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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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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, 2001.
| |  | --------------------------------------------




| ̈ |  | 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





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FREDERICK BREWING CO.


(Name of Small Business Issuer in Its Charter)





Maryland

52-176947(State or Other Jurisdiction of Incorporation or
Organization)

(I.R.S. Employer 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)





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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, 2002Common Stock, $0.0004 Par Value

8,596,211





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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: $3,496,539





The aggregate market value of common shares held by
non-affiliates as of March 26, 2002: $248,946





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





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FREDERICK BREWING CO.





INDEX TO FORM 10-KSB





PagePART I.Item 1.

Description of Business

1Item 2.

Description of Property

7Item 3.

Legal Proceedings

7Item 4.

Submission of Matters to a Vote of Security Holders

7PART II.Item 5.

Market for Common Equity and Related Shareholder Matters

8Item 6.

Managements Discussion and Analysis of Financial Condition and Results of Operations

8Item 7.

Financial Statements

15Item 8.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

15PART III.Item 9.

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

16Item 10.

Executive Compensation

16Item 11.

Security Ownership of Certain Beneficial Owners and Management

17Item 12.

Certain Relationships and Related Transactions

19Item 13.

Exhibits and Reports on Form 8-K

20SIGNATURES

23






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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 28,381 barrels in 2001. Of the 28,381 barrels sold in 2001, 13,700 barrels were Frederick Brewings proprietary brands and 14,681 barrels related to barrels produced and packaged under
production agreements. 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 began production of the Little Kings brand at the Frederick Brewing facility in June 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 was comprised of David Stith and Glenn Corlett, both outside directors of Frederick Brewing. Mr. Stith acted as chairman of the special committee until his resignation on November
1, 2001. 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.





On October 31, 2001 Albert W. Spinelli, Executive Vice President and General Manager tendered his
resignation from the Company. On December 31, 2001 James M. Gehrig, Chief Financial Officer, tendered his resignation from the Company. Effective March 31, 2002 Christopher Livingston, President, Secretary, Director, tendered his resignation from
the Company. Additionally, Kirk Larimore, SIBG Senior Vice-President and Director of Sales resigned effective January 31, 2002. These responsibilities have been assumed by the staff of SIBG and Frederick Brewing Company. Also, David L. Stith,
Director has resigned effective November 1, 2001.





Management believes these resignations will not have a material
impact on Frederick Brewings operations, sales, marketing and financial reporting efforts. Currently, Frederick Brewing does not anticipate replacing these people.




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On March 25, 2002 Frederick Brewing entered into a production agreement with Stoudt Brewery
located in Adamstown, PA. Management believes the production of this brand will add an additional 5,000 barrels to Frederick Brewings annual plant production.




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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 5.0% of the $62.5 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%. Industry reports estimate 2000 growth was approximately 3.4% and that 2001 was relatively flat as compared to 2000. Management 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.





Management believes that a number of market forces could adversely impact the domestic specialty beer categorys ability to achieve and continue
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 2001, Frederick Brewing produced and sold 23 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 2001, sales of the Hempen brands continued to decline rapidly. Additionally, in 2000 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 continued to sell this product until all raw materials and packaging inventories were exhausted in March 2001.





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.




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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 2001, 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 2001 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 2001, Frederick Brewings five largest distributors accounted for greater than 47% of
Frederick Brewings proprietary 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. In 2001, management believes these pricing changes had the following effects:





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




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




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




| |  |  | identified 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. In 2001, management believes the pre-sell ordering process allowed Frederick Brewing to maintain proper inventory levels and manage product freshness.




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Marketing





During 2001, Frederick Brewing continued shifting 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. This strategy will be continued throughout 2002. 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 5% increase in sales volume in the beer category in 2001, which was the greatest increase of all retail channels. All indicators show
that this trend will continue near the same pace for the foreseeable future. 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 reasonable 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
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 increased competition and 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.




