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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549











FORM 10-KSB





(Mark One)





|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------




| | For the fiscal year ended December 31, 2000.
| | --------------------------------------------




| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------




| | For the transition period from ______________   to _______________ 
 .
| | ----------------------------------------------------------------------




Commission File Number: 000-27800











FREDERICK BREWING CO.


(Name of Small Business Issuer in Its Charter)





|Maryland                          |  | 52-176947          
|--------------------------------- |  | -------------------
|(State or Other Jurisdiction      |  | (I.R.S. Employer   
|of 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)











Securities registered under Section 12(b) of the Exchange Act:





None





Securities registered under Section 12(g) of the Exchange Act:





|Title of Each Class             |  | Number of Shares

Outstanding as of

May 1, 2001
|------------------------------- |  | ------------------------------------------------
|Common Stock, $0.0004 Par Value |  | 8,596,211                                       










Check whether the issuer (1) 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  ̈ No x





Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in
this Form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  ̈





Issuers revenues for its most recent fiscal year: $3,112,057





The aggregate market value of common shares held by non-affiliates as of May 16, 2001: $248,946





Transitional Small Business Disclosure Format (Check one): Yes  ̈ No x





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FREDERICK BREWING CO.





INDEX TO FORM 10-KSB





|           |  | Page                                                                                                            
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|PART I.    |  |                                                                                                                 
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|Item 1.    |  | Description of Business                                                                                         
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|Item 2.    |  | Description of Property                                                                                         
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|Item 3.    |  | Legal Proceedings                                                                                               
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|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                             
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|PART II.   |  |                                                                                                                 
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|Item 5.    |  | Market for Common Equity and Related Shareholder Matters                                                        
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|Item 6.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           
|          
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|Item 7.    |  | Financial Statements                                                                                            
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|Item 8.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            
|          
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|PART III.  |  |                                                                                                                 
|          
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|Item 9.    |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)

of the Exchange Act
|          
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|Item 10.   |  | Executive Compensation                                                                                          
|          
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|Item 11.   |  | Security Ownership of Certain Beneficial Owners and Management                                                  
|          
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|Item 12.   |  | Certain Relationships and Related Transactions                                                                  
|          
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|Item 13.   |  | Exhibits and Reports on Form 8-K                                                                                
|          
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|SIGNATURES |  | 23                                                                                                              




PART I.





Item 1.    Description of Business.





Overview





Frederick Brewing Co., which was incorporated and commenced operations in 1993, is a specialty brewer
located in Frederick, Maryland. Frederick Brewing brews, kegs and bottles at its brewery in Frederick, Maryland, for wholesale to its 140 independent distributors, more than 20 styles of fresh, full flavored beers under the brand names of Blue
Ridge, Wild Goose and Brimstone. Frederick Brewing directs its sales and marketing efforts to the segment of the beer drinking market that is seeking full-bodied, full-flavored beers that are sold at prices considerably
higher than those charged for mass-produced American lagers and light lagers. Frederick Brewings beers are critically acclaimed and are popular with specialty beer drinkers predominantly located in the Mid-Atlantic region of the United States.
Frederick Brewings sales have grown from 660 barrels in 1993 to 18,111 barrels in 2000. Managements long-term goal is to continue to build upon Frederick Brewings reputation for brewing excellence and to develop Frederick Brewing
into one of the leading brewers of domestic specialty beers in the Mid-Atlantic region.





Business Development





In 1997, Frederick Brewing completed construction of its Frederick, Maryland brewery and increased its
production capacity from 12,600 barrels to approximately 100,000 barrels per year. As demand warrants, additional fermentation tanks may be added in existing building space to increase Frederick Brewings brewing capacity to more than 160,000
barrels per year. The brewery is modularly designed to permit an additional expansion of brewing capacity up to 300,000 barrels per year.





In January 1998, Frederick Brewing acquired the brands, brew formulas and trademarks of the Wild Goose
Brewery, Inc. of Cambridge, Maryland and the Brimstone Brewing Company of Baltimore, Maryland. Frederick Brewing continues to produce and sell the Wild Goose and Brimstone brands, but liquidated the Wild Goose and Brimstone subsidiaries effective as
of February 1, 2001. At the time of liquidation, Frederick Brewing conducted no operations through these subsidiaries.





On August 24, 1999, Snyder International Brewing Group, LLC (SIBG), an Ohio limited liability
company that is predominantly owned and controlled by its Chairman and Chief Executive Officer, C. David Snyder, completed a series of transactions that resulted in SIBG acquiring approximately 51% of the outstanding common stock of Frederick
Brewing. SIBG is a holding company that owns a portfolio of beer brands, including Crooked River, Little Kings Cream Ale, Hudy Delight, Hudepohl, Christian Moerlein, Burger, Burger Light and Mount Everest malt liquor. In connection with the SIBG
transaction, Frederick Brewing entered into a management agreement whereby SIBG provides to Frederick Brewing administrative, financial, operational and strategic planning services. In addition, effective on August 24, 1999, Frederick Brewing
entered into a production agreement with Crooked River Brewing Company, LLC pursuant to which Frederick Brewing has agreed to produce and package draft beer for Crooked River for up to four years. As a result of the July 5, 2000 merger of Crooked
River into SIBG, SIBG has replaced Crooked River as a party to this agreement. Frederick Brewing is also currently producing Christian Moerlein under this production agreement and plans to begin production of the Little Kings brand at the Frederick
Brewing facility in 2001.





On January 2, 2001, SIBG delivered a letter to the Board of Directors of Frederick Brewing proposing a
merger of SIBG into Frederick Brewing, with Frederick Brewing as the surviving corporation. In the proposed merger, SIBG (or its members) would receive a number of shares of the common stock of Frederick Brewing that would result in SIBG (or its
members) owning in the aggregate approximately 95% of the outstanding common stock of Frederick Brewing after giving effect to the merger. For various reasons, including C. David Snyders dual role as Chairman and Chief Executive Officer of
Frederick Brewing and SIBG, Frederick Brewing established a special committee to review the SIBG proposal. The special committee is comprised of David Stith and Glenn Corlett, both outside directors of Frederick Brewing. Mr. Stith will act as
chairman of the special committee. It is expected that the special committee will engage its own legal counsel and financial advisors to assist in the evaluation of the SIBG proposal. Through the date of this filing, no further action has been taken
with respect to this transaction.





The Market Environment





Frederick Brewing competes in the domestic specialty category of the U.S. brewing industry. Management
believes that this category currently comprises approximately 5.5% of the $63.3 billion U.S. retail beer market. Domestic specialty beers are distinguished from mass-market domestic beers in that they typically are heavier-bodied and more flavorful,
use traditional brewing techniques and ingredients, rather than the corn, rice and other adjuncts and added enzymes used to create the light color and body of mass-market domestic lagers, and are sold to consumers at higher prices than most
mass-market domestic beers.





The domestic specialty beer category has expanded overall since its creation in the early 1980s due to
the efforts of innovative, entrepreneurial companies. Beginning in 1997 and continuing through 1998, however, growth in the domestic specialty beer category slowed substantially. According to industry sources, the domestic specialty beer category
began to experience growth again in 1999, as the number of barrels shipped industry-wide increased by approximately 3.2%. Early industry reports estimate 2000 growth at approximately 3.4%. Management believes, based on industry and demographic
trends, that 2001 will be another year of growth for the domestic specialty beer category. Management further believes that domestic specialty brewers that have consistent product quality and whose products are supported by coherent marketing
programs and strong distribution networks will be the ones that benefit from this growth. Management also believes that the focus of the domestic specialty beer category is shifting and that, in this decade, regional specialty breweries whose brands
already enjoy some popularity and that have both experienced management and a well-defined marketing approach will be successful.





Even though industry sources estimate that the domestic specialty beer category grew in 1999 and 2000,
management believes that a number of market forces could adversely impact the domestic specialty beer categorys ability to achieve and continue such growth. Primary among these forces is the slowing U.S. economy. Frederick Brewing cannot
predict consumer purchase behavior toward a premium priced product if there is a sustained recession of the U.S. economy and an accompanying decrease in consumer confidence, spending and income. Additionally, the continued success and the aggressive
marketing of import beers could negatively impact future growth of the domestic specialty beer category. Import beers share flavor profiles and competitive price points with domestic specialty beers, and through the substantial marketing efforts of
import brewers, many of these beers have achieved substantial sales increases, perhaps at the expense of domestic specialty beers. In addition, some wholesale distributors who had aggressively added many new domestic specialty brands to their
portfolios and devoted high levels of effort to promoting those brands, saw declining returns on their investments in marketing and inventory due to increasing competition. Accordingly, these wholesalers began re-allocating their resources to higher
volume products (sometimes under pressure from the suppliers of those products).





Products





Frederick Brewings product strategy is to produce and sell high-quality, specialty beers. During 2000,
Frederick Brewing produced and sold 27 styles of beer under the brand names, Blue Ridge, Wild Goose, Brimstone and Hempen. Frederick Brewing continuously evaluates the performance of its brands. In the
case of an under-performing brand, Frederick Brewings management may elect to discontinue the brand or, if an opportunity exists, to sell the brand.





During 2000, sales of the Hempen brands continued to decline rapidly. Additionally, the Bureau of Alcohol
Tobacco and Firearms issued an amendment to the labeling laws that would have required Frederick Brewing to change the name of the Hempen products and all related packaging and marketing materials. This cost prohibitive change, coupled with
declining sales, led Frederick Brewing to conclude that discontinuing
these brands would be the most fiscally prudent course of action. Frederick Brewing has negotiated a use-up allowance with the BATF and will continue to sell this product until all raw materials and packaging inventories have been exhausted, which
Frederick Brewing estimates to be about mid 2001.





During 2000, Frederick Brewings brands continued to be recognized for their quality. In June 2000,
Frederick Brewings Blue Ridge Amber Lager and Dopplebock brands won gold medals at the World Beer Cup competition in New York City. This competition is held every two years by the Association of Brewers, Boulder, Colorado.





Trademarks





Frederick Brewing has obtained federal or state registration for a number of trademarks, including
Blue Ridge®, Wild Goose® and Brimstone Brewing Company®. Frederick Brewing uses legal counsel to maintain and enforce these trademarks.





Research and Development





Frederick Brewing conducts a limited amount of research activities relating to the development of new
products and the improvement of existing products. During 2000, Frederick Brewings management implemented and documented new quality, sanitation and lab procedures and analyses to improve the quality and consistency of its beers. Management
believes that these procedures and analyses will create considerable gains in product shelf life and stability. The dollar amounts expended by Frederick Brewing during 2000 on development activities and the number of employees engaged in these
activities during this time period, however, are not considered to be material in relation to the total business of Frederick Brewing.





Distribution





Frederick Brewings beers are sold on an on-premise basis in restaurants, bars and sports
arenas and on an off-premise basis primarily through liquor stores, convenience stores, supermarkets and mass merchants. The beers are marketed and delivered to these retailers by independent beverage distributors. During 2000, Frederick
Brewings five largest distributors accounted for greater than 40% of Frederick Brewings total gross sales. Frederick Brewing believes that as its sales increase, sales by any one distributor will account for a decreasing percentage of
total revenues.





Even though Frederick Brewing generally grants its distributors exclusive rights to sell its proprietary
products within a defined territory, most of Frederick Brewings distributors carry products of other beer producers. This practice is standard in the domestic beer industry. Written agreements with Frederick Brewings distributors vary,
but are generally perpetual or multi-year agreements and terminable by either party for breach of contract or upon expiration of specified notice periods. Certain states have enacted laws that require Frederick Brewing to pay the distributors in
those states an amount equal to the distributors net earnings from sales of Frederick Brewings products during the most recently completed fiscal year if Frederick Brewing terminates a distribution agreement without cause. Frederick
Brewing has written agreements with all of its largest distributors and with most of its smaller distributors.





During 2000, Frederick Brewing, in an attempt to stabilize a history of price fluctuation within its brand
portfolio, renegotiated these distributor agreements to reduce depletion allowances, to increase prices charged to distributors and to increase recommended consumer prices. Management believes that these revised terms are more favorable
to Frederick Brewing and are closer to industry standards. Management expects these pricing changes to:





| |  | increase Frederick Brewings operating efficiency as measured by its revenue per barrel produced;
| | - | -------------------------------------------------------------------------------------------------




| |  | reduce Frederick Brewings distributors inventories, which in turn, will reduce the risk of accumulating out of date
beer;
| | - | --------------------------------------------------------------------------------------------------------------------------




| |  | streamline Frederick Brewings retail channels of distribution to include only those appropriate to sell a premium
priced product;
| | - | ----------------------------------------------------------------------------------------------------------------------------------




| |  | maintain and protect Frederick Brewings prices and margins at a time when the industry leaders in all categories have
successfully implemented price increases; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | identify under-performing brands and packages that lack the necessary distributor, retailer and consumer support to demand a
premium price.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------




During 2000, Frederick Brewing also implemented a pre-sell ordering process for all of its products to allow
it to better forecast finished goods needs. Accordingly, product orders from distributors are now due to Frederick Brewing by the fifth day of the month preceding delivery. The process of brewing generally takes three to five weeks, after which, the
products are packaged for sale in bottles or kegs. Finished products are stored in Frederick Brewings warehouse until distributors pick them up or until Frederick Brewing delivers them to the distributors, depending on the distributor
agreement. Frederick Brewing charges all freight costs incurred in the delivery of products back to the distributor.





Marketing





During the fourth quarter of 2000, Frederick Brewing shifted its marketing efforts to provide enhanced
support to the off-premise retail channels of distribution with emphasis on the national and regional chain store supermarkets, mass merchants and warehouse clubs in the Mid-Atlantic region. Management believes that off-premise retail channels of
distribution provide the greatest potential for immediate incremental volume lift. According to industry sources, the chain store segment of the retail channels realized a 6% increase in sales volume in the beer category in 2000, which was the
greatest increase of all retail channels. Management believes that this dramatic increase is caused by:





| |  | the aggressive building of new and significantly larger chain stores, and
| | - | -------------------------------------------------------------------------




| |  | the increased percentage of floor space provided by chain store retailers to the domestic specialty beer category due to the
attractive margins domestic specialty beer sales deliver.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Frederick Brewing believes that its products are well suited to being marketed in these chain store
environments because Frederick Brewings brands offer the uniqueness of regional brands and have sophisticated marketing support. Traditional local brewing concerns usually lack the sales staff involvement and sufficient marketing materials to
provide adequate support for the brands within the chain store channel of distribution.





