewing after giving effect to
the transaction. At the time of SIBG's investment, Frederick Brewing was
suffering from serious financial and operational problems, which were outlined
in Frederick Brewing's Form 10-QSB for the fiscal quarter ended June 30, 1999.
After SIBG's investment in Frederick Brewing, a number of changes were made in
Frederick Brewing's board of directors and senior management. Each member of
Frederick Brewing's board of directors resigned, except for Jerome Pool, and C.
David Snyder, Christopher J. Livingston, Dale W. Bainbridge and David L. Stith
were appointed to the board to fill their vacancies. On October 1, 1999, Glenn
E. Corlett was also appointed to Frederick Brewing's board. In addition, the
following changes in Frederick Brewing's senior management were made:
. C. David Snyder, founder and Chairman of SIBG, replaced Frederick
Brewing's co-founder, Kevin Brannon, as Chairman and Chief Executive
Officer.
. Christopher J. Livingston, President of SIBG and its craftbrewing
affiliate, Crooked River, replaced Frederick Brewing's co-founder,
Marjorie McGinnis, as President.
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. James Gehrig, the Chief Financial Officer of SIBG, replaced Leslie
Harper as Chief Financial Officer.
Mr. Brannon and Ms. McGinnis served as Vice Presidents of Frederick Brewing
until September 30, 1999 and, as of October 1, 1999, were no longer employees of
Frederick Brewing. Under their transition agreements, Mr. Brannon and Ms.
McGinnis are bound by non-compete provisions through 2001. Mr. Harper's
position with Frederick Brewing terminated on October 31, 1999.
The changes in Frederick Brewing's board of directors and senior management
are expected to result in changes in, among other things, Frederick Brewing's
strategic direction, its distribution efforts and its sales and marketing
strategies. Since the completion of SIBG's investment in Frederick Brewing,
Frederick Brewing's management has engaged in a thorough evaluation of Frederick
Brewing's operations and financial condition. This evaluation is continuing.
Nevertheless, Frederick Brewing has taken a number of immediate steps intended
to stabilize Frederick Brewing's financial condition, which had been
deteriorating rapidly, and to establish a foundation upon which to improve
Frederick Brewing's operating and financial performance in the future. These
include the following:
. Enter into the SIBG Management Agreement
Effective August 24, 1999, Frederick Brewing entered into a management
agreement with SIBG under which SIBG provides Frederick Brewing with
administrative, financial, operational, sales and marketing and
strategic planning services. The SIBG management team has
collectively over 70 years of experience in the alcoholic beverage
industry. Frederick Brewing entered into the SIBG management
agreement, which has a term of one year, in order to obtain the
benefits of the extensive experience of the SIBG management team. The
monthly management fee of $30,000 paid by Frederick Brewing to SIBG
under the agreement is less than the aggregate monthly salaries and
related fringe benefits paid to Frederick Brewing's former senior
managers. The members of SIBG's management team who also serve as
officers of Frederick Brewing do not receive any compensation from
Frederick Brewing. This agreement was unanimously approved by those
members of the Frederick Brewing board who are not members, officers
or directors of, or otherwise affiliated with, SIBG or Crooked River.
. Enter into the Crooked River Production Agreement
Effective August 24, 1999, Frederick Brewing entered into a production
agreement with Crooked River under which Frederick Brewing produces
and packages draft beer for Crooked River for up to four years, which
includes automatic renewal periods. This agreement was unanimously
approved by those members of the Frederick Brewing board who are not
members, officers or directors of, or otherwise affiliated with, SIBG
or Crooked River.
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. Enter into the SIBG Promissory Note
In order to repay certain outstanding indebtedness of Frederick
Brewing and to fund working capital and other corporate needs,
Frederick Brewing executed a promissory note in favor of SIBG. The
SIBG note is payable on demand and provides that Frederick Brewing may
borrow on a revolving basis up to $5.0 million in aggregate principal
amount. The note has an interest rate per annum equal to the prime
rate of a regional financial institution plus one percent. As of
September 30, 1999, Frederick Brewing had outstanding borrowings of
approximately $2.2 million under the note. This note was unanimously
approved by those members of the Frederick Brewing board who are not
members, officers or directors of, or otherwise affiliated with, SIBG
or Crooked River.
. Acquire Distribution Rights for the Frederick, Maryland Regional Area
Through September 30, 1999, Frederick Brewing's gross revenues had
been negatively impacted by the decision of Frederick Brewing's major
distributor in the Frederick, Maryland regional area to diversify its
brand portfolio and concentrate its sales and marketing efforts in
alcoholic beverage products other than beer. Consequently, on
September 24, 1999, Frederick Brewing acquired its distribution rights
for Frederick Brewing's brands for the Frederick, Maryland regional
area from this distributor. Frederick Brewing immediately assigned
these rights to nine distributors that will service the Frederick,
Maryland regional area. C. David Snyder, Frederick Brewing's Chairman
and Chief Executive Officer, personally guaranteed up to $160,000 of
the acquisition price for these distribution rights. Frederick
Brewing's management believes that these new distributors will help to
stabilize Frederick Brewing's brands in this area.
. Initiate New Sales and Marketing Plans
During the fourth quarter of 1999, Frederick Brewing expects to
initiate and begin implementation of new sales strategies and
marketing plans to increase interest in Frederick Brewing's brands.
Initially, Frederick Brewing expects to concentrate its sales efforts
in the Maryland and Virginia areas.
Frederick Brewing's management believes that the key to improving Frederick
Brewing's financial performance is to increase the utilization levels of its
brewing facility. To that end, Frederick Brewing has entered into the
production agreement with Crooked River. In addition, Frederick Brewing may
enter into a similar production agreement relating to certain brands C. David
Snyder had previously acquired from The Hudepohl-Schoenling Brewing Company,
although no assurance can be given as to when or if Frederick Brewing will enter
into such agreement. To accommodate and produce the potential incremental
volume related to these additional brands, Frederick Brewing is considering
expanding the brewing capacity and storage capability of its brewery. Current
estimates for this capital expansion project are in the range of $150,000 to
$200,000. Management plans to fund this capital expansion project, in part,
with funds from SIBG. Frederick Brewing is also pursuing additional funds
sources at both the state and local government levels for this project.
Also, Frederick Brewing's management is directly monitoring and, as
appropriate, reducing overhead spending. Overall employment at the brewery is
also being reviewed in an effort to maximize the talents of Frederick Brewing's
labor workforce.
14
<PAGE>
Results of Operations
The following table sets forth data derived from Frederick Brewing's
Consolidated Statements of Operations. The table set forth below is expressed
as a percentage of net sales, for the three and nine months ended September 30,
1999 and 1998.
Percentage of Net Sales
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross Sales 219.6% 113.4% 128.3% 113.2%
Less: Returns and allowances, and
excise taxes 119.6 13.4 28.3 13.2
------ ----- ------ -----
Net sales 100.0 100.0 100.0 100.0
Cost of sales 235.9 75.8 120.2 76.6
------ ----- ------ -----
Gross profit/(loss) (135.9) 24.2 (20.2) 23.4
Selling, general and administrative
expenses 253.5 61.4 102.3 71.7
Impairment of goodwill 368.6 0.0 62.2 0.0
Amortization of deferred public
relations costs 0.0 0.0 0.0 29.3
------ ----- ------ -----
Operating loss (758.0) (37.2) (184.7) (77.6)
Loss on sale of equipment 0.6 0.0 0.1 2.7
Interest expense, net 41.2 14.8 23.0 11.3
------ ----- ------ -----
Loss before extraordinary gain on (799.8) (52.0) (207.8) (91.6)
forgiveness of debt
Extraordinary gain on forgiveness
of debt, net 219.3 0.0 37.0 0.0
Net Loss ------ ----- ------ -----
(580.5) (52.0) (170.8) (91.6)
</TABLE>
15
<PAGE>
Per Barrel Operating Data
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Barrels sold 5,091 9,233 16,404 23,800
Gross sales per barrel sold $159.11 $173.64 $170.97 $177.02
Less: Returns and allowances, and
excise taxes 86.66 20.53 37.68 20.60
------- ------- ------- -------
Net sales per barrel sold $ 72.45 $153.11 $133.29 $156.42
Cost of sales per barrel sold 170.88 116.04 160.16 119.79
------- ------- ------- -------
Gross profit per barrel sold $(98.43) $ 37.07 $(26.87) $ 36.63
</TABLE>
Three Months Ended September 30, 1999 to Three Months Ended September 30, 1998
Gross Sales
Gross sales decreased $793,198, or approximately 49.5%, to $810,014 for the
third quarter of 1999 from $1,603,212 for the comparable period in 1998. The
decrease in gross sales resulted primarily from a reduction in demand in all
product lines as sales, marketing and promotional efforts for all markets were
curtailed by Frederick Brewing's former management.
Selling Price per Barrel
The selling price per barrel decreased by $14.53, or approximately 8.4%, to
$159.11 per barrel for the third quarter of 1999 from $173.64 for the comparable
period in 1998. The decrease in selling price per barrel was primarily due to
Frederick Brewing's continued use of price reductions in certain markets to
maintain Frederick Brewing's brand presence in the consumer market in lieu of
significant marketing and selling support.
Significant changes in the packaging mix could have a material effect on
sales price per barrel. Frederick Brewing packages its brands in bottles and
kegs. Assuming the same level of production, a shift in the mix from bottles to
kegs would effectively decrease revenue per barrel because the selling price
per equivalent barrel is lower for kegs than for bottles. Keg sales as a
percentage of total equivalent barrels of brands were 28% for the third
quarter of 1999, and 24% for the third quarter of 1998.
Returns and Allowances, and Excise Taxes
Returns and allowances increased $251,564, or approximately 132.7%, to
$441,159 in the third quarter of 1999 from $189,595 for the comparable period in
1998. The increase is
16
<PAGE>
attributable to an allowance reserve established by Frederick Brewing's
management relating to allegedly out-of-code product that was exported to, and
is currently warehoused in, a non-U.S. market. Frederick Brewing's management is
currently reviewing the situation and is in discussions with the relevant
authorities in the non-U.S. market.
State excise taxes vary, depending on where the beer is to be sold. In
some jurisdictions, including Maryland and Pennsylvania, the brewery is required
to pay the excise tax, while in others, such as the District of Columbia and
Virginia, the tax is paid by the wholesale distributor to whom the beer is
shipped. State excise tax rates vary from state to state as well. Frederick
Brewing also currently pays a $7 per barrel federal excise tax on all beer sold
in the United States.
Net Sales
Net sales decreased $1,044,762, or approximately 73.9%, to $368,855 for the
third quarter of 1999 from $1,413,617 for the comparable period in 1998. The
decrease was caused, in part, by (i) a decrease in gross sales of $793,198 for
the third quarter of 1999 compared to the comparable period in 1998 and (ii) an
increase in Frederick Brewing's returns and allowances and excise taxes of
$251,564 for the third quarter of 1999 compared to the comparable period in
1998.