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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 2001, 77% 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 or
earnings 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 and 2001, 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 March 26, 2002, Frederick Brewing had 18 full-time employees. Under the sales and marketing agreement with SIBG and the management agreement with
SIBG, an additional 15 full-time employees provide services to Frederick Brewing.




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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, 2001. Frederick Brewing plans to have an annual meeting of its shareholders during 2002; however, no date has been set for this meeting. Frederick Brewing will
notify its shareholders when a date for the 2002 annual meeting of shareholders has been set.




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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, 2001 and 2000, 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.





2001

2000High Ask

Low Bid

High Ask

Low BidFirst Quarter

$
0.380

$
0.090

$
0.875

$
0.313Second Quarter


0.190


0.050


0.688


0.281Third Quarter


0.190


0.050


0.375


0.250Fourth Quarter


0.190


0.040


0.500


0.094





(b)  The number of record shareholders of Frederick
Brewings common stock at May 9, 2002 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, 2001 and 2000. 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, 2001, dividends in arrears on the Series
A Preferred totaled $291,000. 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, 2001 and 2000. 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 2000 and 2001 financial statements and the notes thereto, included elsewhere in this
Form 10-KSB.





Overview





For fiscal year ended December 31, 2001, Frederick Brewings net loss decreased by $3,141,939 from fiscal year 2000. Management attributes the decrease in operating loss to a decrease in operating
costs, improved production efficiency, increases in co-pack revenue at its Frederick, Maryland brewery and a $2,015,000 charge for impairment of long-lived assets recorded in 2000. Management believes that its operating loss will continue to
decrease in 2002 due in large part to an expected increase in the capacity utilization rate at Fredericks brewery. Under the production agreement with SIBG, Frederick Brewing currently brews Crooked River and Christian Moerlein brands and
began brewing the Little Kings brand in June 2001. Under the production agreement with Stoudt Brewery, Frederick Brewing began brewing Stoudts brands in May 2002. Management expects that by adding these brands, Frederick Brewings annual
production will grow to over 40,000 barrels and its current capacity utilization will significantly increase by the end of 2002. 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.




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Management attributes the increase in gross sales in 2001 to the production agreement with
SIBG. During the second half of 2001 Frederick Brewing began production of the Little Kings brand. The sales recorded under the production agreement with SIBG amounted to approximately $1,045,000 in 2001 as compared to approximately $122,000 in
2000.





In 2000, in an effort to reduce its distribution costs, Frederick Brewing renegotiated its distributor agreements to
reduce depletion allowances and implemented a pre-sell ordering process for all of its products to better forecast finished goods needs. In 2001, the pre-sell ordering process allowed Frederick Brewing to better maintain proper inventory levels and
manage product freshness. Also, the reduction in the depletion allowances resulted in improved cash flow due to the reduction in discrepancies between the wholesaler and Frederick Brewing.





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 2002. 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 2002; 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/or C.
David Snyder may agree to 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 potential financing arrangements with other sources, including a possible 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.




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Results of Operations





Gross Sales





Gross sales in 2001 and 2000 were $3,496,539 and $3,112,057, respectively,
an increase of $384,482 or 12.4%. Shipped barrels increased to 28,381 barrels in 2001 from 18,111 barrels in 2000, an increase of 10,270 barrels or 56.7%. The sales and shipped barrels volume increases were related to the increased production of the
Crooked River and Little King brands sold under the production agreement with SIBG. In 2001, Frederick Brewings proprietary brands represented 13,700 barrels as compared to 16,652 barrels in 2000, a decrease of 2,952 barrels or 17.7%.
Proprietary revenues were $2,451,184 in 2001 and $2,989,183 in 2000, a decrease of $537,999 or 18.0%. Co-pack barrels represented 14,681 barrels sold in 2001 as compared to 1,459 barrels in 2000. Additionally, co-pack revenue was $1,045,355 in 2001
as compared to $122,874 in 2000, an increase of $922,481 or 750.8%.





