Escrow Agreement

Exhibit 10.5


EXECUTION COPY
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ESCROW AGREEMENT
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This Escrow Agreement (this "Agreement") is made and entered into this 24th day of August, 1999 (the "Effective Date"), by and among Frederick Brewing Co., a Maryland corporation (the "Company"), Key Trust Company, N.A. (the "Escrow Agent"), Kevin Brannon ("Brannon") and Marjorie McGinnis ("McGinnis") (Brannon and McGinnis, together, are the "Consultants").


Recitals
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A. The Company and Brannon have entered into a Transition Agreement, dated as of August 24, 1999 (the "Brannon Transition Agreement"), attached hereto as Exhibit A.


B. The Company and McGinnis have entered into a Transition Agreement, dated as of August 24, 1999, (the "McGinnis Transition Agreement"), attached hereto as Exhibit B (the Brannon Transition Agreement and the McGinnis Transition Agreement are, collectively, the "Transition Agreements").


C. Capitalized terms used in this Agreement but not defined are used in this Agreement as defined in the Transition Agreements.


D. In connection with the Transition Agreements, the Company and the Consultants have agreed that the aggregate sum of $295,000 (as decreased by any disbursements or losses on investments, the "Escrow Fund"), $150,000 with respect to Brannon under the Brannon Transition Agreement (as decreased by any disbursements or losses on investments, the "Brannon Escrow Fund") and $145,000 with respect to McGinnis under the McGinnis Transition Agreement (as decreased by any disbursements or losses on investments, the "McGinnis Escrow Fund"), shall be deposited by the Company with the Escrow Agent to be held and disbursed by the Escrow Agent subject to the terms and conditions set forth in this Agreement.


NOW THEREFORE, in consideration of the foregoing and of the mutual covenants set forth in this Agreement, the parties to this Agreement agree as follows:


1. Appointment of Escrow Agent. Company and Consultants hereby appoint and designate the Escrow Agent as the escrow agent for the purposes set forth in this Agreement, and the Escrow Agent hereby accepts such appointment under the terms and conditions set forth in this Agreement. Notwithstanding the references in this Agreement to the Transition Agreements, Company and Consultants acknowledge that the Escrow Agent is not a party to either of the Transition Agreements for any purpose and is not responsible for the interpretation or enforcement of such Transition Agreements.


2. Establishment of Escrow. Upon the Effective Date, Company shall deposit the Escrow Fund with the Escrow Agent. The Escrow Agent shall hold and, subject to the terms



and conditions of this Agreement, disburse the Escrow Fund as permitted by Section 4.2 of this Agreement in accordance with the terms and conditions of this Agreement. Any and all income earned on the Escrow Fund will not be deemed to become part of the Escrow Fund and must be disbursed directly to Company in accordance with Section 4.3 of this Agreement.


3. Investment of Funds. Except as the Company and the Consultants may from time to time jointly instruct the Escrow Agent in writing, the Escrow Fund will be invested from time to time, to the extent possible, in United States Treasury bills having a remaining maturity of 90 days or less and repurchase obligations secured by such United States Treasury Bills (or an investment fund maintained by Escrow Agent for the purpose of investing in such securities), with any remainder being deposited and maintained in a money market deposit account, namely the Victory U.S. Government Obligation Money Market Fund, with Escrow Agent, until disbursement of the entire Escrow Fund. The Escrow Agent is authorized to liquidate in accordance with its customary procedures any portion of the Escrow Fund consisting of investments to provide for payments required to be made under this Agreement. Escrow Agent shall provide Company with a written report, at least once a quarter, detailing the investment activity in, and the performance of, the Escrow Fund ("Income Report")


4. Escrow Claims and Distributions.


4.1 Claims for Losses. (a) From and after the Effective Date, the Company shall be entitled to reimbursement out of the Escrow Fund for any and all liabilities, damages, costs, attorneys' fees and other expenses incurred by the Company as a result of any breach by a Consultant of his or her Transition Agreement.