Frederick Brewing is applying a different off-premise strategy in Maryland because Maryland law prohibits
the sale of beer in chain grocery stores. As a result, Frederick Brewing is providing enhanced marketing support to the numerous large independent retail establishments in Maryland that are currently selling the Frederick Brewing brands. Frederick
Brewings management believes that this enhanced marketing support will increase sales at these stores.





The enhanced marketing support that Frederick Brewing plans to provide to these Mid-Atlantic retail chain
stores and the Maryland independent retail establishments primarily consists of in-store marketing materials directed at domestic specialty beer drinkers. Management believes that this marketing program will be well received by these retailers
because SIBG has launched a similar program in other markets that has received wide retailer support. Industry research indicates that in-store displays are the best way to increase beer sales. Frederick Brewing anticipates introducing these
marketing tools into several core markets within the Mid-Atlantic region during the second and third quarters of 2001.





Frederick Brewing will also continue to provide marketing support to on-premise establishments in the
Mid-Atlantic region. Within the Mid-Atlantic region, Frederick Brewing will focus on the critical markets of Baltimore, Maryland, Washington, D.C. and Northern Virginia where exposure to Frederick Brewings brands
has been eroding due to decreased sales and marketing efforts in those areas prior to SIBGs investment in Frederick Brewing. Frederick Brewings on-premise strategy is to increase the number of on-premise establishments that carry its
draft products by focusing on current accounts that have the highest sales volume within the Mid-Atlantic region and on national and local chain establishments within this region. Management believes that these chain establishments provide the
greatest potential for immediate incremental volume lift. Frederick Brewing plans to provide promotional materials to all of these on-premise establishments to educate customers about Frederick Brewings brands and to encourage
sampling.





Sales





The strategic focus of the sales force is to work closely with the distributor network to establish and
measure quarterly goals and performance. Effective January 1, 2000, all of 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 brands. In return for these services, Frederick Brewing pays SIBG $29,908 each month plus certain expenses under the sales and marketing agreement with SIBG, dated January 1,
2000.





Management believes that it has substantially improved its sales force during 2000 and early 2001 by hiring
several sales professionals who had successful records with other brewing companies and distributorships. In January 2001, the Vice President of Sales for Frederick Brewing resigned, and his duties were assumed by the SIBG Senior Vice President and
Director of Sales, Kirk Larimore. Mr. Larimore has nearly 20 years experience in beer sales and sales force management with the LaBatt U.S.A., Latrobe Brewing Company in Pennsylvania. Mr. Larimores salary and the other new sales
professionals salaries are paid through the sales and marketing agreement. Frederick Brewing, through SIBG, continues to recruit qualified beer industry sales professionals for markets not sufficiently covered.





Packaging and Raw Materials





The malted barley, hops and yeast used to produce Frederick Brewings beer are readily available from
several alternative sources in North America. Because Frederick Brewing is not dependent on any one supplier for these ingredients, Frederick Brewing believes a continuous supply of raw materials will be readily available for its brewing
operations.





Frederick Brewings products are packaged in bottles or kegs. In 2000, 73% of Frederick Brewings
total production was packaged in glass bottles. The remainder of the beer sold was packaged in one-sixth barrel, quarter-barrel and half-barrel stainless steel kegs. Frederick Brewing uses corrugated cardboard boxes and fiberboard boxes for the
shipping of its bottles. Even though Frederick Brewing buys all of its bottles and boxes from single sources, Frederick Brewing has not experienced any difficulties in obtaining supply in the past and does not anticipate any shortages in the future.
If Frederick Brewing were not able to continue to obtain bottles or boxes from its current suppliers, management believes that it would be able to obtain comparable products elsewhere.





In 2000, Frederick Brewing entered into a multi-year lease agreement with a significant keg supplier to
provide Frederick Brewing with all of its keg requirements. This arrangement allows Frederick Brewing to reduce the capital investment in owned kegs and reduces the burden of maintaining and retrieving kegs from the distributor network. Frederick
Brewing believes that its keg supplier will continue to provide this service adequately for the foreseeable future. If, however, Frederick Brewing requires additional kegs that its supplier is not able to obtain or Frederick Brewing desires to
maintain its own keg inventory, management believes that several other suppliers exist that offer comparable products at competitive prices and that a change in supplier should not disrupt Frederick Brewings ability to continue to meet demand
for kegged goods.





Governmental Regulation, Licensing and Environmental Regulation





The business of Frederick Brewing is highly regulated by federal, state and local laws. Frederick Brewing
was required to obtain a federal permit from the Bureau of Alcohol, Tobacco and Firearms and a state permit from the State of Maryland Comptroller of the Treasury, Alcohol and Tobacco Tax Unit prior to commencement of production and sale of beer.
Management believes that it has obtained all regulatory permits and licenses necessary to operate its brewery and to sell its products in the states where they are currently being distributed. Failure on the part of Frederick Brewing to comply with
federal, state or local regulations could cause Frederick Brewings licenses to be revoked and force it to cease operations.





Frederick Brewings brewery is subject to federal, state and local environmental protection laws and
regulations. Management believes that Frederick Brewing is operating within existing laws and regulations or is taking action aimed at assuring compliance with these laws. Various strategies are utilized to help assure this compliance. Frederick
Brewing does not expect compliance with such laws and regulations to materially affect Frederick Brewings capital expenditures, earnings or competitive expenditures in 2002.





To meet Frederick Countys wastewater discharge standards, construction of a wastewater treatment
system was completed in December 1999 at the Frederick, Maryland brewery. Throughout 2000, monthly monitoring of the effluent took place with samples sent to Frederick County and to an independent laboratory for analysis. Management believes that
Frederick Brewing has been in compliance with the Frederick County guidelines since this testing began.





Employees





As of May 18, 2001, Frederick Brewing had 22 full-time employees. Under the sales and marketing agreement
with SIBG and the management agreement with SIBG, an additional 24 full-time employees provide services to Frederick Brewing.





Item 2.    Description of Property.





All of Frederick Brewings brewing, packaging and office functions have, since March 1997, been carried
out at its 55,000 square foot facility located on approximately 5.5 acres in a light industrial park at 4607 Wedgewood Boulevard, Frederick, Maryland. The facility was designed and built according to Frederick Brewings specifications.
Frederick Brewing leases the land and building from Blue II, LLC, a Maryland limited liability company, under a capital lease that expires on March 1, 2017. Frederick Brewing has the option to purchase the land and building for a one-year period
beginning March 1, 2008 and ending March 1, 2009 at a price of approximately $3.6 million. Frederick Brewing believes that this property has been adequately maintained, is in good condition generally and is suitable and adequate for its business as
presently conducted. On August 24, 1999, SIBG purchased all of the outstanding equity interests of Blue II.





Item 3.    Legal Proceedings.





From time to time, Frederick Brewing is party to certain claims and litigation in the ordinary course of
business. Frederick Brewing does not believe any of the proceedings will, individually or in the aggregate, have a material adverse effect upon its financial condition or results of operations.





Item 4.    Submission of Matters to a Vote of Security Holders.





No matters were submitted to a vote of security holders during the three months ending December 31, 2000.
Frederick Brewing plans to have an annual meeting of its shareholders during 2001; however, no date has been set for this meeting. Frederick Brewing will notify its shareholders when a date for the 2001 annual meeting of shareholders has been
set.








PART II.





Item 5.    Market for Common Equity and Related Shareholder Matters.





(a)  Frederick Brewings common stock, par value $0.0004 per share, has traded on the
National Association of Securities Dealers Over-The-Counter Bulletin Board since August 5, 1999. The common stock currently trades under the ticker symbol FRBW and prior to April 5, 2000, traded under the symbol BLUE.
Frederick Brewings common stock was previously traded on the Nasdaq SmallCap Market, but was delisted on April 21, 1999 for failure to maintain a minimum closing bid price of $1.00 per share. In March 1999, in an effort to boost the stock
price to maintain its Nasdaq SmallCap Market listing, Frederick Brewings shareholders approved a 1-for-10 reverse stock split of Frederick Brewings common stock. From April 22, 1999 through August 4, 1999, Frederick Brewings common
stock was traded in the Over-The-Counter Markets Pink Sheets, which is operated by the National Quotation Bureau, LLC. The following table shows the price range of high ask and low bid prices per share for Frederick Brewings
common stock for the fiscal years ending December 31, 2000 and 1999, on a quarterly basis as reported on the Nasdaq SmallCap Market, the Pink Sheets and the Over-The-Counter Bulletin Board, as the case may be. The prices below also reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.





|               |  | 2000   |  | 1999  
|-------------- |  | ------ |  | ------
|
|First Quarter  |  | $0.875 |  | $0.313
|Second Quarter |  | 0.688  |  | 0.281 
|Third Quarter  |  | 0.375  |  | 0.250 
|Fourth Quarter |  | 0.500  |  | 0.094 




(b)  The number of record shareholders of Frederick Brewings common stock at May 1, 2001 was
approximately 851. Frederick Brewing believes that it has significantly more than 851 beneficial holders of its common stock.





(c)  Frederick Brewing paid no dividends on its common stock during the fiscal years ending
December 31, 2000 and 1999. The terms of Frederick Brewings 8% Cumulative Preferred Stock, Series A, prohibit Frederick Brewing from paying dividends on its common stock until all dividends due on the Series A Preferred have been declared and
paid. The Series A Preferred shareholders are entitled to receive $40 per share per year in dividends, when and if declared by Frederick Brewings Board of Directors. Frederick Brewing has never declared and paid dividends on the Series A
Preferred, and as of December 31, 2000, dividends in arrears on the Series A Preferred totaled $232,800. In light of these restrictions, Frederick Brewing does not anticipate paying dividends on its common stock in the foreseeable
future.





Item 6.    Managements Discussion and Analysis of Financial Condition and Results of Operations.





The following is a discussion of the financial condition, changes in financial condition and results of
operations of Frederick Brewing for the twelve months ended December 31, 2000 and 1999. The following selected financial data and Managements Discussion and Analysis of Financial Conditions and Results of Operations should be read in
conjunction with Frederick Brewings 1999 and 2000 financial statements and the notes thereto, included elsewhere in this Form 10-KSB.





Overview





For fiscal year ended December 31, 2000, Frederick Brewings gross losses decreased by approximately
$453,000 from fiscal year 1999, even though Frederick Brewing experienced a decrease in gross sales from fiscal year 1999 of approximately $657,000. Management attributes the decrease in operating losses to a decrease in operating costs and improved
production efficiency at its Frederick, Maryland brewery.
Management believes that its operating losses will continue to decrease in 2001 due in large part to an expected increase in the capacity utilization rate at Frederick Brewings brewery. Under the production agreement with SIBG, Frederick
Brewing currently brews Crooked River and Christian Moerlein brands and expects to begin brewing the Little Kings brand in 2001. Management expects that by adding these brands, Frederick Brewings annual production will grow to 30,000 barrels
and its current capacity utilization will significantly increase by the end of 2001. In an effort to further decrease operating losses, management continues to seek other means by which to decrease operating costs and to increase capacity
utilization at the Frederick, Maryland facility, including exploring opportunities to enter into additional production agreements with other brewers. No assurance can be given, however, that managements efforts will result in decreased
operating losses.





Management attributes the decrease in gross sales in 2000 in part to the restructuring of the sales force
that occurred in 2000. During the fourth quarter of 2000 and early 2001, Frederick Brewing hired several sales professionals with successful beer industry and distributor experience. In addition, Frederick Brewing continues to recruit qualified beer
industry sales professionals for markets not sufficiently covered. Management expects that its successful and continued efforts to recruit qualified beer sales professionals will result in an increase in the sales of Frederick Brewings
products during 2001.





In 2000, in an effort to reduce its distribution costs, Frederick Brewing renegotiated its distributor
agreements to reduce depletion allowances, to increase prices charged to distributors and to increase recommended consumer prices and implemented a pre-sell ordering process for all of its products to better forecast finished goods needs. The
pricing changes to the distributor agreements initially resulted in smaller orders from distributors and slower sell through in some retail channels that were not well suited to carry Frederick Brewings higher priced brands. Additionally, a
few of Frederick Brewings brands were identified as under-performing. By identifying these under-performing brands, management believes that it will be able to streamline the brand portfolio and concentrate sales and marketing efforts on the
brands that are more likely to succeed. By the fourth quarter of 2000, management believes that the Wild Goose brand distribution had responded positively to these distribution pricing changes with quarter over quarter increases in revenue shipped
and increases in revenue per barrel. In the third and fourth quarters of 2000, Wild Goose sales increased 4.6% as compared to the same period in 1999. Additionally, during this time period, Wild Goose accounted for 31.7% of all of Frederick
Brewings volume, as compared to 30.8% for the same period in 1999. The Wild Goose brands currently account for 62% of Frederick Brewings total volume and 57% of its total revenue. Management expects that this brand will increase in both
measures in 2001.





In late 2000, Frederick Brewing shifted its marketing efforts to provide enhanced support to the off-premise
retail channels of distribution with emphasis on the national and regional chain store supermarkets, mass merchants and warehouse clubs in the Mid-Atlantic region. Frederick Brewing also plans to provide continued marketing support to the more
traditional on-premise distribution channel in 2001. Moreover, management plans to continue to direct its sales force to work closely with the distributor network to establish and measure quarterly goals and performance.





Management believes that these recently implemented changes in Frederick Brewings distribution and
marketing strategy and improvements in its sales force will have a positive impact on the sales of its products in 2001; however, due to, among other things, market forces, managements ability to predict future sales is limited. Frederick
Brewings products compete in the domestic specialty beer category of the U.S. brewing industry. This market is highly competitive due to the large number of domestic specialty brewers and market share gains achieved by import beers. Sales in
this market generally reflect a degree of seasonality with the second and third quarters reflecting stronger sales than the rest of the year. In addition, demand for Frederick Brewings products is subject to changes in consumers
tastes.





Until Frederick Brewing can achieve operating profitability, it will need to borrow additional amounts from
SIBG or other financing sources. Frederick Brewing has no availability remaining under the SIBG note. To meet Frederick Brewings short-term working capital needs, SIBG may increase the amounts available to Frederick Brewing under the SIBG
note. To fund this increased availability, SIBG may conduct a private
equity offering to raise additional funds and C. David Snyder may lend additional funds to SIBG on a case-by-case basis. No assurances can be given, however, that SIBG will be able to raise additional funds or that C. David Snyder will lend
additional funds to SIBG and that SIBG will subsequently lend such amounts to Frederick Brewing. To meet its long-term needs, Frederick Brewing continues to explore obtaining financing arrangements from other sources, including possibly a line of
credit secured by Frederick Brewings equipment. No assurances, however, can be given that any such financing arrangements will be obtained and, if obtained, upon what terms such financing would be provided to Frederick Brewing.