Selling Price Per Barrel





The selling price per proprietary barrel decreased by $.62, or .3%, to $178.94 per barrel for 2001 from $179.56 for 2000. However, the selling price per
total barrels decreased by $48.63, or 28.3%, to $123.20 per barrel for 2001 from $171.83 for 2000. The decrease in the selling price per total barrels was primarily due to the co-pack barrels accounting for approximately 51.7% of total barrels sold
in 2001 as compared to 8.1% in 2000. The additional co-pack revenues mainly assist in covering fixed costs.





Returns and
Allowances





Product returns and allowances were $162,046 (6.6% of Frederick proprietary sales) in 2001 versus $322,893
(10.8% of Frederick proprietary sales) in 2000. The decrease in returns and allowances is primarily due to a significant change in Frederick Brewings depletion allowance program and the increase in co-pack revenue. Product returns and
allowances relate to Frederick Brewings proprietary brands.





Excise Taxes





State and federal excise taxes were $128,923 in 2001 and $155,448 in 2000, representing 3.7% and 5.0% 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 2001 results from the mix of sales by state, lower volumes shipped
of Fredericks proprietary brands in 2001 and the increase in co-pack revenues.




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Cost of Sales





For 2001 and 2000, the cost of sales was $3,352,798 or $118.14 per barrel, and $3,223,407, or $177.98 per barrel, respectively. The cost of sales for 2001 decreased to
104.6% of net sales from 122.4% for 2000. Variable costs were $1,944,825, or $68.26 per barrel, for 2001 and $2,004,260, or $110.67 per barrel, for 2000. Fixed overhead costs for 2001 increased by $188,826, or approximately 15.5%, to $1,407,973 from
$1,219,147 for 2000.





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
fixed overhead costs for 2001 was primarily due to the production agreement with SIBG. Frederick Brewings cost of goods sold per barrel decreased primarily due to costs being absorbed over an increased amount of barrels shipped, 28,381 barrels
in 2001, compared to 18,111 barrels in 2000. The increase in barrels shipped was primarily due to the production of the Crooked River, Christian Moerlein and Little Kings brands. For 2001, Frederick Brewings brewing facility operated at a
level of 28.4% of plant capacity compared to 18.1% in 2000. 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
2001 decreased $799,745, or approximately 32.0%, to $1,698,430 from $2,498,175 for 2000. This decrease was due, in part, to:





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




| |  |  | a reduction in depreciation and amortization expense resulting from the charge of $2,015,000 for the impairment of long-lived assets in 2000;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | a reduction in advertising costs;
| | - |  | ---------------------------------




| |  |  | a reduction in management fees charged by SIBG;
| | - |  | -----------------------------------------------




| |  |  | a reduction in professional costs due to change in accountants; and
| | - |  | -------------------------------------------------------------------




| |  |  | a general reduction in overall general and administrative costs compared to 2000
| | - |  | --------------------------------------------------------------------------------




Impairment of Long Lived Assets





Impairment of long-lived assets for 2000 resulted in a charge of $2,015,000. 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.




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Interest Expense (Net)





Net interest expense increased $49,889, or approximately 7.3%, to $730,719 for 2001 from $680,830 for 2000. A substantial portion of the interest expense incurred during 2001 related to
indebtedness incurred by Frederick Brewing in connection with its lease of the brewing facility, which is accounted for as a capital lease, and interest due SIBG for working capital advances.





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,
2001, Frederick Brewing had a working capital deficit of $7,775,748. Net cash used for operating activities was $1,407,429 in 2001 as compared to $1,669,081 in 2000.





Net cash provided by investing activities was $17,476 in 2001, which resulted from a change in restricted cash of $51,071, proceeds from the sale of equipment of $7,500 and reduced by
equipment purchases of $41,095 as compared to net cash provided by investing activities of $46,696 in 2000.





Net cash provided
by financing activities was $1,389,385 in 2001 representing the utilization of working capital loans from SIBG of $2,403,613 offset by payments on debt and capital lease obligations of $1,014,228. Net cash provided by financing was $1,590,021 in
2000.





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 16, 2002, Frederick Brewing owed $6,755,128 to SIBG. This amount includes principal and interest due under the note as
well as 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 9, 2002, 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.




