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FREDERICK BREWING CO
10QSB, 2000-08-11
MALT BEVERAGES

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x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934,

For the quarterly period ended June 30, 2000.

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT.

Maryland		52-1769647
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

Common Stock, $0.0004 par value		8,596,211
(Title of Each Class)		(Number of shares outstanding as of August 4, 2000)

				PAGE NO.
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
Consolidated Balance Sheet (unaudited) — June 30, 2000				3
Consolidated Statements of Operations (unaudited)— for the three and six months ended June 30, 2000 and 1999				4
Consolidated Statements of Cash Flows (unaudited)— for the three and six months ended June 30, 2000 and 1999				5
Notes to Consolidated Financial Statements (unaudited)				6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		7-14
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings		15
Item 6.		Exhibits and Reports on Form 8-K		15
SIGNATURES

ASSETS
Current assets:
Cash and cash equivalents		$            1,275
Cash-restricted		113,170
Trade receivables, net of allowance for doubtful accounts of $31,716		296,368
Inventories, net of obsolescence reserve of $50,173		441,674
Prepaid expenses and other current assets		105,048
Total current assets		957,535
Property, plant and equipment, net of accumulated depreciation of $2,173,258		7,482,747
Intangibles, net of accumulated amortization of $213,471		328,486
Goodwill, net of accumulated amortization of $93,214		848,247
Total assets		$    9,617,015
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities long-term debt		$    3,684,505
Capital lease obligations, current portion		53,025
Accounts payable		1,042,142
Accrued liabilities		572,120
Total current liabilities		5,351,792
Long term debt		84,151
Capital lease obligations		2,574,314
Total liabilities		8,010,257
Stockholders’ equity:
Preferred Stock—$0.01 par value, 1,000,000 shares authorized:           Cumulative, convertible Series A, 1,455 shares issued and outstanding		548,512
Common Stock—$0.0004 par value, 19,000,000 shares authorized and           8,596,211 shares issued and outstanding		3,439
Additional paid-in capital		23,861,881
Accumulated deficit		(22,807,074	)
Total stockholders’ equity		1,606,758
Total liabilities and stockholders’ equity		$    9,617,015

		Three Months Ended June 30,						Six Months Ended June 30,
		2000			1999			2000			1999
Gross sales		$    762,449			$1,003,550			$1,469,326			$  1,994,508
Less: returns and allowances, and excise taxes		107,237			169,362			213,636			356,738
Net sales		655,212			834,188			1,255,690			1,637,770
Cost of sales		716,404			900,850			1,566,523			1,757,227
Gross loss		(61,192	)		(66,662	)		(310,833	)		(119,457	)
Selling, general and administrative expense		565,781			484,472			1,150,479			1,122,747
Operating loss		(626,973	)		(551,134	)		(1,461,312	)		(1,242,204	)
Interest expense, net		160,280			196,517			299,154			350,541
Net loss		$  (787,253	)		$  (747,651	)		$(1,760,466	)		$ (1,592,745	)
Basic and diluted loss per common share:
Net loss per common share		$        (0.09	)		$        (0.41	)		$        (0.20	)		$          (0.87	)
Weighted average common shares		8,596,211			1,821,363			8,596,211			1,821,363

The accompanying notes are an integral part of these consolidated financial statements.

		Three Months Ended June 30,						Six Months Ended June 30,
		2000			1999			2000			1999
Cash flows from operating activities:
Net loss		$(787,253	)		$(747,651	)		$(1,760,466	)		$(1,592,745	)
Adjustments to reconcile net loss to net cash from           operating activities:
Depreciation		187,836			198,323			374,229			386,028
Amortization		77,635			87,081			159,980			183,036
Write off receivables		—			2,325			—			3,999
Change in operating assets and liabilities:
Trade receivables		(77,206	)		(24,529	)		(53,904	)		35,806
Inventories		34,147			183,282			102,895			171,010
Prepaid assets		(13,730	)		776			(16,112	)		(426	)
Accounts payable		(58,388	)		180,377			(117,726	)		440,097
Accrued liabilities		(66,334	)		26,945			27,891			(21,063	)
Net cash used in operating activities		(703,293	)		(93,071	)		(1,283,213	)		(394,258	)
Cash flows from investing activities:
Purchase of equipment and improvements		(96,031	)		(146,171	)		(169,981	)		(152,280	)
Purchase of intangibles		—			(647	)		—			(2,355	)
Change in restricted cash		713			—			199,305			—
Net cash (used in) provided by investing activities		(95,318	)		(146,818	)		29,324			(154,635	)
Cash flows from financing activities:           Payments debt obligations		—			51,493			—			(15,871	)
Payments capital leases		(12,341	)		(11,016	)		(24,337	)		(21,724	)
Proceeds debt obligation		705,000			198,061			1,230,000			500,000
Net cash provided by financing activities		692,659			238,538			1,205,663			462,405
Net decrease cash and cash equivalents		(105,952	)		(1,351	)		(48,226	)		(86,488	)
Cash and cash equivalents, beginning of period		107,227			7,862			49,501			92,999
Cash and cash equivalents, end of period		$      1,275			$      6,511			$        1,275			$        6,511

Raw ingredients			$    62,853
Work in process			58,923
Packaging materials			135,315
Finished goods			93,313
Marketing supplies			141,443
Inventory, gross			491,847
Reserve for obsolescence			(50,173	)
Inventory, net			$ 441,674

Provide Enhanced Managerial Expertise

Effective August 24, 1999, Frederick Brewing entered into a management agreement with SIBG under which SIBG provides Frederick Brewing with administrative, financial, operational 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 were not members, officers or directors of, or otherwise affiliated with, SIBG or Crooked River Brewing Company, LLC, an Ohio limited liability company, which was predominantly owned and controlled by C. David Snyder and which merged into SIBG effective July 5, 2000.

