The deteriorating political situation in Madagascar has led Novel Denim Holdings Limited to close both its woven and knit operations on the island and transfer its woven production to Mauritius and South Africa.


For the third quarter of fiscal 2002, Madagascar generated approximately 20 per cent of Novel Denim's total sales and operated at a loss.


"The political situation in Madagascar has deteriorated since February and has created a number of significant operational difficulties," explained Mr KC Chao, CEO of Novel Denim. "Our factories are facing severe fuel shortages and production delays due to road blockages, limited air freight and substantial customer discounts for late deliveries.


"In February we expected that the situation would improve and that all the orders we had on hand would be completed in Madagascar. However, because of the constraints we were unable to ship many of the orders and have now decided to close our Madagascar operations over the next three months, including our knitted shirts business."


Novel Denim supplies denim, chino, twill and knitted garments, as well as a broad range of woven and printed fabrics, to retailers, wholesalers and manufacturers in the United States and Europe.


The company expects to report an unbudgeted operating loss from its Madagascar operations during the fourth quarter of approximately $1.5 million. In addition, the closure of the woven and knit operations will result in a non-recurring charge of approximately $3.7 million relating to air transportation costs, discounts given to customers for late deliveries and the impairment of inventory associated with orders that cannot be completed.


Novel Denim said it has also experienced production disruptions caused by a labour dispute involving some expatriate employees working in Mauritius. All but a few have now returned to work and the factories are running at normal production levels.


The company employs approximately 6,000 people in Mauritius. As a result of the lost production time, expects to incur a shortfall versus planned garment shipments from Mauritius during March of 25-40 per cent.


A loss of between $0.20 and $0.25 per share is expected for the fourth quarter, before the $3.7 million one-time charge associated with closing the Madagascar operations.


Novel Denim says it is currently working with customers on new delivery schedules and expects to achieve diluted earnings per share of between $1.00 and $1.20 in fiscal 2003.


Despite these production disruptions the company says it remains committed to its strategy of geographic and product diversification.