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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 2001 and 2000, and no net provisions for income taxes have
been provided for on the Consolidated Statements of Operations, since a full valuation allowance has been recorded against its 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, has significant cash commitments to creditors and a significant deficit in working capital. 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, 2001, and the sales and marketing agreement automatically renewed for another one-year term on January 1, 2002; 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 9, 2002, 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 discussions 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. 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 2002 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | 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.




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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 Report on Form 8-K, reporting under Item 4, filed March 5, 2001, which described change in Frederick Brewings accountants and the basis for such change.




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##### Table of Contents




PART III.





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





As of December 31, 2001, the following individuals were directors or officers of Frederick Brewing:





Name

Age

Position

SinceC. David Snyder

49

Chairman, Chief Executive Officer,Treasurer

August 24, 1999Christopher J. Livingston

39

President, Secretary, Director

August 24, 1999Glenn E. Corlett

58

Director

October 1, 1999





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 recently resigned as the President of SIBG.





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.





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 2001, 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.




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##### Table of Contents




TABLE 1





SUMMARY COMPENSATION TABLE





Name and Principal Position

Year

Annual Compensation

Other Annual Compensation($)Salary($)

Bonus($)C. David Snyder Chairman, Chief Executive Officer and Treasurer(1)

2001 2000

0 0

0 0

0 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 paid SIBG $30,000 per month through March 2001 and $15,000 per month thereafter for these services to
Frederick Brewing. For the fiscal year ended December 31, 2001, Frederick Brewing was charged by SIBG an aggregate of $225,000 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 2001, 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 9, 2002 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




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(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 ClassSnyder International Brewing Group, LLC Baker
Building, Suite 200 1940 East 6th Street Cleveland, Ohio 44114

4,447,104
(1)(2)

51.7
%Cede & Co. Bowling Green Station
New York, New York 10004

1,879,586
(3)

21.9
%Balmore Funds S.A. Trident Chambers
Road Town Tortola, British Virgin Islands

709,283
(3)

8.3
%Austost Anstalt Schaan Lichenstein Landstrasse
163 7440 Fuerstennim France

703,833
(3)

8.2
%C. David Snyder

4,447,104
(4)

51.7
%Christopher J. Livingston

4,447,104
(5)

51.7
%Glenn E. Corlett

0


0.0
%All directors and named executive officers as a group (3 persons)

4,447,104


51.7
%(6)


---

|(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, 2002.
|--- |  | ------------------------------------------------------------------------------------------

|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 $6.2 million from SIBG for the fiscal
year ended December 31, 2001.





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, 2001. In addition, SIBG also charges Frederick Brewing a monthly real estate maintenance fee of $3,000. For the year ended December 31, 2001, 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, 2001, 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, 2001, borrowings under the Snyder Notes totaled $1.4 million of which approximately $488,500 consisted of borrowings by Frederick Brewing. As of December 31, 2001, under the SIBG note, Frederick Brewing owed
$6,162,529 in principal, interest and 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 2001, whereby SIBG provides to Frederick Brewing administrative, financial, operational, marketing
and strategic planning services. Under this agreement, Frederick Brewing was charged by SIBG $30,000 per month through March 2001, and $15,000 per month thereafter for these services. For the fiscal year ended December 31, 2001 Frederick Brewing was
charged $225,000 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, 2001, amounts charged to SIBG by Frederick Brewing under this agreement totaled approximately $1,045,000.
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, 2001, Frederick Brewing was charged $358,896 by SIBG for these services.




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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.

Description3.1

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)




20




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##### Table of Contents




Exhibit No.

Description4.14

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)23.2

Consent of Grant Thornton LLP, dated May 20, 200224

Power of Attorney, dated May 17, 2002, 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



21




---

##### Table of Contents

|(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.