Results of Operations





Gross Sales





Gross sales in 2000 and 1999 were $3,112,057 and $3,768,629, respectively, a decrease of $656,572 or 17.4%.
Shipped barrels decreased to 18,111 barrels in 2000 from 21,577 barrels in 1999, a decrease of 3,466 barrels or 16.1%. The sales and shipped barrels volume decreases were related to:





| |  | a significant reduction in Hempen sales due to reduced consumer and distributor interest;
| | - | -----------------------------------------------------------------------------------------




| |  | a continuing decrease in the sales of the Blue Ridge brand;
| | - | -----------------------------------------------------------




| |  | reduced orders from distributors while the changes to the distributor agreements were being implemented;
| | - | --------------------------------------------------------------------------------------------------------




| |  | the longer than expected depletion of distributor inventories that had been artificially high at the beginning of 2000 due to
late 1999 over-ordering brought on by Y2K fears; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | the restructuring of the sales force in 2000.
| | - | ---------------------------------------------




Selling Price Per Barrel





The selling price per barrel decreased by $2.83, or 1.62%, to $171.83 per barrel for 2000 from $174.66 for
1999. The decrease in the selling price per barrel was primarily due to a significant change in Frederick Brewings package mix sold and not to a decrease in prices charged 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 core brands was 26.9% for 2000
and 17.8% for 1999. The decrease in selling price per barrel in 2000 can be primarily attributed to this increase in percentage of keg sales.





Returns and Allowances





Product returns and allowances were $322,893 (10.4% of gross sales) in 2000 versus $812,861 (21.6% of gross
sales) in 1999. The higher rate of returns and allowances in 1999 included a charge of $350,000 for a potential loss related to allegedly out-of-code product that had been exported to, and is currently warehoused in, a non-U.S. market. Frederick
Brewings management is continuing to review this situation and is in discussions with the relevant authorities in this non-U.S. market.





Excise Taxes





State and federal excise taxes were $155,448 in 2000 and $202,885 in 1999, representing 5.0% and 5.4% of
gross sales, respectively. State excise tax rates and methods of computing taxes vary, depending on where the beer is sold. In some states, such as Maryland and Pennsylvania, the brewer is required to pay the tax; in others, such as Virginia and
also in the District of Columbia, the tax is paid by the purchasing distributor. Frederick Brewing currently pays $7 per barrel federal excise tax on all beer sold within the United States. The decrease in excise taxes paid in 2000 results from the
mix of sales by state and lower volumes shipped in 2000.





Cost of Sales





For 2000 and 1999, the cost of sales was $3,223,407 or $177.98 per barrel, and $3,796,111, or $175.93 per
barrel, respectively. The cost of sales for 2000 decreased to 122.4% of net sales from 137.9% for 1999. Variable costs were $2,004,260, or $110.67 per barrel, for 2000 and $2,436,720, or $112.93 per barrel, for 1999. Fixed overhead costs for 2000
decreased by $140,244, or approximately 10.3%, to $1,219,147 from $1,359,391 for 1999.





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.
Fixed costs include depreciation expense, salary personnel costs and rent.





The increase in cost of sales per barrel for 2000 was primarily caused by Frederick Brewings fixed
overhead costs being absorbed over a reduced barrel shipment, 18,111 barrels in 2000, compared to 21,577 barrels in 1999. For 2000, Frederick Brewings brewing facility operated at a level of 18.1% of plant capacity compared to 21.5% in 1999.
Frederick Brewings capacity utilization has a significant impact on gross profit. When facilities are operating at their maximum designed production capacities (100,000 barrels designed capacity for Frederick Brewing), profitability is
favorably affected by spreading fixed 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 and Management Fees





SG&A expenses for 2000 decreased $102,194, or approximately 3.9%, to $2,498,175 from $2,600,369 for
1999. This decrease was due, in part, to:





| |  | a significant decrease in consulting and former executive officers compensation;
| | - | ---------------------------------------------------------------------------------




| |  | the absence of a $200,000 compensation charge related to stock issued to the former executive officers that was paid in
1999;
| | - | -----------------------------------------------------------------------------------------------------------------------------




| |  | a reduction in depreciation and amortization expense resulting from the elimination of company owned vehicles;
| | - | --------------------------------------------------------------------------------------------------------------




| |  | a general reduction in overall general and administrative costs compared to 1999; and
| | - | -------------------------------------------------------------------------------------




| |  | a reduction in salaries for sales staff.
| | - | ----------------------------------------




The above decreases were partially offset by an increase in management fees and sales and marketing expenses
paid to SIBG resulting from the management agreement being effective for four months in 1999 compared to all of 2000 and the sales and marketing agreement being effective for no months in 1999 compared to all of 2000.





Impairment of Long Lived Assets





Impairment of long-lived assets for 2000 resulted in a charge of $2,015,000 as compared to a charge of
$1,359,751 for 1999. In 2000, Frederick Brewings management determined, based on an estimate of future undiscounted cash flows, that certain long-lived assets were impaired. The fair value of the equipment and leasehold improvements was
determined based upon estimated future cash flows and an independent appraisal obtained by Frederick Brewing. As a result, Frederick Brewing wrote down $2,015,000 of long-lived assets, consisting of $1,824,000 of machinery and equipment and $191,000
of leasehold improvements. In 1999, Frederick Brewings management determined that the goodwill of $2,734,113 that was recognized when Frederick Brewing acquired Wild Goose in 1998 would not be fully recovered due to lower than expected sales
volume of certain Wild Goose brands. Based on estimated future cash flows, Frederick Brewings management took an impairment charge of $1,359,751 in 1999.





Interest Expense (Net)





Net interest expense increased $50,051, or approximately 7.9%, to $680,830 for 2000 from $630,779 for 1999.
A substantial portion of the interest expense incurred during 2000 related to indebtedness incurred by Frederick Brewing in connection with its lease of the brewing facility and interest due SIBG for working capital advances.





Extraordinary Gain on Forgiveness of Debt (Net)





There was no extraordinary net gain on forgiveness of debt in 2000 as compared to $731,360 for 1999. In
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 $824,662. One of the creditors was a financial institution for which
Frederick Brewing had unamortized debt costs of $93,302 that were expensed.





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 and, since August 24, 1999, from unsecured working capital advances from SIBG. As of December 31, 2000, Frederick Brewing had a working capital deficit of $5,879,321. Net cash used for
operating activities was $1,669,081 in 2000 as compared to $1,891,927 in 1999.





Net cash provided by investing activities was $46,696 in 2000, which resulted from a change in restricted
cash of $248,928 reduced by equipment purchases of $202,232 as compared to net cash used in investing activities of $755,665 in 1999.





Net cash provided by financing activities was $1,590,021 in 2000 representing the utilization of working
capital loans from SIBG of $1,702,440 offset by payments on debt and capital lease obligations of $112,419. Net cash provided by financing was $2,604,904 in 1999.





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 continues to work to eliminate or substantially reduce excess brewing capacity. In order to meet its short-term obligations, Frederick Brewing
will need to continue to borrow additional amounts from SIBG or from other financing sources. Frederick Brewing currently receives funding for its working capital and other corporate needs under the SIBG note, which is payable on demand and provides
that Frederick Brewing may borrow on a revolving basis up to $5,000,000 in principal amount, subject to certain limitations. As of May 18, 2001, Frederick Brewing owed $5,666,340 to SIBG. This amount includes principal and interest due under the
note as well as accounts payable to SIBG for amounts due under the management agreement and the sales and marketing agreement with SIBG and for amounts owed for the monthly real estate maintenance fee related to the lease of the Frederick property.
To meet Frederick Brewings short-term working capital needs, SIBG may increase the amounts available to Frederick Brewing under the SIBG note. SIBG currently receives funding for Frederick Brewings borrowings under the SIBG note from a
$5,000,000 line of credit obtained by SIBG from a financial institution (the SIBG Line of Credit) on substantially similar terms and from loans aggregating $1,500,000 in principal amount from C. David Snyder (the Snyder
Notes), which are payable on demand and allow SIBG to borrow on a revolving basis, subject to certain limitations. As of May 18, 2001, there was no availability under the SIBG Line of Credit and no availability under the Snyder Notes. To fund
the increased availability to Frederick Brewing under the SIBG note, SIBG may conduct a private equity offering to raise additional funds or may borrow additional amounts from Mr. Snyder on a case-by-case basis; however, any increased availability
under the SIBG note will be limited to the amounts of any new funds raised by SIBG or borrowed from Mr. Snyder. Moreover, SIBG, which recently merged with Crooked River and Royal Brewing, LLC, may also utilize some of the funds raised or borrowed by
SIBG to fund the Crooked River and Royal Brewing operations. As a result, some or all of the funds raised or borrowed by SIBG may, in fact, not
be available to Frederick Brewing if SIBG utilizes those funds. Furthermore, even though SIBG is owned and controlled by Mr. 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 under the SIBG Line of Credit or if Mr. Snyder demands repayment of the Snyder Notes. To meet its long-term needs,
Frederick Brewing continues to explore obtaining financing arrangements from other sources, 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, 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 2000 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.





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 U.S. 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. When used in this Form 10-KSB, the words believes, anticipates, expects,
intends and other predictive, interpretive and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause
the actual results of Frederick Brewing to be materially different from expectations expressed or implied by such forward-looking statements. Such factors include, but are not limited to:





| |  | 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 continues to
significantly depend upon the financial support and contributions of Frederick Brewings controlling shareholder, SIBG and Frederick Brewings Chairman and Chief Executive Officer, C. David Snyder:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | Under the management agreement with SIBG and the sales and marketing agreement with SIBG, SIBG provides extensive management
and sales and marketing services for Frederick Brewing. The management agreement automatically renewed for another one-year term on August 24, 2000, and the sales and marketing agreement automatically renewed for another one-year term on January 1,
2001; however, if SIBG terminates these agreements, there can be no assurance that Frederick Brewing will be able to attract and hire qualified management and sales and marketing personnel to develop its business and to sell its
products;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | Frederick Brewing obtains funding for operations from borrowings under the SIBG note. As of May 18, 2001, there was no
availability remaining under the SIBG note. There can be no assurance
that SIBG will be able to increase the amounts available to Frederick Brewing under the SIBG note, and there can be no assurance that Frederick Brewing will be able to borrow funds from 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, or if C. David Snyder demands repayment of the Snyder Notes from SIBG. If SIBG demands repayment of the SIBG 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
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | SIBGs ownership of other brands has resulted in the four-year agreement for Frederick Brewing to produce and package
the Crooked River and Christian Moerlein brands and may lead to other production agreements to produce and package other SIBG-owned brands. If SIBG terminates the current production agreement with Frederick Brewing 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 continuing to review the situation and is in discussion with the relevant
authorities in the non-U.S. markets. However, because 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, to assist Frederick Brewing in creating demand for its
products and to provide adequate service to its retail customers. Frederick Brewing renegotiated its distributor agreements in 2000, and management believes that these revised terms are more favorable to Frederick Brewing and are closer to industry
standards. There can be no assurance, however, that Frederick Brewings distributors will respond positively to these changes and increase orders as a result. In addition, 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s brands.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | 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 1997, the overall sales growth of domestic
specialty brewers slowed substantially. Even though certain industry sources indicate that, since 1999, this trend has been 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 2001 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. Even though Frederick Brewing has taken actions to address this issue and is exploring additional actions that can be taken 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | Restructured Sales Force.    Frederick Brewing must substantially increase sales in order
to improve its financial performance. Even though Frederick Brewings sales force was restructured in 2000 and Frederick Brewing believes that its sales force consists of capable, experienced sales persons, no assurances can be given that this
new sales force will be successful in selling Frederick Brewings brands. Additionally, given the competitive market for qualified sales persons, no assurances can be given that these employees will choose to remain with SIBG and Frederick
Brewing, or that if they should choose to leave, that they can be replaced with equally qualified personnel. A significant turnover in the sales staff could have a material adverse effect on Frederick Brewings business.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | Marketing Strategies.Frederick Brewing believes that its new off-premise strategy to
pursue display activity in chain supermarkets and large regional beverage stores will increase sales. However, no assurances can be given that this marketing strategy will increase sales if retailers do not utilize the display programs and do not
agree to carry more of Frederick Brewings products in support of these programs.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




These statements are based on certain assumptions and analyses made by Frederick Brewing in light of its
experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. These statements are subject to a number of other assumptions, risks,
uncertainties, general economic and business conditions, and the business opportunities (or lack thereof) that may be presented to and pursued by Frederick Brewing. Prospective investors are cautioned that these statements are not guarantees of
future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. The accompanying information contained in this Annual Report on Form 10-KSB, including, without limitation, the
information set forth in this section and under Item 1. Description of Business, identifies important factors that could cause such differences.





Item 7.    Financial Statements.





See Page F-1 for Financial Statements.





Item 8.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.





Reference is made to Frederick Brewings Current Reports on Form 8-K, reporting under Item 4, filed
October 22, 1999 and March 5, 2001, which described changes in Frederick Brewings accountants and the basis for such changes.








PART III.





Item 9.    Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act.





As of December 31, 2000, the following individuals were directors or officers of Frederick
Brewing:





|Name                      |  | Age |  | Position                                      |  | Since          
|------------------------- |  | --- |  | --------------------------------------------- |  | ---------------
|C. David Snyder           |  | 48  |  | Chairman, Chief Executive Officer,

Treasurer |  | August 24, 1999
|Christopher J. Livingston |  | 38  |  | President, Secretary, Director                |  | August 24, 1999
|James M. Gehrig           |  | 50  |  | Chief Financial Officer                       |  | August 24, 1999
|David L. Stith            |  | 59  |  | Director                                      |  | August 24, 1999
|Glenn E. Corlett          |  | 57  |  | Director                                      |  | October 1, 1999
|Albert W. Spinelli        |  | 51  |  | Executive Vice President, General

Manager    |  | April 3, 2000  




Mr. Snyder, prior to joining Frederick Brewing in 1999, was the Chairman and Chief Executive Officer
of Realogic, Inc., a technology consulting business that Mr. Snyder started in 1993. Mr. Snyder currently also serves as Chief Executive Officer and Chairman of SIBG.





Mr. Livingston, prior to joining Frederick Brewing in 1999, served as the Senior Vice President of
LaSalle Partners, a commercial real estate business, from July 1993 until September 1998. As Senior Vice President, Mr. Livingston was responsible for the mid-west territory of the commercial leasing division. Mr. Livingston currently also serves as
the President and is a member of the Board of Managers of SIBG.