Volume
Barrelage volume decreased by 4,142 barrels, or approximately 44.9%, to
5,091 barrels for the third quarter of 1999 from 9,233 barrels for the
comparable period in 1998. The decrease was primarily caused by a significant
decline in volume for all of Frederick Brewing's product lines. The predominant
factor in this broad based product volume decline was Frederick Brewing's
continued reliance on one major wholesaler for the Frederick, Maryland regional
area. In 1999, this wholesaler elected to change its product portfolio from a
major beer emphasis to other alcoholic beverage products. On September 24,
1999, Frederick Brewing acquired its distribution rights for the Frederick,
Maryland regional area from this distributor and promptly assigned those
acquired rights to nine wholesalers.
Cost of Goods Sold
For the third quarters of 1999 and 1998, the cost of sales was $869,958, or
$170.88 per barrel, and $1,071,373, or $116.04 per barrel, respectively. For
the third quarters of 1999 and 1998, variable costs (materials, direct labor and
variable overhead) were $592,758, or $116.43 per barrel, and $753,319, or
$81.59 per barrel, respectively. Fixed overhead costs for the third quarter
of 1999 decreased by $40,854, or approximately 12.8%, to $277,200 from $318,054
for the comparable period in 1998.
Variable costs include raw materials, packaging materials, liquid costs and
variable labor costs directly related to the production and packaging of beer.
Variable and fixed overhead costs
17
<PAGE>
include costs related to the following operational departments: brewing,
cellaring, packaging, quality assurance, warehousing, maintenance and production
management.
The increase in cost of sales was caused by Frederick Brewing's fixed
overhead costs being absorbed over a reduced barrel shipment, 5,091 barrels in
1999 compared to 9,233 barrels in 1998. For the third quarter of 1999,
Frederick Brewing's facility operated at a level of 20.4% of plant capacity as
compared to 36.9% for the comparable period in 1998. Frederick Brewing's
capacity utilization has a significant impact on gross profit. When facilities
are operating at their maximum designed production capacities, profitability is
favorably affected by spreading fixed and variable operating costs over a larger
sales base. Because the actual production level is substantially below the
facility's maximum designed production capacity, gross margins are negatively
impacted. This impact is reduced when actual utilization levels increase.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased $71,913, or
approximately 8.3%, to $935,190 for the third quarter of 1999 from $863,277 for
the comparable period in 1998. This increase was due, in part, to (i) a
$30,000 monthly management fee paid by Frederick Brewing to SIBG, and (ii)
consulting fees paid to former senior executive officers of Frederick Brewing.
Impairment of Goodwill
Impairment of goodwill associated with the Wild Goose acquisition resulted
in a charge of $1,359,751 for the third quarter of 1999 as compared to $0.00 for
the comparable period in 1998. Frederick Brewing's management determined that
the goodwill of $2,734,113 that was recognized when Frederick Brewing acquired
Wild Goose in 1998 will not be fully recovered due to lower than expected sales
volumes of certain Wild Goose brands. Based on future cash flows analysis,
Frederick Brewing's management has estimated that it can recover $941,461 of the
remaining value of its goodwill.
Interest Expense (net)
Net interest expense decreased $57,479, or approximately 27.4%, to $151,996
for the third quarter of 1999 from $209,475 for the comparable period in 1998.
A substantial portion of the interest expense incurred during the third quarter
of 1999 and 1998 relates to indebtedness incurred by Frederick Brewing in
connection with equipment financing. Interest expense for the third quarter
decreased as a result of Frederick Brewing repaying this indebtedness.
Extraordinary Gain on Forgiveness of Debt (net)
The net amount of extraordinary gain on forgiveness of debt for the third
quarter of 1999 was $808,929 as compared to $0.00 for the comparable period in
1998. In order to facilitate SIBG's investment in Frederick Brewing, a number
of Frederick Brewing's creditors forgave
18
<PAGE>
amounts owed to Frederick Brewing totalling $902,231. One of the creditors was a
financial institution for which Frederick Brewing had unamortized debt costs of
$93,302 that were expensed.
Net Operating Loss
A net loss of $2,141,234 or $0.48 per weighted-average common share was
incurred during the third quarter of 1999, compared to a net loss of $982,493 or
$0.72 per weighted-average common share for the comparable period in 1998, an
increase of $1,158,741 or approximately 117.9%.
Nine Months Ended September 30, 1999 To Nine Months Ended September 30, 1998
Gross Sales
Gross Sales decreased $1,408,537, or approximately 33.4%, to $2,804,522 for
the nine months ended September 30, 1999 from $4,213,059 for the comparable
period in 1998. The decrease resulted primarily from the reduction in demand in
all product lines as sales, marketing and promotional efforts for all markets
were curtailed by Frederick Brewing's former management.
Selling Price Per Barrel
The selling price per barrel decreased by $6.05, or approximately 3.4%, to
$170.97 per barrel for the nine months ended September 30, 1999 from $177.02 for
the comparable period in 1998. The decrease in the selling price per barrel was
primarily due to Frederick Brewing's continued use of price reductions to
maintain Frederick Brewing's brand presence in the consumer market in lieu of
significant marketing and selling support.
Significant changes in the packaging mix could have a material effect on
sales price per barrel. Frederick Brewing packages its brands in bottles and
kegs. Assuming the same level of production, a shift in the mix from bottles to
kegs would effectively decrease revenue per barrel because the selling price per
equivalent barrel is lower for kegs than for bottles. Keg sales as a percentage
of total equivalent barrels of brands were 28% for the nine months ended
September 30, 1999, and 25% for the nine months ended September 30, 1998.
Returns and Allowances, and Excise Taxes
Returns and allowances increased $127,713, or approximately 26.0%, to
$618,053 for the nine months ended September 30, 1999 from $490,340 for the
comparable period in 1998. The increase is attributable to an allowance reserve
established by Frederick Brewing's management relating to allegedly out-of-code
product that was exported to, and is currently warehoused in, a non-U.S. market.
Frederick Brewing's management is currently reviewing the situation and is in
discussions with the relevant authorities in the non-U.S. market.
19
<PAGE>
State excise taxes vary, depending on where the beer is to be sold. In
some jurisdictions, including Maryland and Pennsylvania, the brewery is
required to pay the excise tax, while in others, such as the District of
Columbia and Virginia, the tax is paid by the wholesale distributor to whom the
beer is shipped. State excise tax rates vary from state to state as well.
Frederick Brewing also currently pays a $7 per barrel federal excise tax on all
beer sold in the United States.
Net Sales
Net sales decreased $1,536,250, or approximately 41.3%, to $2,186,469 for
the nine months ended September 30, 1999 from $3,722,719 for the comparable
period in 1998. The decrease was caused, in part, by (i) a decrease in gross
sales of $1,408,537 for the nine month period ended September 30, 1999 compared
to the comparable period in 1998 and (ii) an increase in Frederick Brewing's
returns and allowances and excise taxes of $127,713 for the nine months ended
September 30, 1999 compared to the comparable period in 1998.
Volume
Barrelage volume decreased by 7,396 barrels, or approximately 31.1%, to
16,404 barrels for the nine months ended September 30, 1999 from 23,800 barrels
for the comparable period in 1998. The decrease was primarily caused by a
significant decline in volume for all of Frederick Brewing's product lines.
The predominant factor in this broad based product volume decline was
Frederick Brewing's continued reliance on one major wholesaler for the
Frederick, Maryland regional area. In 1999, this wholesaler elected to change
its product portfolio from a major beer emphasis to other alcoholic beverage
products. On September 24, 1999, Frederick Brewing acquired its distribution
rights for the Frederick, Maryland regional area from this distributor and
promptly assigned those acquired rights to nine wholesalers.
Cost of Goods Sold
For the nine months ended September 30, 1999 and 1998, the cost of sales
was $2,627,185, or $160.16 per barrel, and $2,851,091, or $119.79 per barrel,
respectively. For the nine months ended September 30, 1999 and 1998, variable
costs (materials, direct labor and variable overhead) were $1,734,785, or
$105.75 per barrel, and $2,003,008, or $84.16 per barrel, respectively. Fixed
overhead costs for the nine months ended September 30, 1999 increased by
$44,317, or approximately 5.2%, to $892,400 from $848,083 for the comparable
period in 1998.
Variable costs include raw materials, packaging materials, liquid costs and
variable labor costs directly related to the production and packaging of beer.
Variable and fixed overhead costs include costs related to the following
operational departments: brewing, cellaring, packaging, quality assurance,
warehousing, maintenance and production management.
20
<PAGE>
The increase in cost of sales was caused by Frederick Brewing's fixed
overhead costs being absorbed over a reduced barrel shipment, 16,404 barrels in
1999 compared to 23,800 barrels in 1998. For the nine months ended September
30, 1999, the Frederick Brewing facility operated at a level of 21.9% of plant
capacity as compared to 31.7% for the comparable period in 1998. Frederick
Brewing's capacity utilization has a significant impact on gross profit. When
facilities are operating at their maximum designed production capacities,
profitability is favorably affected by spreading fixed and variable operating
costs over a larger sales base. Because the actual production level is
substantially below the facility's maximum designed production capacity, gross
margins are negatively impacted. This impact is reduced when actual
utilization levels increase.
Selling, General and Administrative Expenses
SG&A expenses for the nine months ended September 30, 1999 decreased
$427,907, or approximately 16.1%, to $2,237,781 from $2,665,688 for the
comparable period in 1998. The decrease was due, in part, to (i) a reduction of
$629,662 in sales and marketing costs, (ii) an increase in the $30,000 monthly
management fee paid by Frederick Brewing to SIBG, and (iii) an increase in
consulting fees paid to former senior executive officers of Frederick Brewing.
Impairment of Goodwill
Impairment of goodwill associated with the Wild Goose acquisition resulted
in a charge of $1,359,751 for the nine months ended September 30, 1999 as
compared to $0.00 for the comparable period in 1998. Frederick Brewing's
management determined that the goodwill of $2,734,113 that was recognized when
Frederick Brewing acquired Wild Goose in 1998 will not be fully recovered due to
lower than expected sales volumes of certain Wild Goose brands. Based on future
cash flows analysis, Frederick Brewing's management has estimated that it can
recover $941,461 of the remaining value of its goodwill.
Interest Expense (net)
Net interest expense increased $82,627, or approximately 19.7%, to $502,537
for the nine months ended September 30, 1999 from $419,910 for the comparable
period in 1998. A substantial portion of the interest expense incurred during
the nine months ended September 30, 1999 and 1998 relates to indebtedness
incurred by Frederick Brewing in connection with equipment financing. Frederick
Brewing repaid this indebtedness in the third quarter of 1999.