22




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##### Table of Contents




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 20, 2002





FREDERICKBREWING CO.By:

/s/    C. DAVID
SNYDERC. 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
SNYDER C. David Snyder*

Chairman, Chief Executive Officer and Treasurer

May 20, 2002/s/    CHRISTOPHER J.
LIVINGSTON Christopher J. Livingston*

Director, President and Secretary

May 20, 2002/s/    GLENN E.
CORLETT Glenn E. Corlett*

Director

May 20, 2002


---

* 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/    DONALD L. SNYDER Donald L. Snyder Principal Financial and
Accounting Officer

May 20, 2002




23




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##### Table of Contents







FINANCIAL STATEMENTS AND


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





FREDERICK BREWING CO.





December 31, 2001 and 2000




1




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##### Table of Contents




REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors


Frederick Brewing Co.





We have audited the accompanying balance sheets of Frederick Brewing Co. as of December 31, 2001 and 2000,
and the related statements of operations, changes in stockholders deficit, and cash flows for the years 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 audits.





We conducted our audits 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 audits provide a reasonable basis for our opinion.





In our opinion,
the financial statements referred to above present fairly, in all material respects, the financial position of Frederick Brewing Co. as of December 31, 2001 and 2000 and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.





The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note A to the financial statements, the Company has suffered significant net losses. As of December 31, 2001, the Companys
current liabilities exceeded its current assets by $7,775,748 and its total liabilities exceeded its total assets by $4,932,401. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.





Cleveland, Ohio


March 12, 2002




F-1




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##### Table of Contents




FREDERICK BREWING CO.





BALANCE SHEETS


December 31





2001


2000ASSETSCurrent Assets:Cash

$
16,569


$
17,137Restricted cash


12,476



63,547Trade receivables, net of allowance for doubtful accounts of $31,716 in 2001 and 2000


146,112



121,599Inventories, net


366,102



411,042Prepaid expenses and other current assets


72,507



72,320Total current assets


613,766



685,645Property and Equipment, net


4,580,266



5,122,757Intangibles, net of accumulated amortization of $555,315 and $395,037 in 2001 and 2000, respectively


65,235



225,513Goodwill, net of accumulated amortization of $261,000 and $149,143 in 2001 and 2000, respectively


680,462



792,319TOTAL ASSETS

$
5,939,729


$
6,826,234LIABILITIES AND STOCKHOLDERS DEFICITCurrent Liabilities:Current maturities of long-term debt

$
6,246,681



4,801,209Current portion of capital lease obligation


62,876



56,124Accounts payable


1,299,096



1,142,695Accrued liabilities


780,861



634,309Total current liabilities


8,389,514



6,634,337Capital Lease Obligation, net of current portion


2,482,616



2,545,455Total liabilities


10,872,130



9,179,792Commitments and Contingencies






Stockholders Deficit:Preferred stock, $0.01 par value, 1,000,000 shares authorized; cumulative, convertible Series A, 1,455 shares
outstanding in 2001 and 2000


548,512



548,512Common stock, $0.0004 par value, 19,000,000 shares authorized; 8,596,211 shares issued and outstanding in 2001 and
2000


3,439



3,439Additional paid-in capital


23,861,881



23,861,881Accumulated deficit


(29,346,233
)


(26,767,390
)Total stockholders deficit


(4,932,401
)


(2,353,558
)TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT

$
5,939,729


$
6,826,234





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




F-2




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##### Table of Contents




FREDERICK BREWING CO.





STATEMENTS OF OPERATIONS


For the years ended December 31





2001


2000Proprietary sales

$
2,451,184


$
2,989,183Co-packaging


1,045,355



122,874Less: Returns and allowances


162,046



322,893Less: Excise taxes


128,923



155,448Net sales


3,205,570



2,633,716Cost of sales


2,791,934



2,494,244Depreciation


560,864



729,163Gross loss


(147,228
)


(589,691
)Selling, general and administrative expenses


1,078,534



1,743,279Management fees


619,896



754,896Impairment of long-lived assets






2,015,000Operating loss


(1,845,658
)


(5,102,866
)Other (expense) income


(2,466
)


62,914Interest expense


(730,719
)


(680,830
)NET LOSS

$
(2,578,843
)

$
(5,720,782
)Net loss per common sharebasic and diluted

$
(0.30
)

$
(0.67
)Weighted average common sharesbasic and diluted


8,596,211



8,596,211





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




F-3




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##### Table of Contents




FREDERICK BREWING CO.





STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT


For the years ended December
31, 2001 and 2000





Convertible Series
A Preferred Stock

Common Stock

Additional Paid-In Capital

Accumulated Deficit


Total Stockholders DefecitShares

Amount

Shares

AmountBalance, December 31, 1999

1,455

$
548,512

8,596,211

$
3,439

$
23,861,881

$
(21,046,608
)

$
3,367,224Net loss















(5,720,782
)


(5,720,782
)Balance, December 31, 2000

1,455


548,512

8,596,211


3,439


23,861,881


(26,767,390
)


(2,353,558
)Net loss















(2,578,843
)


(2,578,843
)Balance, December 31, 2001

1,455

$
548,512

8,596,211

$
3,439

$
23,861,881

$
(29,346,233
)

$
(4,932,401
)




F-4




---

##### Table of Contents




FREDERICK BREWING CO.





STATEMENTS OF CASH FLOWS


For the years ended December 31





2001


2000Cash Flows from Operating Activities:Net loss

$
(2,578,843
)

$
(5,720,782
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


843,955



1,070,351Impairment of long-lived assets






2,015,000Loss on sale of equipment


4,266



Provision for obsolete inventory






35,419Change in operating assets and liabilities:Trade receivables


(24,513
)


120,865Inventories


44,940



98,108Prepaid expenses and other current assets


(187
)


16,616Accounts payable


156,401



347,245Accrued liabilities


146,552



348,097Net cash used in operating activities


(1,407,429
)


(1,669,081
)Cash Flows from Investing Activities:Restricted cash


51,071



248,928Purchase of property and equipment


(41,095
)


(202,232
)Proceeds from sale of equipment


7,500



Net cash provided by investing activities


17,476



46,696Cash Flows from Financing Activities:Net proceeds from debt borrowings


2,403,613



1,702,440Payments on debt obligations


(958,141
)


(62,322
)Payments on capital lease


(56,087
)


(50,097
)Net cash provided by financing activities


1,389,385



1,590,021NET DECREASE IN CASH


(568
)


(32,364
)Cash, beginning of year


17,137



49,501Cash, end of year

$
16,569.00


$
17,137.00





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




F-5




---

##### Table of Contents




FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS


December 31, 2001 and 2000





Note ARecent Events and Future Prospects





Basis of Presentation





The accompanying 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 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. Concurrently, a number of the Companys creditors agreed to forgive certain indebtedness in order to facilitate SIBGs investment in the Company. The Company also entered into transition
agreements with two former officers pursuant to which these individuals were bound by non-compete provisions through August 2001 for which they have received an aggregate of $300,000 in payments. The Company also issued common stock with a fair
value at the time of issuance of $200,000 to these two officers. The Company also executed a demand promissory note with SIBG which provided for borrowings of up to $5,000,000 on a revolving basis. This amount has subsequently been increased to
$6,162,529 as of December 31, 2001 (see Notes F and N).





Future Prospects





The 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.




F-6




---

##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







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 2000 financial statements
included 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 in the 2000 financial statements. As of February 2001, both subsidiaries were liquidated. The Company conducted no operations through these subsidiaries during the years ended
December 31, 2001 or 2000.





Reclassifications





Certain reclassifications have been made to the 2000 financial statements in order to conform to the 2001 presentation.





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, 2001 and 2000 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. Restricted cash at December 31, 2000 also included cash held in an escrow account in accordance with two non-compete agreements with members
of former management.





Concentration of Credit Risk





Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable.





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.




F-7




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







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.





Property and Equipment





Property and equipment is 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 F).





Supplemental Disclosure of Cash Flow Information





During
the years ended December 31, 2001 and 2000, the Company made cash payments for interest in the amounts of $294,781 and $498,565, respectively. No cash payments were made for income taxes in 2001 or 2000.