(b) If the Company desires to assert a claim for reimbursement pursuant to Section 4.1 (a) of this Agreement (a "Claim"), the Company shall deliver a certificate signed by an officer of the Company (a "Claim Notice") to Escrow Agent and the relevant Consultant specifying in reasonable detail the nature and dollar amount of such Claim. Company may make more than one claim with respect to any underlying set of facts. The Company shall provide to the Consultant against whom a Claim is asserted (the "Claimant") as promptly as practical thereafter all information and documentation reasonably requested by such Claimant to verify the Claim asserted. If the Claimant objects to the Claim, Claimant shall, within the 30 days of receiving such Claim Notice, deliver to Company and Escrow Agent a written notice to such effect (an "Objection Notice"), and Company and Claimant shall, within the 30-day period beginning on the date of receipt by Company of such Objection Notice (the "Objection Period"), attempt in good faith to agree upon the rights of the respective parties with respect to such Claim. If during the Objection Period, the Company and the Claimant reach an agreement on their respective rights with respect to the Claim, the Company and the Claimant shall promptly prepare and sign a memorandum setting forth such agreement (a "Memorandum Agreement"). If no agreement is reached, at the end of the Objection Period, the Company may commence a cause of action in any court having competent jurisdiction over claims under this Agreement with respect to the Brannon Escrow Fund and/or the McGinnis Escrow Fund, as the case may be. For purposes of this Agreement, the amounts set forth in (i) Claims specified in any Claim Notice to which the Claimant has not objected by delivering an Objection Notice to Company and the Escrow Agent within 30 days after Claimant's receipt of such Claim Notice, (ii) Claims covered by a Memorandum of Agreement and (iii) Claims, the validity and amount of which have been


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determined by a final, non-appealable judgment by a court of competent jurisdiction (a "Valid Judgment") are, collectively, the "Reimbursement Amounts."


4.2. Escrow Funds Distribution. (a) If Company gives notice to the Claimant and the Escrow Agent in the form attached hereto as Exhibit C (the "Payment Request") certifying that a Reimbursement Amount has been determined in accordance with Section 4.1(b) and specifying the dollar amount payable to Company, then the Escrow Agent promptly shall pay to Company and/or the McGinnis Escrow Fund, as the case may be, from the Escrow Fund in immediately available funds to an account specified by Company the lesser of (i) such Reimbursement Amount and (ii) the aggregate amount of the Brannon Escrow Fund and/or the McGinnis Escrow Fund, as the case may be.


(b) If Company, on the one hand, and Brannon or McGinnis, as the case may be, on the other hand, give notice in the form attached hereto as Exhibit D (the "Termination Notice") to Escrow Agent that the Brannon Transition Agreement or the McGinnis Transition Agreement, as the case may be, has expired or has been terminated pursuant to Section 6.1(a) or 6.1(d) of their respective Transition Agreement, then:


(i) in the case of Brannon, promptly after the Escrow Agent's receipt of the Termination Notice or if such date is prior to January 1, 2000, then on January 4, 2000 (the "First Payout Date"), the Escrow Agent shall distribute to Brannon an amount equal to $100,000 in cash less (X) any Reimbursement Amounts previously paid to Company pursuant to a Payment Request relating to Brannon and (Y) any Holdback Amounts relating to Brannon; or


(ii) in the case of McGinnis, promptly after the First Payout Date, the Escrow Agent shall distribute to McGinnis an amount equal to $95,000 in cash less (X) any Reimbursement Amounts previously paid to Company pursuant to a Payment Request relating to McGinnis and (Y) any Holdback Amounts relating to McGinnis; or and


(c) Six months after the date of the Escrow Agent's receipt of the Termination Notice with respect to the relevant Consultant, or if such date is prior to January 1, 2001, then on January 4, 2001 (the "Second Payout Date"), the Escrow Agent shall distribute to such Consultant an amount equal to $50,000 in cash less (X) any Reimbursement Amounts previously paid to Company pursuant to a Payment Request relating to such Consultant and not adjusted for on the First Payout Date and (Y) any Holdback Amounts. For purposes of this Agreement, "Holdback Amount" means, with respect to the First Payout Date and the Second Payout Date, the aggregate amount, if any, of (A) Claims specified in any Claim Notice delivered on or prior to the First Payout Date or the Second Payout Date, as the case may be, which Claims have not yet been determined to be Reimbursement Amounts pursuant to clause (i) or (ii) of the definition thereof or the validity and amount of which has not yet been determined to be a Valid Judgment as contemplated by clause (iii) of the definition of Reimbursement Amount and (B) all Reimbursement Amounts with respect to which, Company has not received payment as of the First Payout Date or the Second Payout Date, as the case may be.