Mr. Gehrig, prior to joining Frederick Brewing in 1999, was employed by Pittsburgh Brewing Company.
Mr. Gehrig served as the Chief Financial Officer and as a director of Pittsburgh Brewing from October 1995 to December 1997, and then also served as Chief Executive Officer from January 1998 to December 1998. Mr. Gehrig also currently serves as the
Chief Financial Officer of SIBG.





Mr. Stith is retired and formerly served as the President of Bank One, N.A. from October 1995 to
March 1999. As President, Mr. Stith acted as the chief executive officer of the Cleveland area and the head of commercial lending for Northeast Ohio. Mr. Stith was employed as the Chairman of Bank One Texas, N.A. from August 1992 to October 1995. In
this position, Mr. Stith acted as the chief executive officer of the Houston region.





Mr. Corlett is currently employed as the Dean of the College of Business at Ohio University. Before
joining Ohio University in July 1997, Mr. Corlett was employed as the Chief Operating Officer of N.W. Ayer, an advertising agency, from June 1993 to June 1996. Mr. Corlett also serves as a director of PUBCO Corporation, a manufacturer of printers
and business supplies, and as a director of Rocky Shoes & Boots, Inc., a manufacturer of rugged outdoor, occupational and casual footwear.





Mr. Spinelli, prior to joining Frederick Brewing in 2000, was employed as Vice President of
Operations of Latrobe Brewing Company from December 1986 to July 1998. In this position, Mr. Spinelli was responsible for the operations of a million barrel per year, $100 million brewery. From August 1998 until March 2000, Mr. Spinelli worked as a
consultant to the beer industry and operated the Red Star Brewery & Grill. Red Star is a brew pub and restaurant located in Greensburg, Pennsylvania that is partially owned by Mr. Spinelli.





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Frederick Brewings
directors, officers and persons who own more than 10% of a registered class of Frederick Brewings equity securities to
file initial reports of ownership and reports of changes in ownership with the U.S. Securities and Exchange Commission. Such persons are required by SEC regulations promulgated pursuant to the Exchange Act to furnish Frederick Brewing with copies of
all Section 16(a) report forms they file with the SEC.





Based solely on Frederick Brewings review of the copies of report forms received by Frederick Brewing
reporting persons, Frederick Brewing believes that all filing requirements applicable to its current directors, officers and persons who own more than 10% of a registered class of Frederick Brewings equity securities have been timely complied
with in accordance with Section 16(a) of the Exchange Act during fiscal year 2000, except that a report on Form 3 reporting the hiring of Albert W. Spinelli as Vice President of Operations on April 3, 2000 was filed on March 21, 2001.





Item 10.    Executive Compensation.





The following tables and discussion set forth information with respect to all plan and non-plan compensation
awarded to, earned by, or paid to, all individuals serving as Frederick Brewings Chief Executive Officer and to Frederick Brewings four most highly compensated executive officers other than the Chief Executive Officer (these officers,
together with the individuals serving as Chief Executive Officer, are the named executive officers), for all services rendered in all capacities to Frederick Brewing and its former subsidiaries for each of Frederick Brewings last
three completed fiscal years. No disclosure, however, has been made for any executive officer, other than the Chief Executive Officer, whose total annual salary and bonus does not exceed $100,000.





TABLE 1





SUMMARY COMPENSATION TABLE





|Name and Principal Position                                         |  | Year       |  | Annual Compensation |  | Other Annual

Compensation($)
|------------------------------------------------------------------- |  | ---------- |  | ------------------- |  | -----------------------------
|
|C. David Snyder Chairman,

Chief Executive Officer and Treasurer(1) |  | 2000

1999 |  | 0

0                |  | 0

0                         
|                                                                   
|                                                                   
|                                                                   
|Albert W. Spinelli,

Executive Vice President, General Manager      |  | 2000       |  | 125,000             |  | 0                            




|(1) | Mr. Snyder receives compensation directly from SIBG. In 1999, Frederick Brewing entered into a management agreement with SIBG
whereby SIBG provides administrative, financial, operational, marketing and strategic planning services to Frederick Brewing. Under this agreement, Frederick Brewing pays SIBG $30,000 per month for these services to Frederick Brewing. For the fiscal
year ended December 31, 2000, Frederick Brewing was charged by SIBG an aggregate of $360,000 for these services.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Compensation of Directors





Frederick Brewing reimburses its directors for out-of-pocket expenses incurred in traveling to board
meetings. In addition, under the Non-Employee Directors Stock Option Plan, non-employee directors are entitled to receive, on the date of each annual meeting of Frederick Brewings shareholders, an automatic grant of non-qualified stock
options to purchase 2,000 shares of Frederick Brewings common stock. The exercise price of each option is the fair market value of a share of Frederick Brewings common stock on the date of the grant. In 2000, no options were granted to
the non-employee directors under this Plan.





Item 11.    Security Ownership of Certain Beneficial Owners and Management.





The following table gives the number of shares of Frederick Brewings common stock beneficially owned
as of May 1, 2001 by: (1) each person who is known by Frederick Brewing to be the beneficial owner of more than 5% of the shares of its common stock; (2) the directors and named executive officers individually; and
(3) the directors and named executive officers as a group. The address for all directors and executive officers of Frederick Brewing is 4607 Wedgewood Blvd., Frederick, Maryland 21703.





|Name and Address of Beneficial Owner                                                                                           |  | Shares

Beneficially

Owned |        | Percent

of

Class
|------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | ------------------
|Snyder International Brewing Group, LLC

     Baker Building, Suite 200

     1940 East 6th Street

     Cleveland, Ohio 44114 |  | 4,447,104                   | (1)(2) |                   
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|Balmore Funds S.A. 

     Trident Chambers

     Road Town

     Tortola, British Virgin Islands                               |  | 709,283                     | (3)    |                   
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|Austost Anstalt Schaan

     Lichenstein Landstrasse 163

     7440 Fuerstennim

     France                                   |  | 703,833                     | (3)    |                   
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|C. David Snyder                                                                                                                |  | 4,447,104                   | (4)    |                   
|Christopher J. Livingston                                                                                                      |  | 4,447,104                   | (5)    |                   
|James M. Gehrig                                                                                                                |  | 0                           |        |                   
|Glenn E. Corlett                                                                                                               |  | 0                           |        |                   
|David L. Stith                                                                                                                 |  | 0                           |        |                   
|Albert W. Spinelli                                                                                                             |  | 0                           |        |                   
|                                                                                                                               |  |                             |        |                   
|All directors and named executive officers

     as a group (6 persons)                                                        |  | 4,447,104                   |        |                   




|(1) | On August 24, 1999, SIBG entered into a restructuring agreement with 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, Bertek, Inc. and Frederick Brewing. Pursuant to the restructuring agreement, the holders of
Frederick Brewings Series F Convertible Preferred Stock, par value $.01 per share, and Series G Convertible Preferred Stock, par value $.01 per share, converted their Series F and G Preferred Stock into common stock and the holders of the 10%
Convertible Notes, dated June 7, 1999, issued by Frederick Brewing, in the original principal amount of $500,000, were paid in full. Pursuant to Section 9.5 of the restructuring agreement, from and after August 24, 1999 until August 24, 2001, the
preferred shareholders have granted to SIBG an irrevocable proxy to vote all of the shares of common stock then owned or controlled by the preferred shareholders, at any meeting of the shareholders of Frederick Brewing, however called, in favor of
any proposal to (i) approve a merger or other business combination between or involving SIBG and Frederick Brewing which (A) is on reasonable terms and (B) will result in Frederick Brewing remaining a reporting company under the Securities Exchange
Act of 1934, as amended, or (ii) increase the number of authorized shares of Frederick Brewing. After giving effect to the SIBG transaction and the restructuring transaction, the preferred shareholders owned in the aggregate approximately 2,155,140
shares of Frederick Brewing common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | SIBG holds warrants to purchase shares of common stock at an exercise price of $0.01 per share. These warrants become
exercisable solely in the event that warrants, options or convertible securities of Frederick Brewing outstanding on August 24, 1999 are exercised or converted after August 24, 1999.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based on a review of Frederick Brewings stock transfer agents records as of May 1, 2001.
|--- | ------------------------------------------------------------------------------------------

|(4) | Mr. Snyder owns approximately 92.3% of SIBG, which is the beneficial owner of 4,447,104 shares of common stock of Frederick
Brewing. Mr. Snyder disclaims beneficial ownership of SIBGs shares of Frederick Brewing, except to the extent of his pecuniary interest therein. In addition, SIBG holds warrants to purchase shares of common stock at an exercise price of $0.01
per share. These warrants become
exercisable solely in the event that warrants, options or convertible securities of Frederick Brewing outstanding on August 24, 1999 are exercised or converted after August 24, 1999.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Mr. Livingston owns approximately 5.7% of SIBG, which is the beneficial owner of 4,447,104 shares of common stock of
Frederick Brewing. Mr. Livingston disclaims beneficial ownership of SIBGs shares of Frederick Brewing, except to the extent of his pecuniary interest therein. In addition, SIBG holds warrants to purchase shares of common stock at an exercise
price of $0.01 per share. These warrants become exercisable solely in the event that warrants, options or convertible securities of Frederick Brewing outstanding on August 24, 1999 are exercised or converted after August 24, 1999.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | This percentage was calculated including the 4,447,104 shares of Frederick Brewing common stock that are beneficially owned
by Mr. Snyder and Mr. Livingston, indirectly, by virtue of their ownership interest in SIBG.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Change in Control





In connection with the SIBG Line of Credit, SIBG has pledged all of its shares of Frederick Brewing as
security for this line of credit. If there is a default under the SIBG Line of Credit, the lender will have the right to obtain ownership of SIBGs shares of Frederick Brewing. Pursuant to the demand promissory note with SIBG, Frederick Brewing
had borrowed approximately $4.7 million from SIBG for the fiscal year ended December 31, 2000.





Item 12.    Certain Relationships and Related Transactions.





Frederick Brewing currently leases its operating facilities from Blue II, which is wholly-owned by SIBG.
SIBG owns 51.7% of the common stock of Frederick Brewing and is controlled and predominantly owned by C. David Snyder, Frederick Brewings Chairman and Chief Executive Officer. The lease is recorded and accounted for as a capital lease in
accordance with Statement of Financial Accounting Standards No. 13 Accounting for Leases. Total payments made to Blue II pursuant to this lease were approximately $350,000 for the fiscal year ended December 31, 2000. In addition, SIBG
also charges Frederick Brewing a monthly real estate maintenance fee of $3,000. For the year ended December 31, 2000, Frederick Brewing was charged $36,000 in the aggregate for this fee.





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 subject to terms mutually agreeable to SIBG and Frederick Brewing and subject to availability under the SIBG Line of Credit and the Snyder
Notes. Currently, SIBG also borrows under the SIBG Line of Credit and the Snyder Notes. As of December 31, 2000, borrowings under the SIBG Line of Credit totaled $5.0 million, of which approximately $3.9 million consisted of borrowings by Frederick
Brewing. As of December 31, 2000, borrowings under the Snyder Notes totaled $1.0 million of which approximately $265,678 consisted of borrowings by Frederick Brewing. As of December 31, 2000, under the SIBG note, Frederick Brewing owed $4,080,745 in
principal, an additional $258,017 in interest and approximately $364,000 in accounts payable to SIBG related to amounts owed under the management agreement, the sales and marketing agreement and for amounts owed for the monthly real estate
maintenance fee. In 1999, the SIBG note was unanimously approved by the members of the Frederick Brewing board who were not members, officers or directors of, or otherwise affiliated with, SIBG or Crooked River.





Effective August 24, 1999, Frederick Brewing entered into a one-year management agreement with SIBG, which
automatically renewed in 2000, whereby SIBG provides to Frederick Brewing administrative, financial, operational, marketing and strategic planning services. Under this agreement, Frederick Brewing pays SIBG $30,000 per month for these services. For
the fiscal year ended December 31, 2000 Frederick Brewing was charged $360,000 in the aggregate by SIBG for these services. In 1999, 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.





Effective August 24, 1999, Frederick Brewing entered into a production agreement with Crooked River (now
SIBG) pursuant to which Frederick Brewing agreed to produce and package draft beer for Crooked River for up to four years, which includes automatic renewals. Crooked River merged with SIBG on July 5, 2000, and SIBG is controlled and predominantly
owned by C. David Snyder, Frederick Brewings Chairman and Chief Executive Officer. For the fiscal year ended December 31, 2000, amounts charged to SIBG by Frederick Brewing under this agreement totaled approximately $122,000. In 1999, 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.





Effective January 1, 2000, Frederick Brewing entered into a one-year sales and marketing agreement with
SIBG, which automatically renewed in 2001, pursuant to which all of 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 brands. Under this agreement, Frederick Brewing pays SIBG $29,908 per month for these services. For the fiscal year ended December 31, 2000, Frederick Brewing was charged $358,896 by SIBG for
these services.