In addition, Albert Spinelli, who was formerly employed by Latrobe Brewing Company, in Latrobe, Pennsylvania, was hired effective April 3, 2000 to serve as Executive Vice President and General Manager of Frederick Brewing and, on April 25, 2000, Frederick Brewing announced that Andrew W. Tveekrem, who was formerly employed by Great Lakes Brewing Company in Cleveland, Ohio, was hired effective June 1, 2000, to serve as Brewmaster of Frederick Brewing.

Improve Operational Utilization of Plant

Effective August 24, 1999, Frederick Brewing entered into a production agreement with Crooked River under which Frederick Brewing agreed to produce and package draft and bottled beer for Crooked River for up to four years, which includes automatic renewal periods. As a result of the merger of Crooked River into SIBG, SIBG has replaced Crooked River as party to this production agreement. This agreement was unanimously approved by those members of the Frederick Brewing board who were not members, officers or directors of, or otherwise affiliated with, SIBG or Crooked River.

Improve Financial Condition of Frederick Brewing

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, subject to certain limitations. The note has an interest rate per annum equal to the prime rate of a regional financial institution plus one percent. As of August 9, 2000, Frederick Brewing had outstanding borrowings of approximately $3.9 million under the note. This note was unanimously approved by those members of the Frederick Brewing board who were not members, officers or directors of, or otherwise affiliated with, SIBG or Crooked River.

Stabilize Regional Market Presence

Through September 30, 1999, Frederick Brewing’s gross revenues had been negatively impacted by the decision of Frederick Brewing’s major distributor in the State of Maryland 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 reacquired its distribution rights for its brands for the State of Maryland from this distributor. Frederick Brewing immediately assigned these rights to nine distributors that are strategically located throughout the State of Maryland. C. David Snyder, Frederick Brewing’s Chairman and CEO, personally guaranteed up to $160,000 of the acquisition price for these distribution rights. Frederick Brewing’s management believes that these new distributors have helped to stabilize Frederick Brewing’s brands in Maryland.

Initiate New Sales and Marketing Plans

During the third quarter of 1999, Frederick Brewing began to initiate and implement 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 area. Frederick Brewing continued this implementation during the second quarter of 2000.

Improve Efficiency of Sales Force

Effective January 1, 2000, Frederick Brewing’s sales personnel became employees of SIBG as part of an effort to, among other things, increase sales of Frederick Brewing’s brands by taking advantage of the distribution networks established by SIBG for its Crooked River and Hudepohl-Schoenling brands.

·

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 and C. David Snyder. Frederick Brewing’s success depends to a significant degree upon the continued support and contributions of Frederick Brewing’s controlling shareholder, SIBG, and Frederick Brewing’s Chairman and CEO, C. David Snyder:

Ÿ

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;

Ÿ

As of June 30, 2000, Frederick Brewing obtained funding for operations from borrowings under the SIBG note. There can be no assurance that SIBG will have continued availability under the SIBG Line of Credit to fund borrowings under the SIBG note, and there can be no assurance that Frederick Brewing will be able to borrow additional amounts from C. David Snyder and other financing sources to meet its short and long term working capital needs. In addition, there can be no assurance that SIBG will not have to demand repayment of the amounts already borrowed under the SIBG note if the financial institution that provides the funding for these loans to SIBG demands repayment from SIBG. If SIBG demands repayment of the note, there can be no assurance that Frederick Brewing 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; and

Ÿ

SIBG’s ownership of other brands has resulted in the four-year agreement for Frederick Brewing to produce and package draft beer of 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 Production Loss. Frederick Brewing accrued $350,000 during 1999 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 discussion 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 State of Maryland 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 specialty 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 specialty brewers slowed substantially. Management believes that this decrease was primarily caused by factors such as:

Ÿ

the maturation and saturation of certain large consumer markets;

Ÿ

the increased marketing efforts of import brewers; and

Ÿ

a shift in the promotional effort of many wholesale distributors from domestic specialty brands to higher volume products.

Although certain industry sources indicate that this trend is reversing, there can be no assurance that the decrease in sales growth of domestic specialty brewers that previously occurred will not reoccur, which would have a material adverse effect on Frederick Brewing’s financial condition and results of operations. Moreover, even if the domestic specialty beer category experiences growth in 2000 and beyond, no assurance can be given that Frederick Brewing will be in a position to take advantage of such growth.

·

Excess Brewing Capacity. Frederick Brewing must substantially reduce its excess brewing capacity in order to improve its financial performance. Although Frederick Brewing has taken actions to address this issue and is exploring additional actions to address this issue, no assurance can be given that such actions will be successful or, if successful, that any increase in utilization will increase the profitability of Frederick Brewing.

a.		Exhibits
		Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof:
		Exhibit No.		Description
		27.1		Financial Data Schedule.
b.		Reports on Form 8-K
		None.

FREDERICK BREWING CO.

/s/ C. David Snyder

C. David Snyder Chairman of the Board, Chief Executive Officer and Treasurer

/s/ James M. Gehrig

James M. Gehrig Chief Financial Officer

Exhibit		Description
27.1		Financial Data Schedule.

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