Intangible Assets





At December 31, 2001, intangible assets consist primarily of trademarks and copyrights. Trademarks and copyrights are amortized over a five-year period on a straight-line basis. Intangible assets at December 31, 2000
included non-compete agreements which were amortized over the two-year period of the agreement which expired in August 2001. Amortization expense related to intangible assets was $160,278 and $207,025 for the years ended December 31, 2001 and 2000,
respectively.





Goodwill





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 for the years ended December 31, 2001 and 2000, respectively.




F-8




---

##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







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 $50,124 and $215,759 in 2001 and 2000, 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 the weighted average number of outstanding common shares
for the period. Diluted per share losses adjusts the weighted average number of outstanding common shares 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 2001 and 2000 because the effects of such items were anti-dilutive.




F-9




---

##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)










New Accounting Standards





SFAS 142 requires that goodwill no longer be amortized, but instead tested for impairment at least annually.
Any goodwill and any intangible asset determined to have an indefinite useful life that is acquired in a purchased business combination completed after June 2001 will not be amortized, but will be evaluated for impairment in accordance with the
appropriate existing accounting literature. Goodwill and intangible assets acquired in a business combination completed before July 2001 will continue to be amortized until the Company adopts SFAS 142, which is required to be adopted for fiscal
years beginning after December 15, 2001. Because of the extensive effort needed to comply with adopting SFAS No. 142, the impact of adoption on the Companys financial statements has not been determined, including whether any transitional
impairment losses will be required to be recognized as the effect of a change in accounting principle. As of January 1, 2002, the Company expects to have unamortized goodwill in the amount of $680,462 that will be subject to the transition
provisions of SFAS No. 142.





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.




F-10




---

##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







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 Statement of Operations.





Note DInventories





Inventories at December 31 consist of the following:





2001


2000Raw materials

$
36,684


$
74,920Work in process


56,811



33,797Finished goods


30,056



57,217Packaging and marketing supplies


297,854



300,411Reserve for obsolescence


(55,303
)


(55,303
)Total inventories, net

$
366,102


$
411,042





Note EProperty and Equipment





Property and equipment at December 31 consist of the following:





2001

2000Brewing equipment

$
2,916,024

$
2,889,314Building under capital lease


3,000,000


3,000,000Leasehold improvements


1,602,329


1,602,329Furniture and fixtures


139,944


139,539Automobiles and trucks


42,074


42,0747,700,371


7,673,256Less accumulated depreciation


3,120,105


2,550,499Property and equipmentnet

$
4,580,266

$
5,122,757




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







Note FDebt





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





2001

2000Note payable to SIBG, a related party, interest at prime plus 1% (5.75% at December 31, 2001) due on demand (see
Note N)

$
6,162,529

$
4,703,180Note payable to Frederick County, interest at 6.50%, annual payments of $20,250, due August 2005


84,152


98,029Total


6,246,681


4,801,209Less current maturities


6,246,681


4,801,209Long-term debt

$


$






At December 31, 2001 and 2000, the Company was in violation of
certain covenants of the note payable to Frederick County for failure to make a required installment payment. Accordingly, the entire liability has been recorded as a current liability at December 31, 2001 and 2000.





Borrowings on long-term debt are collaterialized by certain property of the Company.





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, 2001:





2002

$
350,2082003


350,2082004


350,2082005


350,2082006


350,208Thereafter


3,705,198Total minimum lease payments


5,456,238Less amount representing interest


2,910,746Present value of future minimum lease payments


2,545,492Less current maturities


62,876Long-term capital lease obligation

$
2,482,616




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







The following represents the net asset under capital lease included
in the balance sheet at December 31, 2001 and 2000:





2001

2000Building under capital lease

$
3,000,000

$
3,000,000Accumulated depreciation


700,000


550,000Net asset under capital lease

$
2,300,000

$
2,450,000





Note G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, 2001 and 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 $291,000 at December 31, 2001. 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.





Note H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.