Item 13.    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                                                                                                                                  
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|3.1              |  | Amended and Restated Articles of Incorporation(1)                                                                                            
|                
|                
|                
|                 |  | (i) Articles Supplementary with respect to Series A Convertible Preferred Stock(2)                                                           
|                
|                
|                
|                 |  | (ii) Articles Supplementary with respect to Series B Convertible Preferred Stock(2)                                                          
|                
|                
|                
|                 |  | (iii) Articles Supplementary with respect to Series C Convertible Preferred Stock(3)                                                         
|                
|                
|                
|                 |  | (iv) Articles Supplementary with respect to Series D Convertible Preferred Stock(4)                                                          
|                
|                
|                
|                 |  | (v) Articles Supplementary with respect to Series E Convertible Preferred Stock(5)                                                           
|                
|                
|                
|                 |  | (vi) Articles Supplementary with respect to Series F Convertible Preferred Stock(6)                                                          
|                
|                
|                
|                 |  | (vii) Articles Supplementary with respect to Series G Convertible Preferred Stock(7)                                                         
|                
|                
|                
|3.2              |  | Amended and Restated Bylaws(8)                                                                                                               
|                
|                
|                
|4.1              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Austost Anstalt Schaan, dated August 24, 1999(9)    
|                
|                
|                
|4.2              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Balmore Funds S.A., dated August 24, 1999(9)        
|                
|                
|                
|4.3              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Ron

Williams, Sr., dated August 24, 1999(9)         
|                
|                
|                
|4.4              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Ron

Williams, Jr., dated August 24, 1999(9)         
|                
|                
|                
|4.5              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Dean

Dowda, dated August 24, 1999(9)                
|                
|                
|                
|4.6              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Fred

Lenz, dated August 24, 1999(9)                 
|                
|                
|                
|4.7              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

World Capital Funding, LLC, dated August 24, 1999(9)
|                
|                
|                
|4.8              |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Edward D. Scott, dated

August 24, 1999(9)                                
|                
|                
|                
|4.9              |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Catherine D. Scott, dated

August 24, 1999(9)                             
|                
|                
|                
|4.10             |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Nicholas P. Foris, dated

August 24, 1999(9)                              
|                
|                
|                
|4.11             |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Robert Schuerholz, dated

August 24, 1999(9)                              
|                
|                
|                
|4.12             |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Vishnampet S. Jayanthimath,

dated August 24, 1999(9)                     
|                
|                
|                
|4.13             |  | Common Stock Purchase Warrant, dated August 24, 1999, by Frederick Brewing Co. in favor of

Snyder International Brewing Group, LLC(10)      

|Exhibit

    No. |  | Description                                                                                                                                                                                                                                                                                                                                                    
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.14             |  | Stock Certificate(8)                                                                                                                                                                                                                                                                                                                                           
|                
|                
|                
|10.1             |  | Investment Agreement, dated August 24, 1999, by and between Snyder International Brewing Group,

LLC and Frederick Brewing Co.(10)                                                                                                                                                                                                                             
|                
|                
|                
|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)
|                
|                
|                
|10.3             |  | Transition Agreement, dated August 24, 1999, by and between Kevin E. Brannon and Frederick

Brewing Co.(10)                                                                                                                                                                                                                                                    
|                
|                
|                
|10.4             |  | Transition Agreement, dated August 24, 1999, by and between Marjorie A. McGinnis and Frederick

Brewing Co.(10)                                                                                                                                                                                                                                                
|                
|                
|                
|10.5             |  | Settlement Agreement, dated August 24, 1999, by and between First Union National Bank and Signet

Bank(10)                                                                                                                                                                                                                                                     
|                
|                
|                
|10.6             |  | Settlement Agreement, dated August 19, 1999, by and among U.S. Small Business Administration,

Snyder International Brewing Group, LLC and Frederick Brewing Co.(10)                                                                                                                                                                                           
|                
|                
|                
|10.7             |  | Production Agreement, dated as of August 24, 1999, by and between Crooked River Brewing

Company, LLC (now SIBG) and Frederick Brewing Co.(11)                                                                                                                                                                                                                 
|                
|                
|                
|10.8             |  | Management Agreement, dated as of August 24, 1999, by and between Snyder International Brewing

Group, LLC and Frederick Brewing Co.(11)*                                                                                                                                                                                                                      
|                
|                
|                
|10.9             |  | Demand Promissory Note, dated August 30, 1999, by Frederick Brewing Co. in favor of Snyder

International Brewing Group, LLC(11)                                                                                                                                                                                                                               
|                
|                
|                
|10.10            |  | Lease Agreement and Option to Purchase, dated July 17, 1996, by and between Blue II, LLC and

Frederick Brewing Co.(12)                                                                                                                                                                                                                                        
|                
|                
|                
|10.11            |  | Lease Modification Agreement, dated June 23, 1998, by and between Blue II, LLC and Frederick

Brewing Co.(13)                                                                                                                                                                                                                                                  
|                
|                
|                
|10.12            |  | Non-Employee Director Stock Option Plan(8)*                                                                                                                                                                                                                                                                                                                    
|                
|                
|                
|10.13            |  | 1995 Stock Option Plan(8)*                                                                                                                                                                                                                                                                                                                                     
|                
|                
|                
|10.14            |  | Sales and Marketing Agreement, dated January 1, 2000, by and between Frederick Brewing Co. and

Snyder International Brewing Group, LLC (13)*                                                                                                                                                                                                                  
|                
|                
|                
|16.1             |  | Letter of BDO Siedman LLP, dated October 21, 1999, to the U.S. Securities and Exchange

Commission (14)                                                                                                                                                                                                                                                        
|                
|                
|                
|16.2             |  | Letter of PricewaterhouseCoopers LLP, dated March 5, 2001, to the U.S. Securities and Exchange

Commission (15)                                                                                                                                                                                                                                                
|                
|                
|                
|23.1             |  | Consent of PricewaterhouseCoopers LLP, dated May 25, 2001                                                                                                                                                                                                                                                                                                      
|                
|                
|                
|23.2             |  | Consent of Grant Thornton LLP, dated May 25, 2001                                                                                                                                                                                                                                                                                                              
|                
|                
|                
|24               |  | Power of Attorney, dated March 19, 2001, for each director and officer of Frederick Brewing signing

this Form 10-KSB                                                                                                                                                                                                                                          




|(1) | Incorporated by reference to Pre-effective Amendment No. 5 to the Form SB-2 filed with the SEC on March 5, 1996.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to such exhibit as filed with Frederick Brewings Registration Statement on Form S-3, file
number 333-25743, dated April 24, 1997.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to such exhibit as filed with Frederick Brewings Registration Statement on Form S-3, file
number 333-35655, dated September 15, 1997.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to such exhibit as filed with Amendment No. 1 to Frederick Brewings Registration Statement on
Form S-3, file number 333-35655, filed December 4, 1997.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to such exhibit as filed with Frederick Brewings Quarterly Report on Form 10-QSB, for the
period ending March 31, 1998.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to such exhibit as filed with Frederick Brewings Registration Statement on Form S-3, file
number 333-65287, dated October 2, 1998.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to such exhibit as filed with Amendment No. 1 to Frederick Brewings Registration Statement on
Form S-3, file number 333-65287, filed December 15, 1998.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Frederick Brewings Form SB-2, filed on December 12, 1995.
|--- | ---------------------------------------------------------------------------------------

|(9) | Incorporated by reference to such exhibits as filed with the Schedule 13D, dated August 24, 1999, with respect to Frederick
Brewing.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to such exhibits as filed with Frederick Brewings Current Report on Form 8-K, dated August
24, 1999.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to such exhibits as filed with Frederick Brewings Quarterly Report on Form 10-QSB for the
period ending September 30, 1999.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to such exhibits as filed with Frederick Brewings Quarterly Report on Form 10-QSB for the
period ending June 30, 1996.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to such exhibit as filed with Frederick Brewings Annual Report on Form 10-KSB for the fiscal
year ending December 31, 1999.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to such exhibit as filed with Frederick Brewings Current Report on Form 8-K, filed October
22, 1999.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference to such exhibit as filed with Frederick Brewings Current Report on Form 8-K, filed March 5,
2001.
|---- | ----------------------------------------------------------------------------------------------------------------------------

|* | Management contract or compensatory plan or agreement.
|- | ------------------------------------------------------




(b)  Reports on Form 8-K.





None.





SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.





Date:  May 25, 2001





| | FREDERICK
BREWING
CO
 .
| | -----------------------




| | /s/    C. DAVID
SNYDER
| | ----------------------

| | By:
| | ---

| | C. David Snyder*
| | ----------------

| | Chairman, Chief Executive Officer and Treasurer
| | -----------------------------------------------




In accordance with the Exchange Act, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.





|Signature                                                                                                                                                                                                                                                                                                                 |  | Title                                                                 |  | Date        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------- |  | ------------
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|/s/    C. DAVID
SNYDERC. David Snyder*                                                                                                                                                                                                                                                                                    |  | Chairman, Chief Executive Officer and

Treasurer                      |  | May 25, 2001
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|/s/    JAMES
M. GEHRIGJames M. Gehrig                                                                                                                                                                                                                                                                                     |  | Chief Financial Officer (Principal Financial

and Accounting Officer) |  | May 25, 2001
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|/s/    CHRISTOPHER
J. LIVINGSTONChristopher J. Livingston*                                                                                                                                                                                                                                                                |  | Director, President and Secretary                                     |  | May 25, 2001
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|/s/    GLENN
E. CORLETTGlenn E. Corlett*                                                                                                                                                                                                                                                                                  |  | Director                                                              |  | May 25, 2001
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|/s/    DAVID
L. STITHDavid L. Stith*                                                                                                                                                                                                                                                                                      |  | Director                                                              |  | May 25, 2001
|                                                                                                                                                                                                                                                                                                                         
|*  The undersigned, by signing his or her name hereto, does sign and execute this Form 10-KSB pursuant to the power of attorney executed by the
above-named officers and directors of the registrant, which is being filed herewith with the Securities and Exchange Commission on behalf of such officers and directors.
|                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                         
|/s/    JAMES
M. GEHRIGJames M. Gehrig

Attorney-in-Fact                                                                                                                                                                                                                                                                   |  |                                                                       |  | May 25, 2001




CONSOLIDATED FINANCIAL STATEMENTS AND


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





FREDERICK BREWING CO.





December 31, 2000 and 1999





REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors


Frederick Brewing Co.





We have audited the accompanying consolidated balance sheet of Frederick Brewing Co. and subsidiaries as of
December 31, 2000, and the related consolidated statements of operations, changes in stockholders deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.





We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.





In our opinion, the December 31, 2000 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Frederick Brewing Co. and subsidiaries, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the
United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in note A to the consolidated financial statements, the Company has suffered significant net losses. These conditions raise substantial doubt about the Companys ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





| | /S
/    GRANT
THORNTON
LLP
| | --------------------------

| | 
| | 




| | GRANT
THORNTON
LLP
| | ------------------




Cleveland, Ohio


March 14, 2001


REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and Stockholders of


Frederick Brewing Co.





In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of
operations, changes in stockholders equity and cash flows present fairly, in all material respects, the financial position of Frederick Brewing Co. and its subsidiaries at December 31, 1999, and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.





The accompanying consolidated financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered significant net losses. These conditions raise substantial doubt about the Companys ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





| | /s/    PricewaterhouseCoopers LLP
| | ---------------------------------

| | 
| | 




| | PricewaterhouseCoopers LLP
| | --------------------------







Cleveland, Ohio


March 31, 2000








FREDERICK BREWING CO.





CONSOLIDATED BALANCE SHEETS


December 31





|                                                                                                                                                           |  | 2000            |   | 1999
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | - | ----
|ASSETS                                                                                                                                                     |  |                 |   |     
|                                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|Current Assets:                                                                                                                                            |  |                 |   |     
|Cash                                                                                                                                                       |  | $        17,137 |   |     
|Restricted cash                                                                                                                                            |  | 63,547          |   |     
|Trade receivables, net of allowance for doubtful accounts of $31,716 in

               2000 and 1999                                                      |  | 121,599         |   |     
|Inventories, net                                                                                                                                           |  | 411,042         |   |     
|Prepaid expenses and other current assets                                                                                                                  |  | 72,320          |   |     
|                                                                                                                                                           |  |                 |   |     
|Total current
assets                                                                                                                                       |  | 685,645         |   |     
|Property and Equipment, net                                                                                                                                |  | 5,122,757       |   |     
|Intangibles, net of accumulated amortization of $395,037 and $188,012 in 2000

     and 1999, respectively                                                 |  | 225,513         |   |     
|Goodwill, net of accumulated amortization of $149,143 and $37,286 in 2000

     and 1999, respectively                                                     |  | 792,319         |   |     
|                                                                                                                                                           |  |                 |   |     
|Total assets                                                                                                                                               |  | $  6,826,234    |   |     
|                                                                                                                                                           |  |                 |   |     
|                                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                      |  |                 |   |     
|                                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|Current Liabilities:                                                                                                                                       |  |                 |   |     
|Current maturities of long-term debt                                                                                                                       |  | $  4,109,403    |   |     
|Current portion of capital lease obligation                                                                                                                |  | 56,124          |   |     
|Accounts payable                                                                                                                                           |  | 1,507,113       |   |     
|Accrued liabilities                                                                                                                                        |  | 892,326         |   |     
|                                                                                                                                                           |  |                 |   |     
|Total current
liabilities                                                                                                                                  |  | 6,564,966       |   |     
|Long-Term Debt, net of current portion                                                                                                                     |  | 69,371          |   |     
|Capital Lease Obligation, net of current portion                                                                                                           |  | 2,545,455       |   |     
|                                                                                                                                                           |  |                 |   |     
|Total
liabilities                                                                                                                                          |  | 9,179,792       |   |     
|Commitments and Contingencies                                                                                                                              |  |                |   |     
|Stockholders Deficit:                                                                                                                                     |  |                 |   |     
|Preferred stock, $0.01 par value, 1,000,000 shares authorized; cumulative,

               convertible Series A, 1,455 shares outstanding in 2000 and 1999 |  | 548,512         |   |     
|Common stock, $0.0004 par value, 19,000,000 shares authorized; 8,596,211

               shares issued and outstanding in 2000 and 1999                    |  | 3,439           |   |     
|Additional paid-in capital                                                                                                                                 |  | 23,861,881      |   |     
|Accumulated deficit                                                                                                                                        |  | (26,767,390     | ) |     
|                                                                                                                                                           |  |                 |   |     
|Total stockholders
deficit                                                                                                                                |  | (2,353,558      | ) |     
|                                                                                                                                                           |  |                 |   |     
|Total liabilities and
stockholders deficit                                                                                                                |  | $  6,826,234    |   |     
|                                                                                                                                                           |  |                 |   |     




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





FREDERICK BREWING CO.





CONSOLIDATED STATEMENTS OF OPERATIONS


For the years ended December 31





|                                                             |  | 2000           |   | 1999
|------------------------------------------------------------ |  | -------------- | - | ----
|Gross sales                                                  |  | $3,112,057     |   |     
|Less: Returns and allowances                                 |  | 322,893        |   |     
|Less: Excise taxes                                           |  | 155,448        |   |     
|                                                             |  |                |   |     
|Net sales                                                    |  | 2,633,716      |   |     
|Cost of sales                                                |  | 2,494,244      |   |     
|Depreciation                                                 |  | 729,163        |   |     
|                                                             |  |                |   |     
|Gross loss                                                   |  | (589,691       | ) |     
|Selling, general and administrative expenses                 |  | 1,743,279      |   |     
|Management fees                                              |  | 754,896        |   |     
|Impairment of long-lived assets                              |  | 2,015,000      |   |     
|                                                             |  |                |   |     
|Operating loss                                               |  | (5,102,866     | ) |     
|Other income                                                 |  | 62,914         |   |     
|Interest expense, net                                        |  | 680,830        |   |     
|                                                             |  |                |   |     
|Loss before extraordinary
gain                               |  | (5,720,782     | ) |     
|Extraordinary gain on forgiveness of debt and capital leases |  |               |   |     
|                                                             |  |                |   |     
|Net loss                                                     |  | $(5,720,782    | ) |     
|                                                             |  |                |   |     
|Net loss per common sharebasic and diluted                  |  |                |   |     
|Net loss before extraordinary gain                           |  | $        (0.67 | ) |     
|Extraordinary gain                                           |  |               |   |     
|                                                             |  |                |   |     
|Net loss per common sharebasic and diluted                  |  | $        (0.67 | ) |     
|                                                             |  |                |   |     
|Weighted average common sharesbasic and diluted             |  | 8,596,211      |   |     
|                                                             |  |                |   |     




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





FREDERICK BREWING CO.