(d) If Company and Brannon or Company and McGinnis, as the case may be, give notice in the form set forth on Exhibit E ("Holdback Notice"), specifying that all or a portion of any Holdback Amount has been determined not to be a Reimbursement Amount, then the Escrow Agent promptly shall pay such amount to Brannon or McGinnis, as the case may be.


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(e) Escrow Agent will not be responsible for determining or calculating amount(s) to be disbursed from the Escrow Fund. Escrow Agent will disburse amount(s) only upon receipt of written directions from Company and/or Consultants.


4.3 Income Distribution. Promptly after the end of each fiscal quarter falling within the term of this Agreement (e.g., September 30, December 31, March 31 and June 30), the Escrow Agent shall distribute all income earned on the Escrow Fund to Company in immediately available funds to the account specified by Company along with the Income Report; provided that, any remaining income earned on the Escrow Fund promptly must be disbursed to Company on the later of (a) the Second Payout Date or (b) the payment of any Holdback Amounts pursuant to Section 4.2.


4.4 Termination. This Escrow Agreement terminates when the Escrow Fund has been fully distributed pursuant to Section 4.


5. Escrow Agent Compensation. The Escrow Agent is to be compensated in accordance with the fee schedule attached to this Agreement as Exhibit F for the performance of its duties under this Agreement (the "Escrow Fees").


6. Obligations and Liabilities of the Escrow Agent. (a) The Escrow Agent has no duties or obligations other than those specifically set forth in this Agreement.


(b) The Escrow Agent is not responsible in any manner whatsoever for any failure or inability of any party other than the Escrow Agent to honor any of the provisions of this Agreement.


(c) The Escrow Agent is fully protected in acting or refraining from acting upon and relying upon any written notice, direction, request, waiver, consent, receipt or other paper or document that the Escrow Agent in good faith reasonably believes to have been signed or presented by the proper party or parties.


(d) The Escrow Agent will not be liable for any error of judgment or for any act done or step taken or omitted by it in good faith or for any mistake in fact or law or for anything that it may do or refrain from doing in connection with this Agreement, except for its own negligence, willful misconduct or act of bad faith.


(e) The Escrow Agent may consult with, and obtain advice from, legal counsel in the event of any dispute or construction of any of the provisions of this Agreement or its duties under this Agreement, and the Escrow Agent will incur no liability and will be fully protected in acting or refraining from acting in good faith in accordance with the opinion and instruction of such counsel.


7. Automatic Succession; Resignation and Removal of Escrow Agent. (a) Any company into which the Escrow Agent may be merged or with which it may be consolidated or any company to whom Escrow Agent may transfer a substantial amount of its global escrow business, will be the successor to the Escrow Agent without the execution or filing of any paper or further act on the part of any parties, notwithstanding anything in this Agreement to the contrary.


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(b) The Escrow Agent may resign as Escrow Agent at any time, with or without cause, by giving written notice to Company and Consultants, such resignation to be effective 30 calendar days following the date such notice is given. In addition, Company and Consultants jointly may remove the Escrow Agent as escrow agent at any time with or without cause by an instrument (which may be executed in counterparts), given to the Escrow Agent, which instrument must designate the effective date of such removal. If any such resignation or removal occurs, a successor escrow agent will be appointed by Company and Consultants. Any such successor escrow agent shall deliver to Company and Consultants a written instrument accepting such appointment and upon such delivery it will succeed to all of the rights and duties of the escrow agent under this Agreement and will be entitled to receive the Escrow Fund.


(c) If Company and Consultants are unable to agree upon a successor escrow agent or have failed to appoint a successor escrow agent prior to the expiration of 30 calendar days following the date of the notice of resignation or removal, the then acting escrow agent shall petition any court of competent jurisdiction for the appointment of a successor escrow agent or other appropriate relief; and any such resulting appointment will be binding upon all of the parties to the Agreement.


(d) Upon acknowledgment by any successor escrow agent of the receipt of the Escrow Fund, the then replaced escrow agent will be fully relieved of all duties, responsibilities and obligations under this Agreement except with respect to actions previously taken or omitted by such Escrow Agent.