Extraordinary Gain on Forgiveness of Debt (net)
The net amount of extraordinary gain on forgiveness of debt for the nine
months ended September 30, 1999 was $808,929 as compared to $0.00 for the
comparable period in 1998. In order to facilitate SIBG's investment in
Frederick Brewing, a number of Frederick Brewing's creditors forgave amounts
owed to Frederick Brewing totalling $902,231. One of the creditors was a
financial institution for which Frederick Brewing had unamortized debt costs of
$93,302 that were expensed.
21
<PAGE>
Net Operating Loss
A net loss of $3,733,979 or $1.40 per weighted-average common share was
incurred for the nine months ended September 30, 1999, compared to a net loss of
$3,683,127 or $3.94 per weighted-average common share for the comparable period
of 1998, an increase of $50,852 or approximately 1.4%.
Liquidity and Capital Resources
Frederick Brewing has recorded losses from operations since 1993 and has
funded its operations primarily from private and public placements of common and
preferred stock. As of September 30, 1999, Frederick Brewing had a working
capital deficit of $2,210,298.
Net cash used in operating activities was $1,346,184 in the third quarter
of 1999, compared to $602,537 in the third quarter of 1998. Year-to-date net
cash used in operations activities was $1,704,160 in 1999, compared to
$1,768,600 in 1998.
Net cash used for investing activities was $497,250 in the third quarter of
1999, compared to $101,586 in the third quarter of 1998. Year-to-date net cash
used for investing activities was $651,885 in 1999, compared to $1,166,081 in
1998.
Net cash provided by financing activities in the third quarter of 1999 was
$1,906,855, compared to $698,383 in the third quarter of 1998. Year to-date net
cash provided by financing activities was $2,332,978 in 1999, compared to
$511,878 in 1998.
Frederick Brewing's ability to meet its obligations on a long term basis is
dependent on achieving operating profitability and on generating positive cash
flows. To achieve these results, Frederick Brewing will need to eliminate or
substantially reduce excess brewing capacity. In order to meet its short term
obligations, Frederick Brewing will need to borrow additional amounts from SIBG
under the SIBG note. Frederick Brewing currently has approximately $2.8 million
in availability under the SIBG note. The SIBG note, however, is subject to
repayment in full upon demand by SIBG. SIBG receives funding for Frederick
Brewing's borrowings under the SIBG note from a line of credit obtained by SIBG
from a financial institution on substantially similar terms and which is also
payable on demand. As a result, although SIBG is owned and controlled by C.
David Snyder, Frederick Brewing's Chairman and Chief Executive Officer, SIBG may
nonetheless have to demand repayment from Frederick Brewing of amounts
outstanding under the SIBG note if the financial institution providing funding
to SIBG demands repayment. Consequently, Frederick Brewing is exploring
obtaining more permanent financing arrangements, including possibly a line of
credit secured by Frederick Brewing's equipment, although no assurances can be
given that any such financing arrangements can be obtained and, if obtained,
upon what terms such financing would be provided to Frederick Brewing.
Impact of Inflation
Frederick Brewing has not attempted to calculate the impact of inflation on
operations, but does not believe that inflation has had a material impact in
recent years. Management does believe any future cost increases in raw
ingredients, packaging materials, direct labor costs,
22
<PAGE>
overhead payroll costs, and general operating expenses due to inflation could
have a significant impact on Frederick Brewing's results of operations to the
extent that these additional costs cannot be transferred to distributors.
Provision for Income Taxes
Frederick Brewing has incurred net operating losses during both 1998 and
1999 and no provisions for income taxes have been provided for on the
Consolidated Statements of Operations. Frederick Brewing has recorded a full
valuation allowance against the net deferred tax assets.
Impact of Year 2000 Issue
The term "Year 2000" is used to describe general problems that may result
from improper processing of dates and date-sensitive calculations by computers
or other machinery as the Year 2000 is approached and reached. This problem
stems from the fact that many of the world's computer hardware and software
applications have historically used only the last two digits to refer to a year.
As a result, may of these computer programs do not or will not properly
recognize a year that begins with "20" instead of the familiar "19". If not
corrected, many computer applications could fail or create erroneous results.
Frederick Brewing is working with key external parties, including banks,
utilities, other vendors and third party payers, to assess the efforts made by
these parties with respect to their own systems and to determine the extent to
which their systems are vulnerable to the Year 2000 issue. Frederick Brewing
has received sufficient information from these parties about their plans to be
able to predict the outcome of their efforts.
Readiness. Frederick Brewing has completed a review of its computerized
information systems to identify systems and applications that could be affected
by Year 2000 issues. Desktop operating systems and software applications are
being upgraded to the latest versions and will be Year 2000 compliant by October
31, 1999. Frederick Brewing plans to finalize its information systems
remediation by enhancing the financial application by October 31, 1999.
Frederick Brewing does not maintain any proprietary information technology
systems and has not made any modifications to any of the information technology
systems provided by its vendors. Frederick Brewing utilizes software and
hardware offered by major vendors and is in the process of receiving Year 2000
readiness disclosures and warranties individually from those vendors. Frederick
Brewing expects that minor Year 2000 compliance issues will continue to be
identified throughout its discussions with hardware and software vendors.
Cost. As of September 30, 1999, Frederick Brewing has spent approximately
$15,000 to upgrade or replace essential computer hardware and software. The
estimated cost of enhancing the financial application will be approximately
$2,500. This estimated cost does not account for any additional costs incurred
due to the failure of any third party vendor or service provider to achieve Year
2000 compliance.
Risk. Year 2000 risk involves a "worst care scenario" which would comprise
of system errors or failures, business interruptions and the inability to engage
in normal business practices.
23
<PAGE>
The main areas of concern would be the accounting and operations systems. The
amount of any potential losses related to these occurrences cannot be reasonably
estimated at this time.
Contingency Plan. Frederick Brewing will continue to explore contingency
plans, so as to be in a position to mitigate the consequences of any disruption
resulting from the Year 2000 issue.
Frederick Brewing recognizes the importance of ensuring that Year 2000
issues will not adversely affect its operations. Frederick Brewing believes
that the process described above will be effective to manage the risks
associated with the problem that the Year 2000 poses.
Certain Factors That May Affect Future Results
From time to time, information provided by Frederick Brewing, statements by
its employees or information included in its filings with the Securities and
Exchange Commission (including those portions of this Management's Discussion
and Analysis that refer to the future) may contain forward-looking statements
that are not historical facts. Those statements are "forward-looking" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, and Frederick Brewing's future performance,
operating results, financial position and liquidity, are subject to a variety of
factors that could materially affect results, including:
. Going Concern. The financial statements included in this report have
been prepared assuming Frederick Brewing will continue as a going
concern. Frederick Brewing has sustained significant recurring operating
losses and has significant cash commitments to creditors. These facts
raise substantial doubt about Frederick Brewing's ability to continue as
a going concern.
. Reliance on SIBG. Frederick Brewing's success depends to a significant
degree upon the continued support and contributions of its controlling
shareholder, SIBG.
. Under the one-year management agreement with SIBG, SIBG provides
extensive management services for Frederick Brewing. If SIBG
terminates this Agreement, there can be no assurance that Frederick
Brewing will be able to attract and hire qualified management
personnel to develop its business.
. Under the promissory note in favor of SIBG, Frederick Brewing has
incurred debt obligations of approximately $2.2 million in principal
amount and may borrow additional amounts up to $5.0 million in
principal amount. There can be no assurance that SIBG will not have
to demand repayment of these amounts if the financial institution
that provides the funding for these loans to SIBG demands repayment
from SIBG. If SIBG demands
24
<PAGE>
repayment of the note, there can be no assurance that Frederick
will be able to obtain alternative financing or if such alternative
financing is obtained, there can be no assurance as to the terms of
the financing.
. SIBG's ownership of other brands has already resulted in the four
year agreement to produce and package draft beer for Crooked River
and may lead to other production agreements to produce and package
other SIBG owned brands. If SIBG terminates the Crooked River
agreement and/or determines not to enter into additional production
agreements, there can be no assurance that Frederick Brewing will
be able to obtain other production contracts, which are needed to
increase plant utilization.
. Potential Out-of-Code Product Loss. The Company has made a $350,000
allowance reserve for a potential loss related to allegedly out-of-code
product that was exported to, and is currently warehoused in, a non-U.S.
market. Frederick Brewing's management is currently reviewing the
situation and is in discussions with the relevant authorities in the
non-U.S. markets. However, since all arrangements regarding this product
were made by former management and, at this point, much information
regarding this situation is still unknown, the potential amount of this
loss is difficult to predict.
. Heavy Dependence on Wholesale Distributors. Frederick Brewing
distributes its products only through independent wholesale distributors
for resale to retailers. Accordingly, Frederick Brewing is dependent
upon these wholesale distributors to sell Frederick Brewing's beers and
to assist Frederick Brewing in creating demand for its products and in
providing adequate service to its retail customers. Even though
Frederick Brewing recently assigned its distribution rights for the
Frederick, Maryland regional area to nine new distributors, there can
be no assurance that any of Frederick Brewing's wholesale distributors
will devote the resources necessary to provide effective sales and
promotional support to Frederick Brewing.
. Competition. Frederick Brewing competes in the speciality beer
segment of the domestic beer market against a variety of domestic and
international brewers, many of whom have substantially greater
financial, production, distribution and marketing resources and have
achieved a higher level of brand recognition than Frederick Brewing.
Increased competition could result in price reductions, reduced profit
margins and loss of market share, all of which would have a material
adverse effect on Frederick Brewing's financial condition and results of
operations.
. Decrease in Industry Growth. Beginning in 1996, the overall sales
growth of domestic speciality brewers has slowed substantially. This
decrease is primarily caused by factors such as (i) the maturation and
saturation of certain large consumer markets, (ii) the increased
marketing efforts of import brewers and (iii) a shift in the promotional
efforts of
25
<PAGE>
many wholesale distributors from domestic speciality brands to higher
volume products. There can be no assurance that this trend will not
continue and such a trend could have a material adverse effect on
Frederick Brewing's financial condition and results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On July 12, 1999, Frederick Brewing's landlord, Blue II, was granted an
Order of Restitution by the District Court for Frederick County, Maryland
permitting Blue II to re-enter and evict Frederick Brewing from the brewery
premises due to Frederick Brewing's failure to pay $158,803 in rental payments.
On August 24, 1999, SIBG purchased all of the outstanding membership interests
in Blue II and settled the amounts due to Blue II. Consequently, on August 25,
1999, the Order was dismissed by Blue II without prejudice.