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT


For the years ended December 31, 2000 and 1999





|                                                                                   |  | Convertible

Series A

Preferred Stock |   | Convertible

Series E

Preferred Stock |          | Convertible

Series F

Preferred Stock |  | Convertible

Series G

Preferred Stock |   | Common Stock |            | Additional

Paid-In

Capital |  | Accumulated

Deficit |   | Total

Stockholders

Deficit
|---------------------------------------------------------------------------------- |  | -------------------------------------- | - | -------------------------------------- | -------- | -------------------------------------- |  | -------------------------------------- | - | ------------ | ---------- | ---------------------------- |  | -------------------- | - | -----------------------------
|
|Balance at December 31,

    1998                                                  |  | 1,543                                  |   |                                        | $581,687 |                                        |  | 210                                    |   |              | $  162,750 |                              |  | 1,000                |   |                              
|Conversion of Series A

    preferred stock to common

    stock                   |  | (88                                    | ) |                                        | (33,175  | )                                      |  |                                       |   |              |           |                              |  |                     |   |                              
|Conversion of Series E

    preferred stock to common

    stock                   |  |                                       |   |                                        |         |                                        |  | (210                                   | ) |              | (162,750   | )                            |  |                     |   |                              
|Conversion of Series F preferred

    stock to common stock                        |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  | (1,000               | ) |                              
|Conversion of Series G

    preferred stock to common

    stock                   |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Issuance of common stock to

    SIBG, net of issuance costs                       |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Issuance of common stock in

    lieu of salary, expense

    reimbursements, etc. |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Issuance of stock to former

    officers                                          |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Employee stock options

    exercised                                              |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Fair value of warrants issued                                                      |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Deferred compensation charge

    associated with issuance of

    warrants        |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Net loss                                                                           |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|                                                                                   |  |                                        |   |                                        |          |                                        |  |                                        |   |              |            |                              |  |                      |   |                              
|Balance, December 31, 1999                                                         |  | 1,455                                  |   |                                        | 548,512  |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|Net loss                                                                           |  |                                       |   |                                        |         |                                        |  |                                       |   |              |           |                              |  |                     |   |                              
|                                                                                   |  |                                        |   |                                        |          |                                        |  |                                        |   |              |            |                              |  |                      |   |                              
|Balance, December 31, 2000                                                         |  | 1,455                                  |   |                                        | $548,512 |                                        |  |                                       |   |              | $         |                              |  |                     |   |                              
|                                                                                   |  |                                        |   |                                        |          |                                        |  |                                        |   |              |            |                              |  |                      |   |                              




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





FREDERICK BREWING CO.





CONSOLIDATED STATEMENTS OF CASH FLOWS


For the years ended December 31





|                                                                            |  | 2000          |   | 1999
|--------------------------------------------------------------------------- |  | ------------- | - | ----
|Cash Flows from Operating Activities:                                       |  |               |   |     
|Net loss                                                                    |  | $(5,720,782   | ) |     
|Adjustments to reconcile net loss to net cash used in operating activities: |  |               |   |     
|Depreciation and amortization                                               |  | 1,070,351     |   |     
|Impairment of long-lived assets                                             |  | 2,015,000     |   |     
|Forgiveness of debt and capital leases                                      |  |              |   |     
|Gain on sale or disposal of equipment                                       |  |              |   |     
|Provision for doubtful accounts                                             |  |              |   |     
|Write-off of accounts receivable                                            |  |              |   |     
|Provision for obsolete inventory                                            |  | 35,419        |   |     
|Compensation charges for fair value of stock issued in lieu of salary       |  |              |   |     
|Compensation charges for issuance of stock to former officers               |  |              |   |     
|Change in operating assets and liabilities:                                
|Trade receivables                                                           |  | 120,865       |   |     
|Inventories                                                                 |  | 98,108        |   |     
|Prepaid expenses and other current assets                                   |  | 16,616        |   |     
|Other assets                                                                |  |              |   |     
|Accounts payable                                                            |  | 347,245       |   |     
|Accrued liabilities                                                         |  | 348,097       |   |     
|                                                                            |  |               |   |     
|Net cash used in operating
activities                                       |  | (1,669,081    | ) |     
|Cash Flows from Investing Activities:                                       |  |               |   |     
|Restricted cash                                                             |  | 248,928       |   |     
|Purchase of property and equipment                                          |  | (202,232      | ) |     
|Purchase of intangibles                                                     |  |              |   |     
|Proceeds from sale of equipment                                             |  |              |   |     
|                                                                            |  |               |   |     
|Net cash provided by (used
in) investing activities                         |  | 46,696        |   |     
|Cash Flows from Financing Activities:                                       |  |               |   |     
|Net proceeds from debt borrowings                                           |  | 1,702,440     |   |     
|Payments on debt obligations                                                |  | (62,322       | ) |     
|Proceeds from issuance of common stock                                      |  |              |   |     
|Offering costs associated with issuance of common and preferred stock       |  |              |   |     
|Payments on capital lease                                                   |  | (50,097       | ) |     
|Proceeds from exercise of stock options                                     |  |              |   |     
|                                                                            |  |               |   |     
|Net cash provided by
financing activities                                   |  | 1,590,021     |   |     
|                                                                            |  |               |   |     
|Net decrease in
cash                                                        |  | (32,364       | ) |     
|Cash, beginning of year                                                     |  | 49,501        |   |     
|                                                                            |  |               |   |     
|Cash, end of year                                                           |  | $      17,137 |   |     
|                                                                            |  |               |   |     




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





FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2000 and 1999





NOTE ARECENT EVENTS AND FUTURE PROSPECTS





| | Basis of Presentation
| | ---------------------




The accompanying consolidated financial statements have been prepared assuming that Frederick Brewing Co.
(the Company) will continue as a going concern. As explained below, the Company has sustained recurring operating losses and cash flow deficits. Also, the Company has significant cash commitments to creditors. These factors raise
substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are described below. The consolidated financial statements do not contain any adjustments that might result from
the outcome of these uncertainties.





| | Recent Events
| | -------------




Effective August 24, 1999, Frederick Brewing Co. and Snyder International Brewing Group, LLC
(SIBG), an Ohio limited liability company, completed a series of transactions that resulted in SIBG acquiring approximately 51% of the outstanding common stock of the Company. SIBG purchased 4,447,104 newly issued shares of the
Companys common stock for $2,000,000 in cash (see Note H). Concurrently, holders of the Companys Series F and Series G Convertible Preferred Stock converted their shares into common stock. Furthermore, a number of the Companys
creditors agreed to forgive certain indebtedness in order to facilitate SIBGs investment in the Company (see Note D). The Company also entered into transition agreements with two former officers pursuant to which these individuals are bound by
non-compete provisions through August 2001 for which they will receive an aggregate of $300,000 in payments. The Company also issued common stock with a fair value of $200,000 to these two officers (see Note H). The Company also executed a demand
promissory note with SIBG which provides for borrowings of up to $5,000,000 on a revolving basis (see Notes G and O).





| | Future Prospects
| | ----------------




The consolidated financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Companys ability to continue as a going concern is contingent
upon its ability to secure additional financing and attain profitable operations. In addition, the Companys ability to continue as a going concern must be considered in light of the difficulties, expenses and complications frequently
encountered while attempting to enter into established markets as well as the competitive market environment in which the Company operates.





Although the Company completed a series of financial transactions in August 1999 with SIBG, whereby the
Company raised $2,000,000 in cash for the issuance of 4,447,104 newly issued common shares of the Company, and has entered into a short-term demand promissory note with SIBG which enabled the Company to substantially repay the majority of the
Companys secured lenders, there can be no assurance that the Company will be able to secure additional financing when needed or obtain such financing under terms satisfactory to the Company, if at all, or raise additional private placement
investments.





The changes to the Companys board of directors and senior management in 1999 have resulted in changes
in, among other things, the Companys long-term strategic direction, its distribution efforts, sales and marketing focus and brewing operational plans.





The Companys current management strongly believes that the key to improving the Companys
financial performance is to immediately increase the utilization levels of its brewing facility. Additionally, the Companys current management is directly monitoring and, as appropriate, reducing overhead spending.


FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)








In April 1999, NASDAQ informed the Company that it had delisted the Companys common stock from the
NASDAQ SmallCap Market for failing to maintain a minimum closing bid price of $1.00 per share.





NOTE BSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





| | Nature of Business
| | ------------------




The Company is engaged in the production, bottling, distribution and sale of beer primarily in the
Mid-Atlantic region.





| | Principles of Consolidation
| | ---------------------------




The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,
BB Acquisition Corporation, dba Brimstone Brewing Company (Brimstone) and FBC Acquisition Corporation, dba Wild Goose Brewery, Inc. (Wild Goose). All significant inter-company accounts and transactions have been eliminated.
As of February 2001, both subsidiaries were liquidated. The Company conducted no operations through these subsidiaries during the years ended December 31, 2000 or 1999.





| | Single Business Segment
| | -----------------------




Statement of Financial Standards No. 131, Disclosure About Segments of a Business Enterprise,(SFAS 131), provides guidance on standards for reporting financial information about operating segments. Presently, the Company operates in a single business segment.





| | Restricted Cash
| | ---------------




Restricted cash as of December 31, 2000 and 1999 represents a short-term investment that was pledged as
collateral to ensure the Companys performance of site improvement work required by the local Frederick County government, and cash held in an escrow account in accordance with two non-compete agreements with members of former management (see
Note A).





| | Concentration of Credit Risk
| | ----------------------------




Financial instruments, which potentially subject the Company to concentrations of credit risk, consist
principally of cash on deposit and accounts receivable.





The Company places its temporary excess cash in high quality financial institutions. Portions of these
instruments are in excess of the Federal Deposit Insurance Corporation (FDIC) limit. At December 31, 2000, the Company had deposits of approximately $127,000 in two institutions of which approximately $24,000 is over the FDIC limit. No
losses have been experienced on such investments.





The Companys accounts receivable result primarily from beer sales to wholesale distributors. The
Company periodically assesses the financial strength of its customers and provides allowances for anticipated losses as necessary.





| | Inventories
| | -----------




Inventories consist of raw ingredients, work in process, finished goods, and packaging material, and are
valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.


FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)








| | Property and Equipment
| | ----------------------




Property and equipment are recorded at cost and depreciated using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes, over the estimated useful lives of the assets. Estimated useful lives are as follows: brewing equipment, 7 to 20 years; automobiles and trucks, 5 years; furniture and fixtures, 3 to 7
years.





Leasehold improvements are recorded at cost and depreciated over the terms of the related lease or the
estimated useful life of the related improvement, whichever is shorter. On retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recorded in the
statement of operations. Repair and maintenance costs are charged to expense in the year incurred.





The Company leases its production facility under a long-term capital lease that is included in property and
equipment. The facility is amortized over a twenty-year lease term (see note G).





| | Intangible Assets
| | -----------------




Intangible assets consist primarily of trademarks, copyrights, and two non-compete agreements. Trademarks
and copyrights are amortized over a five-year period on a straight-line basis. Non-compete agreements are amortized over the two-year period of the agreement. Amortization expense related to intangible assets was $207,025 and $171,475 for the years
ended December 31, 2000 and 1999, respectively.





| | Goodwill
| | --------




In 1998, the excess of the purchase price over the fair value of the net assets acquired of Wild Goose was
recorded as goodwill as of the acquisition date (see Note C). Amortization expense related to goodwill was $111,857 and $219,560 for the years ended December 31, 2000 and 1999, respectively.





| | Revenue Recognition
| | -------------------




Revenue is recognized upon shipment of product to distributors, less an allowance for estimated
returns.





| | Advertising Costs
| | -----------------




Advertising costs are expensed as incurred. The Company incurred advertising costs of $215,759 and $128,749
in 2000 and 1999, respectively.





| | Stock-Based Compensation
| | ------------------------




As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock Based Compensation, the Company recognizes compensation expense with respect to stock option grants to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25; stock-based compensation with
respect to non-employees is recognized under the fair value method prescribed by SFAS 123.





| | Income Taxes
| | ------------




Deferred income taxes are recognized for the tax consequences in future years of the differences between the
tax basis of assets and liabilities and their financial reporting values at each year-end. They are 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 that may be realized. Income
tax expense represents the current tax provision for the period plus the change during the period in deferred tax assets and liabilities.





| | Net Loss Per Common Share
| | -------------------------




Basic per share loss is based on weighted average number of outstanding common shares for the period.
Diluted per share losses adjust the weighted average for the potential dilution that could occur if stock options, warrants, or other convertible securities were exercised or converted into common stock. Diluted loss per share equals basic loss per
share for 2000 and 1999 because the effects of such items were anti-dilutive.





| | New Accounting Standards
| | ------------------------




Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments,(SFAS 133), establishes accounting and reporting standards for derivative instruments and hedging activities. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, which deferred the effective date of adoption
of SFAS 133 for one year. The Company will be required to adopt SFAS 133 during the first quarter of 2001. Presently the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes
that adoption of SFAS 133 will not have a material impact on its consolidated financial position or consolidated results of operations or cash flows.





| | Use of Estimates
| | ----------------




Preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.





| | Fair Value of Financial Instruments
| | -----------------------------------




For cash, restricted cash, trade receivables and payables, the carrying amounts approximate fair value
because of the short maturity of these instruments.





The carrying amount of the Companys debt approximates its fair value as the debt bears interest at
rates approximating current market rates.





NOTE CACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS





The Company accounts for impairment of long-lived assets in accordance with SFAS No. 121, Accounting for
Long-Lived Assets and for Long-Lived Assets to be Disposed of, (SFAS 121). SFAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not
be recoverable. In accordance with SFAS 121, the Company uses an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable.