8. Indemnification of Escrow Agent. In partial consideration of the Escrow Agent's acceptance of this appointment, Company and Consultants jointly and severally shall indemnify and hold the Escrow Agent harmless as to any liability incurred by it to any Person by reason of its having accepted such appointment or in carrying out the terms of this Agreement and shall reimburse the Escrow Agent for all of its reasonable costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, incurred by reason of any matter as to which an indemnity is paid. Notwithstanding the foregoing, no indemnity need be paid in case of the Escrow Agent's gross negligence, willful misconduct or willful breach of this Agreement.


9. Notices. All notices must be in writing and will be deemed to have been duly given when delivered in person or when dispatched by facsimile transfer (confirmed in writing by mail simultaneously dispatched) or one business day after having been dispatched by a nationally recognized overnight courier service to the appropriate party at the following address:


(a) If to Company:


Frederick Brewing Co.
4607 Wedgewood Boulevard
Frederick, Maryland 21703
Telecopy No: (301)694-2971
Attention: C. David Snyder


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with a copy to:


Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
Attention: Patrick J. Leddy
Telecopy No: (216) 579-0212


(b) If to Brannon:


Kevin E. Brannon
125 W. 2nd Street
Frederick, Maryland 21701


(c) If to McGinnis:


Marjorie A. McGinnis
125 W. 2nd Street
Frederick, Maryland 21701


(d) If to Escrow Agent:


Key Trust Company, N.A.
127 Public Square - 15th Floor
Cleveland, OH 44114
Attn: Terrence J. Stone
Escrow Dept.
Phone: (216) 689-3226
Telecopy No: (216) 689-3777


11. Binding Effect. This Agreement is binding and inures to the benefit of the parties and their respective successors and assigns.


12. Assignment. This Agreement may not be assigned or transferred except upon a written agreement executed by each of the parties to this Agreement.


13. Third Party Beneficiaries. Nothing in this Agreement is intended or will be construed to confer on any Person other than the parties or their successors and assigns any rights or benefits under this Agreement.


14. Headings. The headings in this Agreement are intended solely for the convenience of reference and will be given no effect in the construction or interpretation of this Agreement.


15. Exhibits. The Exhibits are deemed to be a part of this Agreement.


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16. Counterparts. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same document.


17. Governing Law. This Agreement must be governed by and construed under Ohio law, without regard to conflict of laws principles.


18. Amendment. No amendment of this Agreement is binding unless made in a written instrument that specifically refers to this Agreement and is signed by Company, Consultants and the Escrow Agent.


19. Entire Agreement. This Agreement contains the entire understanding among the parties and supersedes any prior understanding and agreements between them, in each case respecting this subject matter. There are no representations, agreements or understandings, oral or written, between or among the parties to this Agreement relating to the subject matter of this Agreement that are not fully expressed in this Agreement.


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IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND, Company, the Escrow Agent and Consultants have executed this Agreement as of the Effective Date.


FREDERICK BREWING CO.


By: /s/ C. David Snyder
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Name: C. David Snyder
Title: Chairman and CEO


Key Trust Company, N.A., as Escrow Agent


By: /s/ Terrence J. Stone
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Name Terrence J. Stone
Title: Vice President


/s/ Kevin E. Brannon
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Kevin E. Brannon


/s/ Marjorie McGinnis
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Marjorie McGinnis


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EXHIBIT A
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BRANNON TRANSITION AGREEMENT


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EXECUTION COPY
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TRANSITION AGREEMENT
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THIS TRANSITION AGREEMENT (this "Agreement"), is entered into as of this 24th day of August, 1999 (the "Effective Date"), by and between KEVIN E. BRANNON, an individual (the "Consultant"), and Frederick Brewing Co., a Maryland corporation (the "Company").


WHEREAS, the Company engages in the business of operating a brewery, which manufactures, packages and sells malt and non-malt based beverages (the "Company's Business").


WHEREAS, the Company wishes to retain Consultant to perform certain consulting and transition services for the Company and to advise the Company with respect to the Company's Business under the terms and conditions set forth in this Agreement.