Frederick Brewing also has been the subject of legal actions that were
initiated by certain of its unsecured creditors. While no single action was, by
itself, material, the total amount sought exceeded $35,000. In connection with
SIBG's investment in Frederick Brewing, Frederick Brewing successfully
negotiated with many of its unsecured and secured creditors to obtain
substantial reductions in its secured debt and accounts payable. In the
aggregate, Frederick Brewing estimates that these debt forgiveness arrangements
reduced its outstanding indebtedness by approximately $900,000.
On June 6, 1999, the Department of Public Works Frederick County Maryland
Bureau of Water and Sewer Operations issued an Addendum to Consent Order, which
modifies the Consent Order issued on June 30, 1998. The Consent Order directs
Frederick Brewing to take appropriate actions to cause its wastewater discharge
to meet its permit limitations by November 30, 1999. The Consent Order provides
that failure to obtain compliance by such deadline will result in the imposition
of a penalty of up to $1,000 per day. Frederick Brewing is currently taking
steps to cause compliance and Frederick Brewing expects to obtain compliance on
or before the November 30th deadline.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
On August 24, 1999, Frederick Brewing entered into an Investment Agreement
with SIBG whereby Frederick Brewing sold to SIBG 4,447,104 newly issued shares
of common stock, par value $0.0004 per share, of Frederick Brewing and warrants
to purchase shares of Company common stock for an aggregate cash purchase price
of $2,000,000. The warrants, which have an exercise price of $0.01 per share,
become exercisable solely in the event that any warrants, options or convertible
securities of Frederick Brewing outstanding on August 24, 1999 are exercised or
converted after that date. Frederick Brewing utilized the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
in connection with the issuance of Frederick Brewing common stock and the
warrants.
26
<PAGE>
In order to facilitate SIBG's investment in Frederick Brewing, Frederick
Brewing entered into a Restructuring Agreement on August 24, 1999 with SIBG,
Austost Anstalt Schaan, Balmore Funds S.A., Ron S. Williams, Sr., Ron Williams,
Jr., Dean Dowda, Fred Lenz, World Capital Funding, LLC, The Augustine Fund,
L.P., Jimmy Dean, Congregation Beth Moredechai and Bertek, Inc. Pursuant to the
Restructuring Agreement, the holders of all of Frederick Brewing's Series F
Convertible Preferred Stock, par value $.01 per share, and Series G Convertible
Preferred Stock, par value $0.01 per share, converted their preferred stock into
an aggregate of 2,155,140 newly issued shares of Company common stock. Pursuant
to the Restructuring Agreement, the holders of Common Stock Purchase Warrants,
dated June 7, 1999, entered into Amended and Restated Common Stock Purchase
Warrants to purchase 500,000 shares of Company common stock at an exercise price
of $0.50 per share. This exercise price and the number of shares of Company
common stock issuable upon exercise of the amended warrants are subject to
certain adjustments for dividends, stock splits and the like. Frederick Brewing
utilized the exemption from registration provided by Section 3(a)(9) of the
Securities Act in connection with the issuance of Frederick Brewing common stock
and the amended warrants.
On August 24, 1999, SIBG also entered into a Purchase Agreement with
Frederick Brewing, Edward D. Scott, Catherine D. Scott, Robert Schuerholz,
Nicholas P. Foris and Vishnampet S. Jayanthimath, pursuant to which SIBG
purchased all of the outstanding membership interests in Blue II. SIBG, in
consideration of the sale of these membership interests, paid an amount in cash
to the Sellers, and Frederick Brewing, in consideration of the repayment by SIBG
of certain outstanding obligations owed by Frederick Brewing to Blue II, issued
warrants to the members of Blue II to purchase an aggregate of 132,000 shares of
Company common stock at an exercise price of $1.00 per share. This exercise
price and the number of shares of Company common stock issuable upon exercise of
the warrants are subject to certain adjustments for dividends, stock splits and
the like. Frederick Brewing utilized the exemption provided by Section 4(2) of
the Securities Act in connection with the issuance of the warrants.
During the three months ended September 30, 1999, Frederick Brewing issued
148,208 shares of Company common stock to former employees of Frederick Brewing
in lieu of salary amounts owed to such employees.
Item 3. Defaults Upon Senior Securities.
--------------------------------
For the six months ended June 30, 1999, Frederick Brewing was in default of
its secured loans from First Union National Bank and the U.S. Small Business
Administration. In connection with SIBG's investment in Frederick Brewing,
Frederick Brewing negotiated settlement agreements with these lenders, and,
pursuant to such agreements, Frederick Brewing's obligations were repaid and
Frederick Brewing has been released from all further obligations under such
loans.
27
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
Except as otherwise indicated, the following Exhibits are filed
herewith and made a part hereof:
Exhibit No. Description
----------- -----------
4.1* Amended and Restated Common Stock Purchase Warrant
by Frederick Brewing Co. in favor of Austost
Anstalt Schaan, dated August 24, 1999
4.2* Amended and Restated Common Stock Purchase Warrant
by Frederick Brewing Co. in favor of Balmore Funds
S.A., dated August 24, 1999
4.3* Amended and Restated Common Stock Purchase
Warrant by Frederick Brewing Co. in favor of Ron
Williams, Sr., dated August 24, 1999
4.4* Amended and Restated Common Stock Purchase
Warrant by Frederick Brewing Co. in favor of Ron
Williams, Jr., dated August 24, 1999
4.5* Amended and Restated Common Stock Purchase
Warrant by Frederick Brewing Co. in favor of Dean
Dowda, dated August 24, 1999
4.6* Amended and Restated Common Stock Purchase
Warrant by Frederick Brewing Co. in favor of Fred
Lenz, dated August 24, 1999
4.7* Amended and Restated Common Stock Purchase
Warrant by Frederick Brewing Co. in favor of
World Capital Funding, LLC, dated August 24, 1999
4.8* Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Edward D. Scott, dated
August 24, 1999
4.9* Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Catherine D. Scott, dated
August 24, 1999
4.10* Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Nicholas P. Foris, dated
August 24, 1999
4.11* Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Robert Schuerholz, dated
August 24, 1999
4.12* Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Vishnampet S.
Jayanthimath, dated August 24, 1999
28
<PAGE>
10.1** Investment Agreement, dated August 24, 1999, by
and between Snyder International Brewing Group, LLC
and Frederick Brewing Co.
10.2** Restructuring Agreement, dated August 24, 1999,
by and among Frederick Brewing Co., Snyder
International Brewing Group, LLC, Austost Anstalt
Schaan, Balmore Funds S.A., Ron S. Williams, Sr.,
Ron Williams, Jr., Dean Dowda, Fred Lenz, World
Capital Funding, LLC, The Augustine Fund, L.P.,
Jimmy Dean, Congregation Beth Moredechai and
Bertek, Inc.
10.3** Transition Agreement, dated August 24, 1999, by and
between Kevin E. Brannon and Frederick Brewing Co.
10.4** Transition Agreement, dated August 24, 1999, by and
between Marjorie A. McGinnis and Frederick
Brewing Co.
10.5** Escrow Agreement, dated August 24, 1999, by and
among Frederick Brewing Co., Key Trust Company,
N.A., Kevin E. Brannon and Marjorie A. McGinnis
10.6** Common Stock Purchase Warrant, dated August 24,
1999, by Frederick Brewing Co. in favor of Snyder
International Brewing Group, LLC
10.7** Settlement Agreement, dated August 24, 1999, by and
between First Union National Bank and Signet Bank
10.8** Settlement Agreement, dated August 19, 1999, by
and among U.S. Small Business Administration,
Snyder International Brewing Group, LLC and
Frederick Brewing Co.
10.9 Production Agreement, dated as of August 24, 1999,
by and between Crooked River Brewing Company, LLC
and Frederick Brewing Co.
10.10 Management Agreement, dated as of August 24, 1999,
by and between Snyder International Brewing Group,
LLC and Frederick Brewing Co.
10.11 Demand Promissory Note, dated August 30, 1999, by
Frederick Brewing Co. in favor of Snyder
International Brewing Group, LLC
16.1*** Letter of BDO Siedman, LLP, dated October 21,
1999, to the U.S. Securities and Exchange
Commission
29
<PAGE>
27.1 Financial Data Schedule
99.1** Press release, dated August 26, 1999
30
<PAGE>
b. Reports on Form 8-K
Frederick Brewing filed a Current Report on Form 8-K, dated August
24, 1999, reporting under Items 1 and 5.
Frederick Brewing filed a Current Report on Form 8-K, dated October
22, 1999, reporting under Item 4.
______________________
* Filed as an Exhibit to the Schedule 13D, dated August 24, 1999, and
incorporated herein by this reference.
** Filed as an Exhibit to Frederick Brewing's Current Report on Form 8-K,
dated August 24, 1999, and incorporated herein by this reference.
*** Filed as an Exhibit to Frederick Brewing's Current Report on Form 8-K,
dated October 22, 1999, and incorporated herein by this reference.
31
<PAGE>
FREDERICK BREWING CO.
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FREDERICK BREWING CO.
Date: November 15, 1999 /s/ C. David Snyder
-------------------
C. David Snyder
Chairman of the Board,
Chief Executive Officer and Treasurer
Date: November 15, 1999 /s/ James M. Gehrig
-------------------
James M. Gehrig
Chief Financial Officer
32
<PAGE>
FREDERICK BREWING CO.
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
4.1* Amended and Restated Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Austost Anstalt Schaan, dated August 24,
1999
4.2* Amended and Restated Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Balmore Funds S.A., dated August 24, 1999
4.3* Amended and Restated Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Ron Williams, Sr., dated August 24, 1999
4.4* Amended and Restated Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Ron Williams, Jr., dated August 24, 1999
4.5* Amended and Restated Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Dean Dowda, dated August 24, 1999
4.6* Amended and Restated Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of Fred Lenz, dated August 24, 1999
4.7* Amended and Restated Common Stock Purchase Warrant by Frederick
Brewing Co. in favor of World Capital Funding, LLC, dated August
24, 1999
4.8* Common Stock Purchase Warrant by Frederick Brewing Co. in favor of
Edward D. Scott, dated August 24, 1999
4.9* Common Stock Purchase Warrant by Frederick Brewing Co. in favor of
Catherine D. Scott, dated August 24, 1999
4.10* Common Stock Purchase Warrant by Frederick Brewing Co. in favor of
Nicholas P. Foris, dated August 24, 1999
4.11* Common Stock Purchase Warrant by Frederick Brewing Co. in favor of
Robert Schuerholz, dated August 24, 1999
4.12* Common Stock Purchase Warrant by Frederick Brewing Co. in favor of
Vishnampet S. Jayanthimath, dated August 24, 1999
10.1** Investment Agreement, dated August 24, 1999, by and between Snyder
International Brewing Group, LLC and Frederick Brewing Co.
