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Fortunes of Fast-Expanding Microbrewery Have Fallen Flat

Posted on January 11, 2004

Debts Skyrocket As County Ends Water Subsidy

Ten years ago, the barrels were rolled out with great fanfare when Frederick Brewing Co. opened for business, turning out handcrafted ales, lagers and ruby red porter under the Blue Ridge label and marking the return of commercial beermaking to the city after a 54-year drought.

Bankrolled with $750,000 from more than 30 local investors, the brewery caught the nation’s microbrew wave, expanding from 660 barrels a year to more than 28,000 barrels in less than a decade. The company soon built a sophisticated plant outside the city, bought up competitors, shipped its frothy goods to pubs from Chincoteague to China and eventually became a publicly traded company with a cool-sounding symbol. Just this past December, Washingtonian rated its Wild Goose Porter the best of Washington.

But the ruby red porter wasn’t all that was red.

Despite growth that made the company the largest craft brewer in the mid-Atlantic, a headline-grabbing brew made from hemp and legions of loyal beer-swilling fans, the company failed to practice moderation, expanding too far too fast, and became permanently unable get up off the floor financially.

It didn’t help that the microbrew craze was only that. It also didn’t help that Frederick County rejiggered its utility rates to avoid giving away water and sewer services at below-market cost. The brewery, making a product that is 90 percent water, got socked with a $650,000 water bill it couldn’t pay.

In one year alone, Frederick Brewing Co. lost more than $5.6 million. And that stock? It opened on Nasdaq in March 1996, its ticker symbol BLUE, at $6 a share. Delisted from Nasdaq in 1999, the stock now trades over the counter — if it trades at all — under the much more prosaic symbol FRBW for around a penny per share.

Now in receivership, the company, whose parent is based in Ohio, is searching for a buyer. A bank has initiated foreclosure and is seeking about $2.1 million for the land and building. And Frederick County is coming after the company for more than $1.1 million in unpaid taxes and debts, much of which was for increasingly precious water in the swiftly growing county.

John L. “Lennie” Thompson Jr., president of the Frederick Board of County Commissioners, has drawn up a resolution urging the county attorney to shut off the flow of water and pursue a tax sale or other remedies against the company. Anything less amounts to subsidizing alcohol with taxpayer money, he said. And he has dared the Ohio court, where the receivership was filed, to try to stop the Maryland jurisdiction.

“We can’t have every local government subsidizing every microbrewery that opened in the ’90s,” Thompson said.

Mark E. Dottore, the court-appointed receiver, said plans are underway to break up and sell the company in a way that will repay as much debt as possible to each of its creditors and allow the brewery to continue operating.

Though the brewery employees only about 20 people, he said, the jobs pay well. Not to mention that its heavily taxed product generates welcome revenue for the state and federal governments. In fact, among the parties working behind the scenes for a successful outcome is Maryland’s Economic Development Authority, which guaranteed a $3 million loan for the company. About $1.3 million remains to be paid off, Dottore said.

“My main goal is to keep this company here and alive,” he said.

In a telephone interview last week, Dottore said that a Maryland buyer, whom he would not identify, has contracted to purchase the plant’s building and property for more than $3 million. He is still searching for a buyer for the plant equipment and bottling rights. That buyer would then lease the building. So far, though, Dottore has found only lookers.

Meanwhile, the brewery’s output has trickled to a fraction of its peak. But the company continues to produce batches of its own brands, including Wild Goose Ale and Blue Ridge Amber Lager. The company is also bottling beer under labels from its Ohio-based parent company, such as Hudy Delight, Crooked River and Little Kings. The brewery is also contracting to produce beer for other companies, such as Penn Pilsner for the Pennsylvania Brewing Co. in Pittsburgh.

The odd thing is, Frederick Brewing Co. seemed to have weathered the worst of the boom-and-bust of the craft beer market in the 1990s, said Paul Gatza, a director of the Association of Brewers in Boulder, Colo.

At the height of microbrew mania, the number of new breweries grew by as much as half every year as every brewer with a new home recipe for malt, hops and barley rushed to cash in on the appetite for full-bodied beer. By 1998, however, the quest for a new taste wandered toward fruits and berries, the growth of new craft breweries slowed to zero, and imports were where the action was, Gatza said. (Today, he said, it’s “cheap chic”: your father’s familiar beer label for pennies a swig.)

Still, in 1990, there were 211 craft brewers. Today there are 1,326. And Frederick Brewing Co.’s brands seemed to be if not “really hugely flavorful,” at least respectable, Gatza said.

But the brewery’s troubles go back to problems as old as the business cycle, maybe as old as the history of fermented beverages, and it is told through current employees and filings with the Securities and Exchange Commission.

Kevin E. Brannon, a lawyer from Oregon, and his wife, Marjorie McGinnis, founded Frederick Brewing with two partners using a recipe that came from a home brewer’s basement in Frankenmuth, Mich., according to plant manager John Niziolek. The company started operating in late 1993 with 20 styles of beer marketed under the Blue Ridge label.

With a $4.8 million public stock offering in March 1996 and help from the state, the company built a $7 million plant in Wedgewood Business Park south of Frederick and predicted profitability within a year. The company also shook things up when it produced Hempen Ale, a brew mixed with hemp seeds. (The seeds were sterilized to remove any trace of tetrahydrocannabinol, the psychoactive agent in marijuana.)

In 1998, the company bought out Brimstone Brewing Co. of Baltimore and Wild Goose Brewery Inc. in Cambridge, Md., and took over their brands.

But by 1999, having expanded too fast, the company was hunting for a buyer to pump more money into the venture. Into the mix stepped C. David Snyder, a high-tech entrepreneur from Cleveland with lots of cash and a taste for full-bodied beer, according to Dottore.

Snyder, who was smitten with the taste of Crooked River beer, was looking for a new brewery. He created Snyder International Brewing Group and bought control of the Frederick company, which then began producing its own labels as well as Little Kings Cream Ale, Hudy Delight, Christian Moerlain and other products. But the losses continued to mount, according to Dottore, company officials and filings with the SEC.

Snyder dreamed of building a new Anheuser-Busch, Dottore said, and spent lavishly on executive talent to do it. He brought in people who had worked for Rolling Rock, Corona and other brands. But the company had too much plant and paid too much for everything, especially personnel, Dottore said.

“There used to be six vice presidents over me. And they were all in Cleveland,” said Andrew Tveekrem, the plant’s brewmaster.

Snyder’s attorney, Michael Cheselka, initially agreed to an interview but did not return several telephone calls.

In 1996, the company entered into a complex, multiyear agreement with the county to hook water and sewer pipes up to the new plant and supply it with water. The payments were to be distributed evenly over a period of years. And the amount due was to be adjusted based on the amount of water used by the plant. Initially, the company paid $134,784, or $1,800 per tap.

But after a series of public meetings, the county raised the fees for all users to bring them closer to true costs. In 2002, the county calculated the plant’s use with more than 104 taps at $10,300 each.

Mary K. Whitmer, a lawyer working with Dottore, said the company did not attempt to negotiate with the county until it was too late. “Apparently, this all walked by the owners of this facility,” she said.

Today, the company owes more than $1.1 million in delinquent property taxes and water and sewer fees, said James Babb, the county’s acting treasurer. He said the brewery has not made a payment since May 13, 2002.

That’s business in a free market, said Thompson, the board of county commissioners president.

“Businesses who receive a subsidy run the risk that the subsidy will come to an end,” he said.

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