Pyramid Breweries has fallen into the red in its first quarter as a result of cost increases, in part due to a mediation settlement over an employee break time dispute.

The craft brewer said that it was reporting a net loss of US$2.1m for the quarter, compared to net income of $1.3m, in the first quarter a year ago. Gross sales for the quarter were $11.7m, a 7% increase from gross sales for the first quarter of 2007, primarily attributable to pricing increases and increased Pyramid brand volume.

In the quarter, the company recorded a one-time charge of $1.1m, relating to a mediation settlement with a former alehouse employee who alleged that he and other employees in the California alehouses were denied adequate opportunity to take meal and rest breaks as required by California law. "The parties stipulated to class certification for purposes of settlement only," the company said.

Excluding the impact of the mediation settlement, net loss on a pro forma basis for the quarter was a loss of $935,000 compared to a loss of $1.2m excluding a one-time gain from the sale of Thomas Kemper Soda in the first quarter of 2007.

Beer shipments, led by the Pyramid brand family, were up 4% in the first quarter as compared to the same period last year. Alehouse revenue was up 6% in the first quarter 2008 as compared to the same period last year.

"We are starting to make progress and improve our operating performance which is notable given the backdrop of huge cost increases we are facing, and on a pro forma basis we improved our financial performance while lapping a pretty good quarter last year," said CEO, Scott Barnum. "The cost reduction and business planning initiatives we have made are beginning to pay off. We've had a successful installation of our new bottling line filler in Berkeley, which should generate significant efficiencies. Importantly, we've also stabilised our beer volume trends in our core home market of Washington, and are positioned for growth there in the ensuing quarters due in part to our marketing sponsorship with the Seattle Mariners MLB baseball team," he added.

"While we are yet to feel the full effects of the macro economy, which is getting tougher, I am pleased that we are headed in the right direction and we have planned for the business challenges that are ahead," Barnum said. "Our proposed merger with Magic Hat should be a positive for the company and our brands long-term and put the business on a more secure footing for the future."