WHEREAS, the Consultant is currently employed by the Company pursuant to an Employment Agreement, dated December 9, 1995 ("1995 Agreement"), and it is the desire of the Consultant and the Company that this Agreement supersede in its entirety and replace the 1995 Agreement, as of the date first written above.


NOW, THEREFORE, in consideration of the premises and mutual agreements set forth below, and upon the terms and subject to the conditions contained in this Agreement, the Consultant and the Company agree as follows:


Section 1. Definitions.


1.1 Affiliates. "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified or, directly or indirectly, is related to or otherwise associated with any such Person.


1.2 Company. "Company" includes the Company's subsidiaries, divisions and Affiliates, including, without limitation, Crooked River Brewing Company, LLC ("Crooked River"), Royal Brewing, L.L.C. ("Royal"), and Snyder International Brewing Group, LLC, as they may exist from time to time.


1.3 Confidential Information. "Confidential Information" means information that constitutes a trade secret under the Uniform Trade Secrets Act or that otherwise is not generally known to the public and that is developed, owned or obtained by the Company, including, without limitation, information developed by Consultant in the course of performing service to the Company, the Company's technical information, marketing and financial information, customer and prospective customer information, sales information and product and production information.


1.4 Person. "Person" means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including, without limitation,


a government or political subdivision or an agency or instrumentality of a government or political subdivision.


1.5 Restricted Territory. "Restricted Territory" means:


(a) the geographic area within a 100 mile radius of the Company's brewery in Frederick, Maryland;


(b) the geographic area within a 100 mile radius of Crooked River's brewery in Cleveland, Ohio; and


(c) the geographic area within a 100 mile radius of Royal's operations in Cincinnati, Ohio.


1.6 Work Product. "Work Product" means any and all promotional and advertising materials, catalogs, brochures, plans, customer lists, supplier lists, manuals, handbooks, equipment and parts lists, dealer and distributor lists, inventions, discoveries, improvements, trade secrets, secret processes and any technology, know-how or intellectual property made or developed or conceived of by Consultant, in whole or in part, alone or with others, which results from any work he may do for, or at the request of, the Company or which relates to the business, operations, activities, research, investigations or obligations of the Company.


Section 2. Retention, Services and Compensation.


2.1 Term. The Consultant shall provide the Consulting Services (as defined in Section 2.2) to the Company for a term of six months beginning on the Effective Date of this Agreement, unless sooner terminated pursuant to the provisions of this Agreement (the "Term").


2.2. Consulting Services


(a) Consulting Services. The Company retains Consultant to furnish the Company with consulting services ("Consulting Services") as designated by (i) the Chief Executive Officer of the Company or (ii) any other Person designated by the board of directors of the Company. Consultant shall perform all Consulting Services on behalf of the Company in a timely, diligent and professional manner in accordance with the highest commercial industry standards.


(b) Schedule and Location. Consultant will perform the Consulting Services on a full-time basis. The Consultant shall render the Consulting Services during the Term in accordance with such policies as the Company may establish. The Consultant shall provide the Consulting Services in Frederick, Maryland and may travel to such other places in the United States and elsewhere as the Chief Executive Officer or the Board of Directors of the Company so directs from time to time as needed.


(c) Exclusivity. Without limiting the generality of the foregoing, during the Term, the Consultant shall not, without the prior written approval of the Board of


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Directors of the Company, render services of a business, professional or commercial nature for compensation or otherwise to any Person if the rendering of such services would interfere with the Consultant performing the Consulting Services hereunder.


(d) Documentation. In connection with the provision of Consulting Services, Consultant shall provide to the Company, upon the Company's request: (i) any and all information, documents and other materials relating to the Consulting Services; and (ii) oral or written reports regarding the progress of the Consulting Services rendered.


(e) No Use of Others' Rights. Consultant represents and warrants that Consultant can perform the Consulting Services, independent of any confidential and proprietary information owned by a third party, including, without limitation, patents, copyrights, trademarks, trade secrets, service marks, trade names, slogans, logos, copyrights, designs, sketches, ideas, persona, images (e.g., photographs, computerized graphics, etc.) and/or publicity rights.


2.3 Consulting Fee; Expense Reimbursement. During the Term, the Company shall pay Consultant an aggregate amount of $63,000, in regular installments in accordance with the Company's employee payroll policies in effect from time to time. The Company shall r ...