Recurring operating losses subsequent to the 1998 Wild Goose acquisition resulted in managements
continued evaluation of the Companys long-lived assets. During the third quarter ended September 30, 1999, management determined that the goodwill associated with the Wild Goose acquisition would not be fully
recoverable. At that time, management estimated that it could recover $941,461 of the remaining value of its goodwill based on a future cash flows analysis. Accordingly, the Company recorded an impairment charge of $1,359,751 in its 1999
Consolidated Statement of Operations.





Recurring operating losses during the year ended December 31, 2000 resulted in the continued evaluation of
the Companys long-lived assets. As of December 31, 2000, management determined, based on an estimate of future undiscounted cash flows, certain long-lived assets were impaired. Based upon the determination that the Companys long-lived
assets were impaired, management compared the carrying value of such assets to their respective fair value. The fair value of the assets was determined based upon estimated future cash flows and an independent appraisal obtained by the Company. The
analysis resulted in a write-down of $2,015,000, consisting of $1,824,000 of machinery and equipment and $191,000 of leasehold improvements. Accordingly, the Company recorded an impairment charge of $2,015,000 in its 2000 Consolidated Statement of
Operations.





NOTE DEXTRAORDINARY GAIN ON FORGIVENESS OF DEBT





On August 24, 1999, in order to facilitate SIBGs investment in the Company, a number of the
Companys creditors forgave amounts owed to them by the Company totaling $824,662. One of the creditors was a financial institution for which the Company had unamortized debt costs of $93,302 that were expensed. The net amount of $731,360 of
debt forgiveness has been recorded in the 1999 consolidated statement of operations as an extraordinary gain on forgiveness of debt.





NOTE EINVENTORIES





Inventories at December 31 consist of the following:





|                                 |  | 2000      |   | 1999
|-------------------------------- |  | --------- | - | ----
|Raw materials                    |  | $  74,920 |   |     
|Work in process                  |  | 33,797    |   |     
|Finished goods                   |  | 57,217    |   |     
|Packaging and marketing supplies |  | 300,411   |   |     
|Reserve for obsolescence         |  | (55,303   | ) |     
|                                 |  |           |   |     
|Total inventories, net           |  | $411,042  |   |     
|                                 |  |           |   |     




NOTE FPROPERTY AND EQUIPMENT





Property and equipment at December 31 consist of the following:





|                              |  | 2000       |  | 1999      
|----------------------------- |  | ---------- |  | ----------
|Brewing equipment             |  | $2,889,314 |  | $4,520,913
|Building under capital lease  |  | 3,000,000  |  | 3,000,000 
|Leasehold improvements        |  | 1,602,329  |  | 1,784,214 
|Furniture and fixtures        |  | 139,539    |  | 139,539   
|Automobiles and trucks        |  | 42,074     |  | 41,359    
|                              |  |            |  |           
|                              |  | 7,673,256  |  | 9,486,025 
|Less accumulated depreciation |  | 2,550,499  |  | 1,799,030 
|                              |  |            |  |           
|Property and equipmentnet    |  | $5,122,757 |  | $7,686,995
|                              |  |            |  |           

FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)








NOTE GDEBT





| | Long-Term Debt
| | --------------




Long-term debt at December 31 consists of the following:





|                                                                                                                               |  | 2000          |  | 1999         
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------- |  | -------------
|Note payable to SIBG, a related party, interest at prime plus 1% (10.5% at

     December 31, 2000) due on demand (see Note O) |  | $4,080,745    |  | $2,440,627   
|Note payable to Frederick County, interest at 6.50%, annual payments of $20,250,

     due August 2005                         |  | 98,029        |  | 98,029       
|                                                                                                                               |  |               |  |              
|Total                                                                                                                          |  | 4,178,774     |  | 2,538,656    
|Less current maturities                                                                                                        |  | 4,109,403     |  | 2,454,505    
|                                                                                                                               |  |               |  |              
|Long-term debt                                                                                                                 |  | $      69,371 |  | $      84,151
|                                                                                                                               |  |               |  |              




Future maturities of debt outstanding for the years ended December 31 are as follows:





|2001 |  | $4,109,403
|---- |  | ----------
|2002 |  | 15,740    
|2003 |  | 16,764    
|2004 |  | 17,853    
|2005 |  | 19,014    
|     |  |           
|     |  | $4,178,774
|     |  |           




| | Capital Lease
| | -------------




The Company leases the land and building housing the brewery. This lease is accounted for as a capital lease
in accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases. The Company has the option to purchase the land and building during a one-year period beginning March 1, 2008 and ending March 1, 2009 at a price of
approximately $3,600,000. Future minimum payments under this capital lease, which expires in August 2017, are as follows at December 31, 2000:





|2001                                           |  | $    350,208
|---------------------------------------------- |  | ------------
|2002                                           |  | 350,208     
|2003                                           |  | 350,208     
|2004                                           |  | 350,208     
|2005                                           |  | 350,208     
|Thereafter                                     |  | 4,055,406   
|                                               |  |             
|Total minimum lease payments                   |  | 5,806,446   
|Less amount representing interest              |  | 3,204,867   
|                                               |  |             
|Present value of future minimum lease payments |  | 2,601,579   
|Less current maturities                        |  | 56,124      
|                                               |  |             
|Long term capital lease obligations            |  | $2,545,455  
|                                               |  |             

FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)








The following represents the net asset under capital lease included in the consolidated balance sheet at
December 31, 2000 and 1999:





|                              |  | 2000       |  | 1999      
|----------------------------- |  | ---------- |  | ----------
|Building under capital lease  |  | $3,000,000 |  | $3,000,000
|Accumulated depreciation      |  | 550,000    |  | 400,000   
|                              |  |            |  |           
|Net asset under capital lease |  | $2,450,000 |  | $2,600,000
|                              |  |            |  |           




Interest expense on debt obligations for the years ended December 31, 2000 and 1999 was $680,830 and
$632,063, respectively. Borrowings on long-term debt are collaterialized by property of the Company.





NOTE HSTOCKHOLDERS DEFICIT





The Companys Articles of Incorporation authorize the issuance of 1,000,000 shares of preferred stock,
at $.01 par value. At December 31, 2000, 1,455 shares of non-voting Cumulative, Convertible Series A Preferred Stock (Series A) issued during 1997, remain outstanding. The Series A shares are convertible at any time, based on an average
of $3.67 per share, which was a discount at the date of issuance.





The holders of Series A shares are senior to the Common Stock with respect to dividend rights and are
entitled to a liquidation preference of $500 per share. The annual dividend rate for Series A shares is $40 per share per annum, with cumulative dividends in arrears of $232,800 at December 31, 2000. Full dividends must be paid or set aside on
Series A shares before dividends may be paid or set aside on the Common Stock. All dividend payments will be subordinated to the Companys debt obligations, and will be subject to prior approval of the Companys bank. The Company does not
expect to declare or pay such dividends in the foreseeable future.





During 1997, the Company issued 2,700 shares of Convertible Series E Preferred Stock (Series E).
The Series E shares were convertible immediately upon issuance at 75% of the average market price of the Common Stock for five trading days immediately prior to the conversion date during 1997. At December 31, 1999, all the Series E shares have been
converted to Common Stock.





During 1998, the Company issued 1,000 shares of Convertible Series F Preferred Stock (Series F).
These preferred shares were immediately convertible into Common Stock at the lesser of $0.70 per share or 80% of the average of the three lowest closing bid prices of the Common Stock for the seven days preceding the conversion. A deemed dividend of
$247,000 was recognized immediately on issuance of Series F shares to recognize its beneficial conversion feature. The Company also issued approximately 200,000 warrants with exercise prices ranging from $0.75 per share to $0.98 per share. The
Company determined the aggregate value of these warrants on the date of grant to be approximately $74,600, based on the Black Scholes valuation model with the following weighted average assumptions: dividend yield of 0%, expected volatility of 58%,
risk free interest of 8.5% and expected term of 5 years. This value was recorded as a cost of the Series F offering and deducted from proceeds. At December 31, 1999, all the Series F shares have been converted to Common Stock.





During 1998, the Company also issued 500 shares of Convertible Series G Preferred Stock (Series
G) that are convertible into Common Stock at 70% of the average market price for the five days prior to the conversion. A deemed dividend of $144,581 was recognized on Series G to reflect its beneficial conversion feature. At December 31,
1999, all the Series G shares have been converted to Common Stock.





The deemed dividends related to Series E, Series F and Series G shares were recognized immediately upon
issuance.


FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)








During 1999, the Company issued an aggregate of 27,057 shares of Common Stock to certain members of
management in lieu of salary. The value of the Common Stock on the date pledged was $23,044 and was recorded as compensation expense during 1999.





On March 23, 1999, the Companys board of directors approved a 1-for-10 reverse stock split of Common
Stock. The accompanying financial statements have been adjusted retroactively to reflect the reverse split of all outstanding Common Stock.





During 1999, the Company issued 4,447,104 shares of the Companys Common Stock, $0.0004 par value, to
SIBG for gross proceeds of $2,000,000 before considering offering costs of $158,145 related to the issuance (see Note A).





During 1999, the former board of directors authorized the Company to issue 126,478 shares of Common Stock to
two of the former officers of the Company as compensation for their efforts in facilitating the SIBG investment. The value of the Common Stock issued was $200,000 and was charged to operations as compensation expense in 1999.





NOTE ISTOCK OPTIONS





The Companys 1995 Stock Option Plan was adopted in order to attract and retain qualified personnel in
key positions as well as to compensate members of the board of directors. The exercise price of all options under the plan must be equal to at least the fair value of the related common stock at the date of grant. The vesting provisions for stock
options are determined by the board of directors, and all options are exercisable for ten years after the vesting date.





A summary of the status of the Companys stock option plan follows:





|                                      |  | Years ended December 31,
|------------------------------------- |  | ------------------------
|
|
|Options outstanding-beginning of year |  | 6,075                   
|Options exercised                     |  |                        
|Options forfeited                     |  | (3,928                  
|Options granted                       |  |                        
|                                      |  |                         
|Options outstandingend of year       |  | 2,147                   
|                                      |  |                         
|Options exercisableend of year       |  | 2,147                   
|                                      |  |                         




At December 31, 2000, the weighted average remaining contractual life of the options, which have exercise
prices ranging from $2.50 to $25.63 is approximately seven years.





At December 31, 2000 and 1999, the FASB 123 proforma effect on the Companys net loss and net loss per
common share is not material.


FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)








The fair value of each option is estimated on the date of grant using a Black-Scholes option-pricing model
with the following weighted-average assumptions used for options granted during the year ended December 31, 1999. There were no options granted during the year ended December 31, 2000.





|                        |  | 1999   
|----------------------- |  | -------
|Annual dividend yield   |  | 0      
|Estimated volatility    |  | 58     
|Risk free interest rate |  | 6.8    
|Expected term           |  | 8 years




NOTE JWARRANTS





During 1997, the Company entered into an agreement with a third party for public and investor relations
services to be rendered over a five-year period. In consideration for these services, the Company paid cash and issued 500,000 warrants to purchase common stock of the Company to the public relations firm. These warrants had various exercise prices
and terms, and expire at varying dates through March 2002. The Company determined the estimated aggregate fair value of the warrants on the date of the grant to be approximately $670,000. During 1998 the agreement terminated; however, the warrants
still remain outstanding at December 31, 2000.





The Company issued 500,000 warrants to purchase common stock in June 1999 to a group of investors who had
loaned the Company $500,000. The loan was repaid in August 1999. These warrants were immediately exercisable at $0.375 per share. The Company determined the aggregate fair value of the warrants at the time of the grant was not material. These
warrants were cancelled in August 1999 concurrent with the SIBG transaction (see Note A). Additionally, 500,000 new warrants to purchase common stock were issued to this same group of investors in conjunction with the SIBG transaction whereas each
warrant is exercisable at $0.50. These warrants are exercisable immediately and expire in August 2002. The Company determined the aggregate fair value of these warrants at the time of the grant to be approximately $502,300 which is recorded in the
consolidated statement of changes in stockholders equity as deferred compensation and additional paid-in capital until such time the warrants are exercised.





In August 1999, the Company issued 132,000 warrants to purchase common stock to the former owners of Blue II
as settlement of back rent and late charges. These warrants are exercisable upon grant at $1.00 each and expire in August 2002. These warrants remain outstanding at December 31, 2000.





The Company also issued warrants to purchase shares of common stock to SIBG at an exercise price of $0.01
per share. These warrants become exercisable solely in the event that warrants, options, or convertible securities of the Company outstanding at August 24, 1999 are exercised or converted after August 24, 1999. At December 31, 2000, these warrants
are not exercisable, but remain outstanding.


FREDERICK BREWING CO.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)








NOTE KCOMMITMENTS AND CONTINGENCIES





The Company leases certain equipment under operating leases. Total lease expense incurred during the years
ended December 31, 2000 and 1999 was $111,800 and $103,788, respectively. Minimum future lease payments at December 31, 2000 are as follows:





|Years ending

December 31, |  |        
|-------------------------- |  | -------
|2001                       |  | $77,400
|2002                       |  | 77,400 
|2003                       |  | 57,600 
|2004                       |  | 25,400 
|2005                       |  | 2,100  




The Company has accrued $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. Company management is currently reviewing the situation and is in discussions with the relevant authorities in the non-U.S. markets.





In the normal course of business, the Company is involved in various other claims and litigation. Management
is of the opinion that any liability or loss resulting from such other claims or litigation will not have a material adverse impact on the Companys financial condition, results of operations, or cash flows.





NOTE LWHOLESALE DISTRIBUTORS





The Company distributes its products exclusively through independent wholesale distributors for resale to
retailers such as liquor, wine and beer stores, supermarkets, restaurants, taverns, pubs, bars, and sporting arenas. Accordingly, the Company is dependent upon these wholesale distributors to sell the Companys beer and to assist the Company in
creating demand for, and promoting market acceptance of the Companys products and to provide adequate service to all retail customers. If a significant wholesale distributor were to discontinue selling, or decrease the level of orders for the
Companys products, the Companys business would be adversely affected in areas serviced by such wholesale distributors until the Company obtained a replacement.





During the year ended December 31, 2000, sales to two wholesale distributors accounted for 11.8% and 11.0%
of net sales, respectively. During the year ended December 31, 1999, sales to three wholesale distributors accounted for 24.8%, 12.1% and 10.9% of net sales, respectively.





NOTE MEMPLOYEE BENEFIT PLAN





The Company sponsors a 401(k) defined contribution plan (the Plan) covering substantially all
officers and employees. The Plan permits participants to defer up to a maximum of 15% of their taxable compensation, not to exceed the statutory limit. The employees contribution vests immediately. Employer matching contributions are made at
the discretion of the Company and vest in accordance with a five-year graduated vesting schedule. The Company made no discretionary contributions to the Plan during the years ended December 31, 2000 and 1999.