At December 31, 2001 and 2000, the FASB 123 proforma effect
on the Companys net loss and net loss per common share is not material.




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







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





Years ended December 31,2001


2000Shares


Weighted Average Exercise Price


Shares


Weighted Average Exercise PriceOptions outstandingbeginning of year

2,147


$
7.83


6,075


$
21.00Options exercised












Options forfeited

(940
)

$
(4.83
)

(3,928
)

$
(26.83
)Options granted












Options outstandingend of year

1,207


$
10.16


2,147


$
7.83Options exercisableend of year

1,207


$
10.16


2,147


$
7.83





At December 31, 2001, the weighted average remaining contractual
life of the options, which have exercise prices ranging from $2.50 to $25.63, is approximately six years.





Note I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, 2001.





The Company issued 500,000 warrants to purchase common stock to a
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 was recorded in the statement of changes in stockholders equity as deferred compensation and additional paid-in capital until such time the warrants are exercised.




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







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, 2001.





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, 2001, these warrants are not
exercisable, but remain outstanding.





Note JCommitments and Contingencies





The Company leases certain equipment under operating leases. Total lease expense incurred during the years ended December 31, 2001 and
2000 was $93,486 and $111,800, respectively. Minimum future lease payments at December 31, 2001 are as follows:





Years Ending December 31,2002

$
9,1442003

$
5,1522004

$
3,1562005

$
2,104





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.




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







Note K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, 2001, sales to produce and package draft beer for SIBG accounted for 32.6% of net sales. During the year ended December 31, 2000, sales to two wholesale distributors
accounted for 11.8% and 11.0% of net sales, respectively.





Note L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, 2001 and 2000.





Note MIncome taxes





As of December 31, 2001, the
Company had approximately $21,065,000 of net operating loss carryforwards expiring between 2009 and 2021. 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 through 2001 and an unused prior limitation, approximately $7,977,000 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
$11,631,000 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 $4,685,000 and $3,653,000 at December 31, 2001 and 2000, respectively. The asset recognition for 2001 and 2000 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 2001 and 2000 due primarily to amortization of goodwill and the recognition of net operating loss
carryforwards.




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







The tax effects of the primary temporary differences giving rise to
the Companys deferred tax asset (liability) at December 31, 2001 and 2000 are summarized below:





2001


2000Net operating loss carryforward

$
4,685,000


$
3,653,000Fixed asset impairment


806,000



806,000Other


29,000



71,000Depreciation


(158,000
)


(170,000
)5,362,000



4,360,000Valuation allowance


(5,362,000
)


(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 N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. Total payments made to Blue II, LLC pursuant to this lease were approximately $350,000 for the years ended December 31, 2001 and 2000.





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 F). The availability of this credit line is subject to SIBGs ability to maintain both its credit facility with a 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 is included in the balance of the note, was $679,834 and $249,521 as of December 31, 2001 and 2000,
respectively. At December 31, 2001, there is no availability to the Company under the SIBG demand note.





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 was charged $30,000
per month through March 2001, and $15,000 per month thereafter. For the years ended December 31, 2001 and December 31, 2000, the Company was charged $225,000 and $360,000, respectively, by SIBG for these services. This agreement automatically renews
for successive one (1) year terms, unless either party elects to terminate the agreement.




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##### Table of Contents



FREDERICK BREWING CO.





NOTES TO FINANCIAL STATEMENTS(Continued)







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, SIBG charges the Company $29,908 per month for these services. For the years ended December
31, 2001 and 2000, the Company was charged $358,896 for these services. This agreement automatically renews for successive one (1) year terms, unless either party elects to terminate the agreement.





In addition, SIBG also charges the Company a monthly real estate fee of $3,000. For the years ended December 31, 2001 and 2000, the
Company was charged $36,000.





All fees charged by SIBG to the Company are included as management fees on the 2001
and 2000 Statements of Operations.





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 years ended December 31, 2001 and 2000 approximated $1,045,000 and $122,000, respectively, which is included in co-packaging
revenues in the Statement of Operations.




F-18