33
<PAGE>
10.2** Restructuring Agreement, dated August 24, 1999, by and among
Frederick Brewing Co., Snyder International Brewing Group, LLC,
Austost Anstalt Schaan, Balmore Funds S.A., Ron S. Williams, Sr.,
Ron Williams, Jr., Dean Dowda, Fred Lenz, World Capital Funding,
LLC, The Augustine Fund, L.P., Jimmy Dean, Congregation Beth
Moredechai and Bertek, Inc.
10.3** Transition Agreement, dated August 24, 1999, by and between Kevin E.
Brannon and Frederick Brewing Co.
10.4** Transition Agreement, dated August 24, 1999, by and between Marjorie
A. McGinnis and Frederick Brewing Co.
10.5** Escrow Agreement, dated August 24, 1999, by and among Frederick
Brewing Co., Key Trust Company, N.A., Kevin E. Brannon and Marjorie
A. McGinnis
10.6** Common Stock Purchase Warrant, dated August 24, 1999, by Frederick
Brewing Co. in favor of Snyder International Brewing Group, LLC
10.7** Settlement Agreement, dated August 24, 1999, by and between First
Union National Bank and Signet Bank
10.8** Settlement Agreement, dated August 19, 1999, by and among U.S. Small
Business Administration, Snyder International Brewing Group, LLC and
Frederick Brewing Co.
10.9 Production Agreement, dated as of August 24, 1999, by and between
Crooked River Brewing Company, LLC and Frederick Brewing Co.
10.10 Management Agreement, dated as of August 24, 1999, by and between
Snyder International Brewing Group, LLC and Frederick Brewing Co.
10.11 Demand Promissory Note, dated August 30, 1999, by Frederick Brewing
Co. in favor of Snyder International Brewing Group, LLC
16.1*** Letter of BDO Siedman, LLP, dated October 21, 1999, to the U.S.
Securities and Exchange Commission
34
<PAGE>
27.1 Financial Data Schedule
99.1** Press release, dated August 26, 1999
__________________________
* Filed as an Exhibit to the Schedule 13D, dated August 24, 1999, and
incorporated herein by this reference.
** Filed as an Exhibit to Frederick Brewing's Current Report on Form 8-K,
dated August 24, 1999, and incorporated herein by this reference.
*** Filed as an Exhibit to Frederick Brewing's Current Report on Form 8-K,
dated October 22, 1999, and incorporated herein by this reference.
35
<PAGE>
Exhibit 10.9
PRODUCTION AGREEMENT
--------------------
THIS AGREEMENT, dated as of the 24th day of August, 1999 (the
"Effective Date") by and between Frederick Brewing Co., a Maryland corporation
("FBC"), and Crooked River Brewing Company, LLC, an Ohio limited liability
company ("Customer").
WITNESSETH
----------
WHEREAS, FBC is in the business of brewing, packaging, supplying and
distributing various beers, ales and malt beverage products;
WHEREAS, Customer is the owner of, or has rights in, the trademarks,
copyrights and trade secrets applied to lager and specialty liquid streams (the
"Products") and is in the business of producing, marketing and selling the
Products;
WHEREAS, Customer currently is selling an estimated 50,000 units of
glass and 2,000 barrels of draft beer for the year 1998-1999; and
WHEREAS, Customer wishes to engage FBC to brew and package certain of
the Products.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, the parties agree as follows:
1. PRODUCTION AND PACKAGING.
------------------------
1.1 Production Obligations. FBC shall produce and package for
----------------------
Customer the Products in kegs and bottles in such quantities as specified from
time to time by Customer. FBC shall provide and pay for all packaging
materials, brewing materials and shipping materials. Customer shall provide all
artwork to be affixed to the Products and shall pay all cylinder costs.
1.2 Recipes/Brewing Specifications. During the Term, FBC shall brew
------------------------------
the Products in accordance with such recipes, ingredients and brewing steps as
Customer will provide in writing to FBC from time to time. Customer shall
provide all yeast strains to be used in brewing the Products. If any Products
do not meet Customer's quality standards and taste profiles as determined by
Customer's brewmaster, in his or her sole discretion, Customer may reject any
Products produced and packaged by FBC. Customer will have no obligation to pay
for any Products that are rejected in accordance with this Section 1.2.
-----------
1.3 Plant. FBC shall produce the Products for Customer at FBC's
-----
plant located in Frederick, Maryland (the "Facility").
<PAGE>
2. PACKAGING SPECIFICATIONS AND EQUIPMENT ADJUSTMENTS.
--------------------------------------------------
2.1 Packaging Specifications. Customer shall use reasonable efforts
------------------------
to cause its packaging materials to conform to the current sizes and
configurations of FBC's packaging materials.
2.2 Change Parts Associated with Current Packaging. Customer shall
----------------------------------------------
pay in advance the cost of change parts associated with Customer's packaging of
Products that can be accommodated by FBC without major equipment changes. If,
after the purchase of any such change parts by Customer, FBC uses the change
parts in packaging products other than the Products, then FBC shall reimburse
Customer for the reasonable costs of such use. Any change parts purchased under
this Section 2.3 are the sole and exclusive property of Customer; provided,
----------- --------
however, that upon termination of this Agreement, FBC may purchase such parts
- -------
from Customer at the net book value of such change parts as determined by
Customer in accordance with generally accepted accounting principles.
2.3 Major Equipment Changes. The parties agree to negotiate in good
-----------------------
faith the terms for payment of the cost of major equipment changes necessary to
accommodate packaging that the Facility is not at such time capable of
providing. If the parties reach an agreement regarding the purchase of such
equipment, FBC agrees to promptly take such steps as are reasonably necessary to
implement the changes and to make such equipment fully operational. If the
parties cannot reach an agreement regarding the purchase of such equipment,
Customer will have the right to cause a third party to brew and package the
affected Products.
3. FEES.
----
3.1 Production Fee. Customer shall pay a production fee (the
--------------
"Production Fee") consisting of (a) the actual costs of packaging and brewing
materials (as further described on Exhibit A), (b) a co-pack fee (as further
---------
described on Exhibit A) and (c) applicable federal and state taxes. The
---------
Production Fee is F.O.B. Facility less the cost of any packaging materials
and/or freight actually paid for by Customer (other than as part of the
Production Fee) or by the wholesaler to whom the Products are to be delivered.
3.2 Production Fee Adjustments. (a) Upon 30 days prior written
--------------------------
notice to Customer, the Production Fee may be adjusted upward or downward by the
amount of any corresponding increase or decrease in the actual cost incurred by
FBC for freight, packaging and brewing materials or applicable taxes. No
increase in the Production Fee as a result of any increase in such costs shall
be effective until 30 days after Customer's receipt of such notice.
(b) Upon written notice given at least 30 days prior to each
subsequent anniversary date of this Agreement, the co-pack fee component of the
Production Fee may be adjusted upward or downward on an annual basis; provided,
--------
however, such increase shall not exceed 85% of the increase, if any, in the
- -------
Consumer Price Index ("CPI") for the immediately preceding four quarter period.
No increase in the co-pack fee component of the Production Fee as a result of
any increase in the CPI shall be effective until 30 days after Customer's
receipt of such notice.
2
<PAGE>
(c) During the Term, promptly following each three month period ending
March 31, June 30, September 30 and December 31 (each a "Production Period"),
FBC shall provide Customer with written notice (the "Production Notice") of the
number of barrels of beer produced and packaged at the Facility during such
Production Period. If the number of barrels set forth in the Production Notice
exceeds 6,000 barrels and the co-pack fee was based on a below 6,000 barrel
production level, then the co-pack fee will be decreased by the amount set forth
on Exhibit A for the following Production Period. If the number of barrels set
---------
forth in the Production Notice exceeds 6,000 barrels and the co-pack fee was
based on an above 6,000 barrel production level, then the co-pack fee will
remain the same for the following Production Period. If the number of barrels
set forth in the Production Notice is equal to or less than 6,000 barrels and
the co-pack fee was based on an above 6,000 barrel production level, then the
co-pack fee will be increased by the amount set forth on Exhibit A for the
---------
following Production Period. If the number of barrels set forth in the
Production Notice is equal to or less than 6,000 barrels and the co-pack fee
was based on a below 6,000 barrel production level, then the co-pack fee will
remain the same for the following Production Period.
3.3 FBC's Production Fee Acknowledgment. FBC acknowledges and agrees
-----------------------------------
that the Production Fee includes any and all of FBC's costs incurred in
connection with the brewing and packaging of the Products, including, without
limitation, the costs of brewing materials, packaging materials, federal and
state taxes, labor, overhead and any profits obtained in connection with such
brewing and packaging as well as the freight costs to deliver the Products to
(a) Cleveland, Ohio or (b) another destination or point no further than 300
miles from the Facility.
3.4 Production Fee Payment. Customer shall pay the Production Fees
----------------------
to FBC as the Products are packaged. All respective Production Fees due to FBC
will be paid on Fridays of the week following the week that the Products were
packaged.
3.5 Storage Fees. A storage charge of $.05 per case per month will
------------
be charged for Products that remain at the Facility for more than 60 days after
packaging.
3.6 Freight Charge Adjustment. The freight charges set forth on
-------------------------
Exhibit A represent the estimated costs to transport the Products from the
- ---------
Facility to Cleveland, Ohio. Any increase in the per unit freight costs set
forth on Exhibit A for transportation of the Products from the Facility to
---------
Cleveland, Ohio will cause a simultaneous equivalent reduction in the per unit
co-pack fee set forth on Exhibit A. No simultaneous reduction in the per unit
---------
co-pack fee will be made upon any increase in the per unit freight costs that is
caused by transporting the Products from the Facility to a destination that is a
further distance from the Facility than Cleveland, Ohio.
4. TERM AND TERMINATION.
--------------------
4.1 Term. This Agreement commences on the Effective Date and
----
continues for a period of one year (the "Initial Term"). Thereafter, this
Agreement renews automatically for three successive one year terms upon the
terms and conditions contained herein (the "Renewal Terms," the Initial Term and
any Renewal Terms, collectively, are the "Term").
3
<PAGE>
4.2 Termination. After the Initial Term, Customer may terminate this
-----------
Agreement for any reason upon 90 days prior written notice to FBC unless and
until the Customer's parent organization, Snyder International Brewing Group,
LLC, merges with FBC, in which case this Agreement may be terminated in
connection with the consummation of the merger or at any other time agreed to by
the parties (including during the Initial Term).
4.3 Effect of Termination. Upon termination of this Agreement,
---------------------
Customer shall (a) promptly pay any amounts due and payable hereunder, (b)
promptly purchase from FBC all unused packaging materials used in packaging the
Products at the prices in effect upon the date of termination and (c) remove all
such packaging materials from the Facility within 45 days. In addition, upon
termination of this Agreement, FBC promptly shall return to Customer all
Confidential Information (as defined in Section 13.3) and any other materials
------------
provided to FBC by Customer hereunder. Notwithstanding the foregoing, in the
event of a merger between SIBG and FBC, the parties shall determine in good
faith the parties' rights and obligations relating to the termination of this
Agreement.