NOTE NINCOME TAXES





As of December 31, 2000, the Company had approximately $18,586,000 of net operating loss carryforwards
expiring between 2009 and 2020. However, due to a change in ownership during 1999 (see
note A), the Company has an annual limitation pursuant to Section 382 of the Internal Revenue Code of approximately $203,000 in the utilization of its net operating loss carryforwards. In addition, due to losses in 1999 and 2000 and an unused prior
limitation, approximately $5,272,000 of the carryforwards may be utilized beyond the current annual limitation to offset future taxable income. Based upon the Companys post-change in ownership loss carryforwards and the future utilization of
the $203,000 annual carryforward limitations, the Company would have approximately $9,129,000 of future loss carryforwards which could be used over a 20 year period.





The above-mentioned carryforwards gave rise to deferred tax assets of approximately $3,653,000 and
$2,217,000 at December 31, 2000 and 1999, respectively. Due to the uncertainty of the ultimate realization of a portion of the deferred tax asset, a valuation allowance in the amounts of $4,360,000 and $2,119,000 was recorded by the Company for the
years ended December 31, 2000 and 1999, respectively. The net change in the valuation allowances for 2000 and 1999 was $2,241,000 and $2,476,000, respectively. The asset recognition for 2000 and 1999 is based principally on the portion of net
operating loss carryforwards which are not limited as to their use. These net operating loss carryforwards offset the deferred tax credits that are scheduled to reverse in the carryforward period. Therefore, the Company has reduced the valuation
allowance related to this offset. The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate for 2000 and 1999 due primarily to amortization of goodwill and the recognition of net
operating loss carryforwards.





The tax effects of the primary temporary differences giving rise to the Companys deferred tax asset
(liability) at December 31, 2000 and 1999 are summarized below:





|                                |  | 2000         |   | 1999
|------------------------------- |  | ------------ | - | ----
|Net operating loss carryforward |  | $3,653,000   |   |     
|Fixed asset impairment          |  | 806,000      |   |     
|Other                           |  | 71,000       |   |     
|Depreciation                    |  | (170,000     | ) |     
|                                |  |              |   |     
|                                |  | 4,360,000    |   |     
|Valuation allowance             |  | (4,360,000   | ) |     
|                                |  |              |   |     
|Net deferred taxes              |  | $           |   |     
|                                |  |              |   |     




Realization of the net deferred tax asset at the balance sheet date is dependent on future earnings which
are deemed uncertain at this time. Accordingly, a full valuation allowance was recorded against the assets.





NOTE ORELATED PARTIES





The Company currently leases its operating facilities from Blue II, LLC, which is wholly-owned by SIBG. The
lease is recorded and accounted for as a capital lease (see Note F). Total payments made to Blue II, LLC pursuant to this lease were approximately $350,000 for the year ended December 31, 2000 and approximately $117,000 for the period from August
24, 1999 through December 31, 1999.





Effective August 24, 1999, the Company executed a demand promissory note with SIBG that enables the Company
to borrow up to $5,000,000 from SIBG on a revolving basis (see Note G). The availability of this credit line is subject to SIBGs ability to maintain its credit facility with a certain Cleveland, Ohio bank and certain loans from the principal
shareholder of SIBG. The availability may be limited to the extent SIBG has outstanding borrowings under its credit facility. Total interest accrued to SIBG, which reduces the amount available under the demand note, was $258,017 and $70,033 as of
December 31, 2000 and 1999, respectively,
and is included in accrued liabilities in the consolidated balance sheet. In addition, the Company owes SIBG approximately $364,000 at December 31, 2000, which also reduces the amount available under the demand note, for amounts charged under the
management agreement, the sales and marketing agreement and for the monthly real estate maintenance fee. This amount is included in accounts payable in the consolidated Balance Sheet. At December 31, 2000, total availability to the Company under the
SIBG demand note approximated $297,000.





Effective August 24, 1999, the Company entered into a one-year management agreement with SIBG whereby SIBG
provides to the Company, administrative, financial, operational and strategic planning services. Under this agreement, the Company pays SIBG $30,000 per month for these services. For the year ended December 31, 2000 and the period from August 24,
1999 to December 31, 1999, the Company was charged $360,000 and $120,000, respectively, by SIBG for these services. This agreement automatically renews for additional terms of one (1) year, unless either party elects to terminate the
agreement.





Effective January 1, 2000, the Company entered into a one-year sales and marketing agreement with SIBG,
whereby SIBG provides to the Company direct sales and marketing support and consultation services. Under this agreement, the Company pays SIBG $29,908 per month for these services. For the year ended December 31, 2000, the Company was charged
$358,896 by SIBG for these services. The agreement will automatically renew for successive one (1) year terms, unless either party elects to terminate this agreement.





In addition, SIBG also charges the Company a monthly real estate fee of $3,000. For the year ended December
31, 2000, the Company was charged $36,000.





In addition, effective August 24, 1999, the Company entered into a production agreement with Crooked River
Brewing Company, LLC (Crooked River) pursuant to which the Company has agreed to produce and package draft beer for Crooked River for up to four years including automatic renewals. As of July 5, 2000, Crooked River merged with SIBG, and
SIBG replaced Crooked River as a party to this agreement. Amounts charged to SIBG during the year ended December 31, 2000 and the period from August 24, 1999 to December 31, 1999, approximated $122,000 and $50,000, respectively, which is included in
gross sales in the consolidated Statement of Operations.





NOTE PSUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION





|                                                                 |  | 2000     |  | 1999     
|---------------------------------------------------------------- |  | -------- |  | ---------
|Cash paid for interest                                           |  | $498,565 |  | $562,030 
|Cash paid for income taxes                                       |  |         |  |         
|Supplemental disclosure of non-cash investing and financing:     |  |          |  |          
|Stock issued to former officers                                  |  |         |  | $200,000 
|Non-compete agreements issued in connection with SIBG investment |  |         |  | $278,332 
|Fair value of stock issued in lieu of salary                     |  |         |  | $  23,044







EXHIBIT INDEX





|Exhibit

    No. |  | Description                                                                                                                                  
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|3.1              |  | Amended and Restated Articles of Incorporation(1)                                                                                            
|                
|                
|                
|                 |  | (i) Articles Supplementary with respect to Series A Convertible Preferred Stock(2)                                                           
|                
|                
|                
|                 |  | (ii) Articles Supplementary with respect to Series B Convertible Preferred Stock(2)                                                          
|                
|                
|                
|                 |  | (iii) Articles Supplementary with respect to Series C Convertible Preferred Stock(3)                                                         
|                
|                
|                
|                 |  | (iv) Articles Supplementary with respect to Series D Convertible Preferred Stock(4)                                                          
|                
|                
|                
|                 |  | (v) Articles Supplementary with respect to Series E Convertible Preferred Stock(5)                                                           
|                
|                
|                
|                 |  | (vi) Articles Supplementary with respect to Series F Convertible Preferred Stock(6)                                                          
|                
|                
|                
|                 |  | (vii) Articles Supplementary with respect to Series G Convertible Preferred Stock(7)                                                         
|                
|                
|                
|3.2              |  | Amended and Restated Bylaws(8)                                                                                                               
|                
|                
|                
|4.1              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Austost Anstalt Schaan, dated August 24, 1999(9)    
|                
|                
|                
|4.2              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Balmore Funds S.A., dated August 24, 1999(9)        
|                
|                
|                
|4.3              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Ron Williams, Sr., dated August 24, 1999(9)         
|                
|                
|                
|4.4              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Ron Williams, Jr., dated August 24, 1999(9)         
|                
|                
|                
|4.5              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Dean Dowda, dated August 24, 1999(9)                
|                
|                
|                
|4.6              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

Fred Lenz, dated August 24, 1999(9)                 
|                
|                
|                
|4.7              |  | Amended and Restated Common Stock Purchase Warrant by Frederick Brewing Co. in favor of

World Capital Funding, LLC, dated August 24, 1999(9)
|                
|                
|                
|4.8              |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Edward D. Scott, dated

August 24, 1999(9)                                
|                
|                
|                
|4.9              |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Catherine D. Scott, dated

August 24, 1999(9)                             
|                
|                
|                
|4.10             |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Nicholas P. Foris, dated

August 24, 1999(9)                              
|                
|                
|                
|4.11             |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Robert Schuerholz, dated

August 24, 1999(9)                              
|                
|                
|                
|4.12             |  | Common Stock Purchase Warrant by Frederick Brewing Co. in favor of Vishnampet S. Jayanthimath,

dated August 24, 1999(9)                     
|                
|                
|                
|4.13             |  | Common Stock Purchase Warrant, dated August 24, 1999, by Frederick Brewing Co. in favor of

Snyder International Brewing Group, LLC(10)      
|                
|                
|                
|4.14             |  | Stock Certificate(8)                                                                                                                         
|                
|                
|                
|10.1             |  | Investment Agreement, dated August 24, 1999, by and between Snyder International Brewing Group,

LLC and Frederick Brewing Co.(10)           




|
|

|Exhibit

    No. |  | Description                                                                                                                                                                                                                                                                                                                                                    
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)
|                
|                
|                
|10.3             |  | Transition Agreement, dated August 24, 1999, by and between Kevin E. Brannon and

Frederick Brewing Co.(10)                                                                                                                                                                                                                                                    
|                
|                
|                
|10.4             |  | Transition Agreement, dated August 24, 1999, by and between Marjorie A. McGinnis and

Frederick Brewing Co.(10)                                                                                                                                                                                                                                                
|                
|                
|                
|10.5             |  | Settlement Agreement, dated August 24, 1999, by and between First Union National Bank and Signet

Bank(10)                                                                                                                                                                                                                                                     
|                
|                
|                
|10.6             |  | Settlement Agreement, dated August 19, 1999, by and among U.S. Small Business Administration,

Snyder International Brewing Group, LLC and Frederick Brewing Co.(10)                                                                                                                                                                                           
|                
|                
|                
|10.7             |  | Production Agreement, dated as of August 24, 1999, by and between Crooked River Brewing

Company, LLC (now SIBG) and Frederick Brewing Co.(11)                                                                                                                                                                                                                 
|                
|                
|                
|10.8             |  | Management Agreement, dated as of August 24, 1999, by and between Snyder International Brewing

Group, LLC and Frederick Brewing Co.(11)*                                                                                                                                                                                                                      
|                
|                
|                
|10.9             |  | Demand Promissory Note, dated August 30, 1999, by Frederick Brewing Co. in favor of Snyder

International Brewing Group, LLC(11)                                                                                                                                                                                                                               
|                
|                
|                
|10.10            |  | Lease Agreement and Option to Purchase, dated July 17, 1996, by and between Blue II, LLC and

Frederick Brewing Co.(12)                                                                                                                                                                                                                                        
|                
|                
|                
|10.11            |  | Lease Modification Agreement, dated June 23, 1998, by and between Blue II, LLC and

Frederick Brewing Co.(13)                                                                                                                                                                                                                                                  
|                
|                
|                
|10.12            |  | Non-Employee Directors Stock Option Plan(8)*                                                                                                                                                                                                                                                                                                                   
|                
|                
|                
|10.13            |  | 1995 Stock Option Plan(8)*                                                                                                                                                                                                                                                                                                                                     
|                
|                
|                
|10.14            |  | Sales and Marketing Agreement, dated January 1, 2000, by and between Frederick Brewing Co. and

Snyder International Brewing Group, LLC(13)*                                                                                                                                                                                                                   
|                
|                
|                
|16.1             |  | Letter of BDO Siedman LLP, dated October 21, 1999, to the U.S. Securities and Exchange

Commission(14)                                                                                                                                                                                                                                                         
|                
|                
|                
|16.2             |  | Letter of PricewaterhouseCoopers LLP, dated March 5, 2001, to the U.S. Securities and Exchange

Commission(15)                                                                                                                                                                                                                                                 
|                
|                
|                
|23.1             |  | Consent of PricewaterhouseCoopers LLP, dated May 25, 2001                                                                                                                                                                                                                                                                                                      
|                
|                
|                
|23.2             |  | Consent of Grant Thornton LLP, dated May 25, 2001                                                                                                                                                                                                                                                                                                              
|                
|                
|                
|24               |  | Power of Attorney, dated March 19, 2001, for each director and officer of Frederick Brewing signing

this Form 10-KSB                                                                                                                                                                                                                                          




|(1) | Incorporated by reference to Pre-effective Amendment No. 5 to the Form SB-2 filed with the SEC on March 5, 1996.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to such exhibit as filed with Frederick Brewings Registration Statement on Form S-3, file
number 333-25743, dated April 24, 1997.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to such exhibit as filed with Frederick Brewings Registration Statement on Form S-3, file
number 333-35655, dated September 15, 1997.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to such exhibit as filed with Amendment No. 1 to Frederick Brewings Registration Statement on
Form S-3, file number 333-35655, filed December 4, 1997.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to such exhibit as filed with Frederick Brewings Quarterly Report on Form 10-QSB, for the
period ending March 31, 1998.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to such exhibit as filed with Frederick Brewings Registration Statement on Form S-3, file
number 333-65287, dated October 2, 1998.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to such exhibit as filed with Amendment No. 1 to Frederick Brewings Registration Statement on
Form S-3, file number 333-65287, filed December 15, 1998.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Frederick Brewings Form SB-2, filed on December 12, 1995.
|--- | ---------------------------------------------------------------------------------------

|(9) | Incorporated by reference to such exhibits as filed with the Schedule 13D, dated August 24, 1999, with respect to Frederick
Brewing.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to such exhibits as filed with Frederick Brewings Current Report on Form 8-K, dated August
24, 1999.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to such exhibits as filed with Frederick Brewings Quarterly Report on Form 10-QSB for the
period ending September 30, 1999.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to such exhibits as filed with Frederick Brewings Quarterly Report on Form 10-QSB for the
period ending June 30, 1996.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to such exhibit as filed with Frederick Brewings Annual Report on Form 10-KSB for the fiscal
year ending December 31, 1999.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to such exhibit as filed with Frederick Brewings Current Report on Form 8-K, filed October
22, 1999.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference to such exhibit as filed with Frederick Brewings Current Report on Form 8-K, filed March 5,
2001.
|---- | ----------------------------------------------------------------------------------------------------------------------------

|* | Management contract or compensatory plan or agreement.
|- | ------------------------------------------------------