5. BREWING OPERATION.
-----------------
5.1 Alternating Brewing Operation. FBC agrees to facilitate the
-----------------------------
alternating proprietorship application and to conduct an alternating brewing
operation with the Customer at the Facility to allow (a) Customer to be the
official Brewer of Notice for the Products, (b) Customer to take advantage of
paying an excise tax appropriate for the Customer's annual capacity and (c), if
permissible, the mention of Customer as the listed brewer and packager of the
Products. Simultaneous brewing operations may be conducted at the Facility by
FBC, Customer, and any other alternating brewer, as the case may be; provided,
--------
however, that each vessel, tank, pipeline, cellar and storage area will be
- -------
alternated, as appropriate to any one brewer. A bonded area, that will not be
curtailed, will be occupied by each of the brewers at all times; provided, that,
--------
such areas are subject to variable expansion.
5.2 Record Keeping. Since, at any given time, only one brewer will
--------------
conduct brewing operations using a particular piece of equipment or area, a
single form entry in the daily records will be used to record the alternation.
A given piece of equipment or area will remain alternated to the last using
brewer (FBC, Customer or any other alternating brewer, as the case may be) until
there is use by another brewer. Upon the use by another brewer, the form entry
recorded by the new users will change the alternation. FBC shall use
commercially reasonable efforts to maintain detailed records of alternation
between the alternating brewers based on existing forms with appropriate
modifications. The record keeping procedures and forms may be modified from
time to time as required by the Bureau of Alcohol, Tobacco and Firearms ("ATF").
Such records must document operations from receipt of raw materials to shipment
of finished beer. Each brewer shall (a) maintain separate records for its
operations, (b) file separate records for its operations and (c) file with the
ATF separate Brewer's Reports of Operations (ATF Forms 5130.9) and separate
Excise Tax Returns (ATF Forms 5000.24).
5.3 Preferred Customer Status. FBC shall provide Customer with
-------------------------
preferred priority status over any and all other customers of FBC for (a)
brewing schedules and sizes and (b) distribution, storage and ordering of the
Products.
4
<PAGE>
6. ORDERS, STORAGE AND DELIVERY.
----------------------------
6.1 Orders. Customer shall order the Products in accordance with
------
FBC's reasonable and customary ordering procedures. Currently, Customer must
place orders by the 15th day of the month for delivery the following month. FBC
shall notify Customer in writing at least 30 days prior to any change in such
ordering procedures.
6.2 Storage. Upon production, FBC shall store the Products at the
-------
Facility. Customer shall use commercially reasonable efforts to remove the
Products from the Facility within 15 days of packaging.
6.3 Delivery. The Product will be shipped F.O.B. Facility to
--------
Customer's designated destination on the date acknowledged on FBC's order
acknowledgment form. FBC shall use reasonable commercial efforts to meet
Customer's requested shipping dates, but has the right to schedule shipments
based upon product availability. Upon Customer's request and at Customer's
expense, FBC shall arrange for transportation of the Products to Customer by
contract carrier. In connection with any such arrangements made by FBC,
Customer shall pay the reasonable costs of any licenses necessary to transport
such Products. In addition, Customer shall pay a reasonable and refundable
deposit on all pallets and kegs used in shipment of the Products (current
deposit is $10.00 per pallet and $15.00 per keg).
7. SALES AND MARKETING.
-------------------
Customer is solely responsible for all sales and marketing of the
Products.
8. PROPRIETARY RIGHTS.
------------------
8.1 Use. FBC shall use the approved trademarks and copyrights of the
---
Customer solely on the Products and solely as specified by Customer from time
to time. In addition, FBC shall use the recipes provided by Customer solely
in connection with the Products as specified by the Customer pursuant to
Section 1.2.
- -----------
8.2 Customer's Rights. FBC acknowledges that Customer owns, or has a
-----------------
valid, enforceable right to use, the trademarks, copyrights, trade secrets and
any other intellectual property rights embodied in, or used in connection with,
the brewing and packaging of the Products.
9. REPRESENTATIONS AND WARRANTIES.
------------------------------
9.1 FBC's Representations and Warranties. FBC represents and
------------------------------------
warrants to Customer that the Products will be free from adulteration as defined
in the United States Food, Drug and Cosmetics Act.
9.2 Customer's Representations and Warranties. Customer represents
-----------------------------------------
and warrants that any trademarks and copyrights applied to the Products will not
infringe the intellectual property rights of any third parties.
5
<PAGE>
10. INDEMNIFICATION.
---------------
10.1 FBC's Indemnification. FBC shall indemnify, defend and hold
---------------------
Customer harmless from and against any and all demands, losses, liabilities,
claims, obligations, charges, penalties, costs, damages, and expenses
(including, without limitation, reasonable attorneys' fees) (collectively,
"Losses") arising out of or relating to any (a) breach by FBC of any
representation or warranty in this Agreement and (b) act or omission of FBC, its
agents, employees or subcontractors, in the performance of activities under or
related to this Agreement, including, without limitation, FBC's loading,
transportation, unloading, storage, handling, formulation, packaging or use of
the Products, equipment, or materials supplied by Customer and (c) defect in any
Product caused by or arising out of any act or omission of FBC; except, however,
when caused by (i) the negligence, willful act or omission of the Customer, its
employees or agents, or (ii) FBC's reliance on and adherence to any
specifications provided by Customer pursuant to Section 1.2.
-----------
10.2 Customer's Indemnification. Customer shall indemnify, defend
--------------------------
and hold harmless FBC from and against any Losses arising out of or relating
to (a) any breach by Customer of any representation or warranty in this
Agreement, (b) the sales and marketing of the Products by Customer and (c) any
activities undertaken by FBC on behalf of Customer in accordance with
Sections 5.1 and 5.2.
- ------------ ---
11. INSURANCE.
----------
FBC shall (a) obtain adequate insurance commensurate with FBC's
activities contemplated under this Agreement, (b) maintain such insurance during
the Term and (c) name Customer as an additional insured under such policy or
policies. FBC shall provide Customer with proof of such insurance on an annual
basis.
12. FBC'S ADDITIONAL OBLIGATIONS AND AGREEMENTS.
-------------------------------------------
12.1 Third Party Products. During the Term, FBC shall not brew or
--------------------
produce any beer products on a contract or an alternating proprietorship basis
for any third party if such products will be distributed primarily in the State
of Ohio; provided, however, that FBC may brew or produce any beer products for
-------- -------
Affiliates (as defined in Section 14.4) of Customer even if such products will
------------
be distributed primarily in the State of Ohio.
12.2 DBA Filing. After the Effective Date, upon Customer's request,
----------
FBC shall make a fictitious name filing in Maryland and in Ohio to provide for
the following name: "Crooked River Brewing Company, Frederick, Maryland."
12.3 Inventories and Change Parts. FBC acknowledges and agrees that
----------------------------
all materials, inventory and change parts paid for by Customer in connection
with this Agreement are the sole and exclusive property of Customer. Customer
and FBC agree to execute all requisite UCC filings and other documentation to
evidence such ownership.
6
<PAGE>
13. CONFIDENTIALITY.
---------------
13.1 Ownership. FBC acknowledges that the Products are Confidential
---------
Information of Customer and include, without limitation, trademarks, copyrights
and trade secrets that have been developed by Customer at great expense. All
Confidential Information of Customer disclosed under this Agreement will remain
the exclusive property of Customer.
13.2 Confidentiality Obligation. FBC agrees: (i) to take all
--------------------------
reasonable measures necessary to protect the confidential nature of all
Confidential Information disclosed to it including notifying its employees,
agents, consultants, contractors, joint venturers, distributors, customers,
clients or anyone else with whom a party works to complete the purposes of this
Agreement of the confidential nature of such Confidential Information; (ii)
except as provided in this Agreement or as required by law or court order, not
to disclose to third parties or copy any Confidential Information or allow any
third party access to such Confidential Information without first obtaining
Customer's written consent; (iii) not to use, or permit any third party to use,
any Confidential Information disclosed to it except for the purposes set forth
herein; (iv) to take all reasonable steps to insure that the terms and
conditions of this Agreement are made known to anyone who uses the Confidential
Information; and (v) to ensure that all materials that could lead to the use of
the Confidential Information in a manner that violates this Agreement will be
erased or destroyed when they are no longer needed.
13.3 Confidential Information Definition. "Confidential Information"
-----------------------------------
means that information which is not generally known to the public or which would
constitute a trade secret under the Uniform Trade Secrets Act and which is
owned, developed or acquired by Customer, including, without limitation, all
recipes, ingredients, brewing steps, formulae, designs, ideas, inventions, data,
data formats and files, and all customer, sales, marketing production, packaging
and technical information of Customer and all copies and tangible embodiments
thereof; provided, however, that any of the foregoing shall not be considered
-------- -------
Confidential Information if it: (i) becomes publicly known through no wrongful
act or breach of any obligation of confidentiality on FBC's or any third party's
part; (ii) was in the lawful knowledge and possession of, or was independently
developed by, FBC prior to the time it was disclosed to, or learned by, FBC as
evidenced by written records kept in the ordinary course of business by FBC or
by written or other documentary proof of actual use by FBC; (iii) was rightfully
received from a third party not in violation of any contractual, legal or
fiduciary obligation by such third party; or (iv) was approved for release by
written authorization by Customer.
14. GENERAL.
-------
14.1 Entire Agreement. This Agreement (including the Exhibit) is the
----------------
entire agreement between the parties relating to the subject matter hereof and
supersedes all other prior and contemporaneous understandings and agreements,
written or oral.
14.2 No Waiver or Amendment. This Agreement may only be waived or
----------------------
amended if such waiver or amendment is in writing, specifically references this
Agreement and is signed by the party to be bound. Any signed waiver is
effective only in the specific instance and for the specific purpose for which
it was made or given.
7
<PAGE>
14.3 Notices. All notices, requests, demands, waivers and other
-------
communications required or permitted to be given under this Agreement are to be
in writing and are duly given if delivered personally or by a nationally
recognized overnight courier with delivery charges prepaid, or mailed by
certified or registered mail (postage prepaid and return receipt requested), or
sent by facsimile to the parties at the addresses set forth below, or to such
other person or address as specified in writing by the party.
If to FBC:
Frederick Brewing Co.
4607 Wedgewood Blvd.
Frederick, Maryland 21703
Attn:
Facsimile: (301) 694-2971
If to Customer:
Crooked River Brewing Company, LLC
1101 Center Street
Cleveland, Ohio 44113
Attn: Jim Gehrig
Facsimile: (216) 771-7990
All notices, requests, demands, waivers and communications are deemed received
on the date of delivery.
14.4 Successors and Assigns. This Agreement is binding upon and
----------------------
inures to the benefit of the parties, their successors and permitted assigns.
This Agreement is not assignable by either party without the prior written
consent of the other party, such consent not to be unreasonably withheld;
provided, however, that Customer may assign this Agreement to any of its
- -------- -------
Affiliates without the consent of FBC. The term "Affiliates" means any
individual, corporation, partnership, limited liability company, joint venture,
trust, governmental entity, unincorporated association or any other entity or
organization that, directly or indirectly, controls, is controlled by, or under
common control with, Customer. Any attempted assignment that does not comply
with the terms of this Section 14.4 is void and of no legal effect.
------------
14.5 Compliance with Laws. Each party shall comply with all
--------------------
applicable laws, regulations and orders including, without limitation,
trademark, copyright and trade secret laws. Each party shall cooperate to comply
with all such measures and shall promptly inform the other parties of any
suspected noncompliance of which it becomes aware.
14.6 Severability. The illegality, invalidity, or unenforceability
------------
of any part of this Agreement does not affect the legality, validity or
enforceability of the remainder of this Agreement. If any part of this
Agreement is found to be illegal, invalid or unenforceable, this Agreement will
be given such meaning as would make this Agreement legal, valid and enforceable
in order to give effect to the intent of the parties.
8
<PAGE>
14.7 Survival. Sections 4.3, 10, 13 and 14.7 survive any
--------
termination of this Agreement.
14.8 Relationship of the Parties. This Agreement creates no
---------------------------
relationship of employer and employee, agent and principal, partnership or joint
venture among the parties. FBC and Customer are independent contractors.
Neither party has the right to assume, directly or indirectly, any liability of
or for the other party, and neither party will represent that it has such
authority.
14.9 Headings Section. The section headings of this Agreement are
----------------
inserted for reference only and do not affect the meaning of this Agreement.
14.10 Choice of Law. This Agreement and all disputes arising
-------------
hereunder are governed by the laws of the State of Ohio, without regard to
choice of law principles. Each of the parties submits to the jurisdiction
of the federal and state courts located within the State of Ohio.
14.11 Force Majeure. Neither party will be liable to the other party
-------------
on account of the disabled party's inability to perform arising out of matters
beyond the reasonable control of the disabled party including, without
limitation, acts of God, acts of government, labor disputes, transportation
embargoes; provided, that the disabled party uses its commercially reasonable
--------
efforts to overcome the circumstances that created the disability.
14.12 Remedies. FBC acknowledges that its failure to comply with
--------
Article 13 of this Agreement will irreparably harm the business of Customer.
- ----------
Therefore, Customer acknowledges that Customer is entitled to injunctive relief
and/or specific performance without the posting of bond or other security, in
addition to whatever other remedies Customer may have, at law or in equity, in
any court of competent jurisdiction against any such acts of breach or non-
compliance.
14.13 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which is an original, and all of which are one and the
same agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.
CROOKED RIVER BREWING FREDERICK BREWING CO.
COMPANY, LLC
By: /s/ Christopher J. Livingston By: /s/ James M. Gehrig
-------------------------------- --------------------------------
Name: Christopher J. Livingston Name: James M. Gehrig
Title: President Title: Chief Financial Officer
10
<PAGE>
Exhibit A
Production Agreement
Crooked River & Frederick Brewing
9/16/99
<TABLE>
<CAPTION>
total
package packaging brewing production co-pack
liquid size type costs costs costs fee
- ------ ------ ------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Micro 12 oz. Black Forest glass $4.55 $ 1.83 $ 6.38 $1.50
7 oz. To be determined
Micro 12 oz. Lighthouse glass $4.55 $ 1.50 $ 6.05 $1.50
7 oz. To be determined
Micro 12 oz. Settlers glass $4.55 $ 2.00 $ 6.55 $1.50
7 oz. To be determined
Micro 12 oz. Cool Mule glass $4.55 $ 2.17 $ 6.72 $1.50
7 oz. To be determined
Micro 12 oz. Stadium, Expansion glass $4.54 $ 1.53 $ 6.07 $1.50
Ballpark
7 oz. To be determined
Seasonal 12 oz. Seasonal glass $4.55 $ 1.94 $ 6.49 $1.50
7 oz. To be determined
Micro 1/2 Black Forest keg $0.02 $12.61 $12.63 $9.87
1/4 $0.02 $ 6.31 $ 6.33 $7.87
Micro 1/2 Lighthouse keg $0.02 $10.31 $10.33 $9.87
1/4 $0.02 $ 5.16 $ 5.18 $7.87
Micro 1/2 Settlers keg $0.02 $13.77 $13.79 $9.87
1/4 $0.02 $ 6.89 $ 6.91 $7.87
Micro 1/2 Cool Mule keg $0.02 $14.98 $15.00 $9.87
1/4 $0.02 $ 7.49 $ 7.51 $7.87
Micro 1/2 Stadium, Expansion keg $0.02 $10.58 $10.60 $9.87
Ballpark
1/4 $0.02 $ 5.29 $ 5.31 $7.87
Seasonal 1/2 Seasonal keg $0.02 $13.35 $13.37 $9.87
1/4 $0.02 $ 6.68 $ 6.70 $7.87
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarterly
fee
reduction
package FOB estimated over
liquid size type fee freight Subtotal 6,000 lbs.
- ------ ------ ------- ------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Micro 12 oz. Black Forest glass $ 7.88 $0.32 $ 8.20 $0.12
7 oz. To be determined
Micro 12 oz. Lighthouse glass $ 7.55 $0.32 $ 7.87 $0.12
7 oz. To be determined
Micro 12 oz. Settlers glass $ 8.05 $0.32 $ 8.37 $0.12
7 oz. To be determined
Micro 12 oz. Cool Mule glass $ 8.22 $0.32 $ 8.54 $0.12
7 oz. To be determined
Micro 12 oz. Stadium, Expansion glass $ 7.57 $0.32 $ 7.89 $0.12
Ballpark
7 oz. To be determined
Seasonal 12 oz. Seasonal glass $ 7.99 $0.32 $ 8.31 $0.12
7 oz. To be determined
Micro 1/2 Black Forest keg $22.50 $1.79 $24.29 $0.80
1/4 $14.20 $0.90 $15.09 $0.40
Micro 1/2 Lighthouse keg $20.20 $1.79 $21.99 $0.80
1/4 $13.05 $0.90 $13.94 $0.40
Micro 1/2 Settlers keg $23.66 $1.79 $25.45 $0.80
1/4 $14.78 $0.90 $15.67 $0.40
Micro 1/2 Cool Mule keg $24.87 $1.79 $26.66 $0.80
1/4 $15.38 $0.90 $16.28 $0.40
Micro 1/2 Stadium, Expansion keg $20.47 $1.79 $22.26 $0.80
Ballpark
1/4 $13.18 $0.90 $14.08 $0.40
Seasonal 1/2 Seasonal keg $23.24 $1.79 $25.03 $0.80
1/4 $14.57 $0.90 $15.46 $0.40
</TABLE>
<PAGE>
Exhibit 10.10
MANAGEMENT AGREEMENT
--------------------
THIS MANAGEMENT AGREEMENT ("Agreement") is effective as of the 24th day of
August, 1999, by and between Frederick Brewing Co., a Maryland corporation
("FBC"), and Snyder International Brewing Group, LLC, an Ohio limited liability
company ("SIBG").
WHEREAS, FBC and SIBG desire to enter into this Agreement to set forth the
terms upon which SIBG will provide management and consulting services to FBC.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Services. FBC engages SIBG to provide, and SIBG agrees to provide to
--------
FBC, such services as FBC may reasonably require with respect to (i) financial
planning, (ii) management support and consultation, (iii) capital expenditure
and strategic planning, (iv) marketing consultation, and (v) operational
matters, as well as such other services as FBC may reasonably request
(collectively, the "Services"). The Services will be provided on a regular
basis and at such other times and with respect to such matters as FBC may
reasonably request from time to time. The Services will be performed by the
officers and employees of SIBG, some of whom may also be officers and/or
employees of FBC (the "SIBG/FBC Officers/Employees"). During the Term (as
defined in Section 4 below), none of the SIBG/FBC Officers/Employees shall
receive any compensation from FBC for services rendered to FBC.
2. Management Fee; Expense Reimbursement. As compensation for the
-------------------------------------
Services rendered under this Agreement, FBC will pay to SIBG a fee (the
"Management Fee") of $30,000 per month during the Term. The Management Fee is
payable on the first day of each month. During the Term, FBC shall reimburse
SIBG for all reasonable out-of-pocket expenses incurred by SIBG in providing the
Services upon receipt of appropriate documentation evidencing such expenses.
3. Restrictions on Payments. Notwithstanding anything in this Agreement
------------------------
to the contrary, FBC's obligation to pay the Management Fee may, from time to
time, be subject to certain restrictions on the payment of such fees set forth
in the documents governing indebtedness of FBC for borrowed money (the "Credit
Documents"). In the event FBC cannot make a monthly installment or installments
of the Management Fee as a result of the restrictions described in the preceding
sentence, such unpaid amount or amounts will accrue for the benefit of SIBG (the
"Accrued Payments"), with interest thereon accruing at a rate equal to the rate
of interest from time to time in effect under the Credit Documents relating to
FBC's then most senior indebtedness. FBC agrees to pay to SIBG any and all
Accrued Payments and all accrued interest thereon, along with its regularly
scheduled monthly installments of the Management Fee, at such time as, and to
the extent that, the payment of such fees will not cause an "Event of Default"
under any of the Credit Documents.
<PAGE>
4. Term. This Agreement will commence on the date hereof and will
----
continue for a period of one (1) year from such date (the "Term"). On
completion of the initial Term, this Agreement will automatically renew for
successive one (1) year terms (the "Renewal Terms"), unless either party elects
to terminate this Agreement, effective at the completion of the initial Term or
any Renewal Term on written notice delivered to the other party at least thirty
(30) days prior to such effective date of termination.
5. Notices. All notices and other communications under this Agreement
-------
must be in writing and will be deemed to have been duly given when delivered by
hand, upon receipt of a telephonic facsimile transmission or sent by registered
or certified mail, return receipt requested, postage prepaid and addressed as
follows:
To FBC: Frederick Brewing Co.
4607 Wedgewood Boulevard
Frederick, MD 21703
Attention: President
Telecopy No. (301) 694-2971
To SIBG: Snyder International Brewing Group, LLC
1101 Center Street
Cleveland, OH 44113
Attention: Managing Member
Telecopy No. (216) 771-7990
6. Complete Agreement. This Agreement constitutes the entire agreement
------------------
between the parties with respect to the subject matter hereof and supersedes all
previous negotiations, commitments and writings with respect to such subject
matter.
7. Amendments. This Agreement may not be modified or amended except by
----------
an agreement in writing signed by both parties.
8. Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of Ohio without regard to the principles
of conflicts of laws thereof.
9. Assignment. Neither FBC nor SIBG may assign any of its rights or
----------
benefits under this Agreement without the prior written consent of the other.
This Agreement is binding on and will inure to the benefit of the parties and
their respective successors and permitted assigns.
10. No Third Party Beneficiaries. This Agreement is solely for the
----------------------------
benefit of the parties hereto and should not be deemed to confer upon third
parties any remedy, claim, liability, reimbursement, claim of action or other
right in excess of those existing without reference to this Agreement.
11. Captions. Captions and section headings are used for convenience of
--------
reference only and are not part of this Agreement and may not be used in
construing it.
12. Enforceability. Any provision of this Agreement which is prohibited
--------------
or unenforceable in any jurisdiction will, as to such jurisdiction, be
ineffective to the extent of such
2
<PAGE>
prohibition or unenforceability without invalidating the remaining provisions
hereof. Any such prohibition or unenforceability in any jurisdiction will not
invalidate or render unenforceable such provision or remedies otherwise
available to any party hereto.
13. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed to be an original but all of which
together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first above written.
FREDERICK BREWING CO.
By: /s/ Janmes M. Gehrig
-----------------------------
Its: Chief Financial Officer
-----------------------------
SNYDER INTERNATIONAL BREWING
GROUP, LLC
By: /s/ Christopher J. Livingston
-----------------------------
Its: President
-----------------------------
3
<PAGE>
Exhibit 10.11
DEMAND PROMISSORY NOTE
----------------------
$5,000,000 or such lesser
amount as may be August 30, 1999
owing from time to time Cleveland, Ohio
ON DEMAND, for value received, FREDERICK BREWING CO. ("Debtor") hereby
promises to pay to the order of SNYDER INTERNATIONAL BREWING GROUP, LLC
("Holder") (a) $5,000,000 or (b) such lesser principal amount as is advanced by
Holder to Debtor hereunder, as evidenced prima facie but not conclusively by the
most recent entry in the column headed "Principal Amount Outstanding" on
Schedule A, attached hereto and incorporated herein by reference, together with
- ----------
interest thereon calculated from the date hereof in accordance with the
provisions of this promissory note (this "Note").
1. Indebtedness.
------------
(a) Advances. The indebtedness evidenced hereby has arisen, and will
--------
arise, by virtue of loan advances from Holder to Debtor. Subject to the rights
of Holder to demand repayment of such indebtedness, in whole or in part, on
demand, it is anticipated that such advances may be repaid by Debtor and
readvanced by Holder. If the advances are at any time repaid in full and
amounts are subsequently readvanced by Holder to Debtor, this Note will continue
in effect as evidence of any such subsequent advance and the rights of Debtor
and Holder in respect thereof. Notwithstanding anything in this Note to the
contrary, the aggregate principal amount available for borrowing from time to
time hereunder shall equal the excess of $5,000,000 over the sum of (i) the
aggregate principal amount outstanding under this Note plus (ii) the aggregate
principal amount outstanding under the Demand Promissory Note executed by
Crooked River Brewing Company, LLC in favor of Holder, dated August 30, 1999.
(b) Record of Advances. This Note will serve as a master note and
------------------
will evidence all advances to Debtor hereunder. Holder is authorized to
endorse on Schedule A or on a continuation thereof, both of which will be
----------
attached to this Note and are incorporated by reference herein, the date and
amount of each advance, the date and amount of each payment of principal, and
the principal amount outstanding. Such endorsements will be deemed prima facie
evidence of Debtor's indebtedness under this Note unless Debtor disputes the
same within three days of receipt of the written notice of such endorsement.
2. Payment of Interest.
-------------------
(a) Interest Rate. Commencing on the date of this Note, interest will
-------------
accrue on a daily basis (computed on the basis of a year of 360 days for the
actual number of days elapsed) on the unpaid principal amount of this Note
outstanding from time to time, at a rate per annum equal to the Prime Rate of
KeyBank National Association, Cleveland, Ohio ("Bank") plus one percent (1%).
If the Prime Rate changes, the interest rate on this Note will be immediately
correspondingly adjusted, but in no event may the interest rate on this Note
exceed
<PAGE>
the highest rate permitted by law on the date of this Note. The "Prime Rate" of
Bank means the rate established from time to time by Bank as Bank's Prime Rate,
whether or not such rate is publicly announced.
(b) Scheduled Payments. Accrued interest will be due and payable on
------------------
the first day of each month and on demand. Prior to a demand for payment of the
entire unpaid principal amount due upon this Note, if any payment of interest is
not paid when due, Debtor shall pay Holder a late fee equal to the greater of
(i) ten percent (10%) of the amount of such payment or (ii) twenty five dollars
($25).
(c) Payment upon Demand. After demand, the unpaid principal of and
-------------------
accrued interest on this Note will, until paid, bear interest (calculated on the
basis of a year of 360 days for the actual number of days elapsed) at a rate per
annum equal to four percent (4%) in excess of the Prime Rate, which rate will be
adjusted immediately and correspondingly with each change in the Prime Rate, but
in no event will the interest rate on this Note exceed the highest rate
permitted by law on the date of demand for payment of this Note.
3. Payment of Principal.
--------------------
(a) Optional Prepayment. Debtor may, at any time and from time to
-------------------
time, without premium or penalty, prepay all or any portion of the outstanding
principal amount of this Note; provided that any prepayment must first be
--------
applied to any accrued but unpaid interest. Principal amounts prepaid or repaid
will be available to be borrowed again by Debtor upon three business days'
written notice.
(b) Time of Payment. If any payment of principal or interest on this
---------------
Note becomes due on a Saturday, Sunday, or legal holiday under the laws of the
State of Ohio, such payment must be made on the next succeeding business day and
such extension of time will in such case be included in computing interest in
connection with such payment.
4. Default.
-------
(a) Events of Default. An "Event of Default" will (unless waived in
-----------------
writing by Holder) be deemed to have occurred if:
(i) Debtor fails to pay any principal or interest amount
hereunder when due, whether at maturity, by acceleration or otherwise; or
(ii) Debtor makes a general assignment for the benefit of
creditors; or an order, judgment or decree is entered adjudicating Debtor
bankrupt or insolvent; or any order for relief with respect to Debtor is
entered under the Federal Bankruptcy Code; or Debtor commences any
proceeding relating to it or any of its assets under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution
or liquidation law of any jurisdiction; or any such petition or application
is filed, or any such proceeding is commenced, against Debtor and either
(A) Debtor by any act indicates its approval thereof, consent thereto or
acquiescence therein or (B) such petition, application or proceeding is not
dismissed within 90 days.
2
<PAGE>
(b) Consequences of the Occurrence of an Event of Default. Without
-----------------------------------------------------
limitation upon Holder's right to demand payment of this Note at any time for
any reason, upon the occurrence of an Event of Default, all or any portion of
the outstanding principal amount of this Note will become due and payable, and
Debtor shall immediately pay to Holder the outstanding principal amount of this
Note plus all accrued and unpaid interest thereon.
(c) Costs of Collection. In the event of an Event of Default
-------------------
hereunder, Debtor shall pay to Holder, in addition to such amounts due, all
costs of collection, including, without limitation, reasonable attorneys' fees.
5. Amendment and Waiver. Except as otherwise expressly provided herein,
--------------------
no modification, amendment, or waiver of the provisions of this Note will be
binding or effective unless the Debtor has obtained the prior written consent of
Holder. No delay or omission on the part of Holder in the exercise of any right
or remedy hereunder will operate as a waiver thereof and no partial exercise of
any right or remedy precludes other or further exercise thereof or the exercise
of any other rights or remedy.
6. Transfer and Assignment. This Note is binding on any successors and
-----------------------
assigns of Holder. Debtor may not assign any rights and obligations under this
Note to any other party without the prior written consent of Holder.
7. Place of Payment; Notices. Payments of principal and interest are to
-------------------------
be made by Debtor to Holder, 1940 East 6th Street, Suite 200, Cleveland, Ohio
44114 or to such other person or at such other address as specified by prior
written notice to Debtor.
8. Governing Law. All questions concerning the construction, validity
-------------
and interpretation of this Note will be governed by and construed in accordance
with the domestic laws of the State of Ohio, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of Ohio or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Ohio.
9. Waiver of Presentment, Demand and Dishonor. Debtor, or its successors
------------------------------------------
and assigns, hereby waives presentment for payment, protest, demand, notice of
protest, notice of nonpayment and diligence with respect to this Note, and
waives and renounces all rights to the benefits of any statute of limitations or
any moratorium, appraisement, exemption, or homestead now provided or that
hereafter may be provided by any federal or applicable state statute, including,
without limitation, exemptions provided by or allowed under the Federal
Bankruptcy Code, both as to itself and as to all of its property, whether real
or personal, against the enforcement and collection of the obligations evidenced
by this Note and any and all extensions, renewals, and modifications of this
Note.
3
<PAGE>
IN WITNESS WHEREOF, Debtor has caused its duly authorized
representative to execute and deliver this Note as of the date first written
above.
FREDERICK BREWING CO.
By: /s/ C. David Snyder
-------------------------------
Name: C. David Snyder
Title: Chairman and CEO
4
<PAGE>
Schedule A
----------
Principal Principal Principal
Amount Amount Amount
Date of Entry Advanced Paid Outstanding
- --------------------------------------------------------------------------------
August 30, 1999 $1,890,813.49 $0.00 $1,890,813.49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 382,407 382,407
<SECURITIES> 0 0
<RECEIVABLES> 441,617 441,617
<ALLOWANCES> 31,716 31,716
<INVENTORY> 545,201 545,201
<CURRENT-ASSETS> 1,596,216 1,596,216
<PP&E> 9,468,972 9,468,972
<DEPRECIATION> 1,725,036 1,725,036
<TOTAL-ASSETS> 10,798,022 10,798,022
<CURRENT-LIABILITIES> 3,806,514 3,806,514
<BONDS> 0 0
0 0
581,687 581,687
<COMMON> 3,439 3,439
<OTHER-SE> 3,703,576 3,703,576
<TOTAL-LIABILITY-AND-EQUITY> 10,798,022 10,798,022
<SALES> 368,855 2,186,469
<TOTAL-REVENUES> 810,014 2,804,522
<CGS> 869,958 2,627,185
<TOTAL-COSTS> 2,294,941 3,597,532
<OTHER-EXPENSES> 2,123 2,123
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 151,996 502,537
<INCOME-PRETAX> (2,950,163) (4,542,908)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,950,163) (4,542,908)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 808,929 808,929
<CHANGES> 0 0
<NET-INCOME> (2,141,234) 3,733,979
<EPS-BASIC> (.48) (1.40)
<EPS-DILUTED> (.48) (1.40)
</TABLE>
