20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF

THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                         

Commission file number 33-45136

DSG INTERNATIONAL LIMITED

(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of incorporation or organization)

17/F Watson Centre, 16-22 Kung Yip Street, Kwai Chung

Hong Kong

Tel. No. 852-2484-4820

(Address of principal executive office)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each Class	Name of each exchange on which registered
None

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Ordinary Shares, par value

$0.01 per share (“Ordinary Shares”)

(Title of Class)

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Ordinary Shares 6,989,116

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.  x  Yes  ¨  No

Indicate by check mark which financial statement item the registrant has elected to follow.  ¨  Item 17  x  Item 18

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  ¨  Yes  ¨  No

PART I

Item 1.    Identity of Directors, Senior Management and Advisors.

Not applicable.

Item 2.    Offer Statistics and Expected Timetable.

Not applicable.

Item 3.     Key Information.

A.     Selected Financial Data

The information required is contained in the Selected Consolidated Financial Data of the Annual Report to Shareholders, and is incorporated herein by reference.

B.     Capitalization and Indebtedness

The information required is contained in the Consolidated Balance Sheets and Consolidated Statements of Shareholders’ Equity of the Annual Report to Shareholders, and is incorporated herein by reference.

C.    Reasons for the Offer and Use of Proceeds

Not applicable.

D.     Risk Factors

Among the factors that have a direct effect on the results of operations and financial condition of DSG International Limited (the “Company”) are the following:

1.    Raw Material Cost

The overall raw material costs have moderately decreased during year 2001 and the Company’s operating results may be adversely affected by any increases in raw material costs in the future, specifically the cost of the main raw material, fluff wood pulp, which increased moderately in 2000 and may increase moderately in 2002.

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2.    Branded Product Innovation

Patents and other intellectual property rights are an important competitive factor in the disposable diaper market, mostly because of the industry emphasis in product innovations. Patents held by the main competitors could severely limit the Company’s ability to keep up with branded product innovations, by prohibiting the Company from marketing product with comparable features.

3.    Pricing and Volumes

The market position of the Company’s main competitors, The Procter & Gamble Company (“P&G”) and Kimberly-Clark Corporation (“KC”), relative to the Company varies from one geographic area to another; but due to their substantial financial, technical and marketing resources, both of these major manufacturers have the ability to exert significant influence in price and volumes, and gain substantial market share in any of their marketing areas. They have heavily promoted diapers in the multi-pack configuration. These packages offer a lower unit price to the retailer and consumer. It is possible that as a consequence of this strategy, in those geographic markets in which the main competitors have adopted it, the Company may realize lower selling prices and/or lower sales volume.

4.    Increased Cost

On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company’s products in the Asian Pacific and Australian region after December 31, 2000. A similar agreement with P&G was entered into in 1998 relating to the North American region that provides for payments of royalty fees based on a percentage of certain products sold after December 31, 1997 within the North American region.

The Company believes that the royalty being charged by P&G under its respective license agreements is approximately the same royalty that will be paid by its major competitors for similar patent rights. However, these royalties will continue to have an adverse impact on the Company’s future financial condition and results of operations as compared to pre-settlement.

5.    Increased Financial Leverage

As a result of the acquisition of the North American assets of Drypers Corporation, the Company has short and long term debt of $47.9 million, bearing various interest rates as of December 31, 2001.

As a consequence of the incurrence of the Company’s new debt, its principal and interest obligations have increased substantially. The increase in the Company’s financial leverage as described above, could adversely affect the Company’s ability to obtain additional financing for working capital, acquisitions or other purposes and could make the Company more vulnerable to economic crisis in the different geographical markets and to competitive pressures from its main competitors.

As a substantial portion of the Company’s available cash from operations will have to be applied to meet debt service requirements, the Company’s liquidity could be affected as well as its ability to fund capital expenditures.

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Notwithstanding, the Company believes that its cash flow from operations and other sources of liquidity will be adequate to meet its requirements for working capital, capital expenditures, interest payment and scheduled principal payment for the foreseeable future. However, if the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There is no assurance that this additional financing could be obtained. If financing is obtainable, there is no guarantee it could be obtained on favorable terms to the Company.

6.    Litigation Risk

As the Company operates in an industry in which patents are numerous and are enforced vigorously, the Company and its subsidiaries are from time to time involved in legal matters.

In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by the Plaintiffs John M. Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the United States District Court for the Middle District of Georgia. The complaint alleged that the Company, its U.S. subsidiary and certain European suppliers of disposable diaper manufacturing equipment (the “Defendants”) have infringed U.S. Patent No. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers; that the Company and its U.S. subsidiary breached a confidentiality agreement with the Plaintiffs by using certain information relating to the waistband applicator disclosed to them in confidence by the Plaintiffs; and theft by the Defendants of the Plaintiffs’ trade secrets concerning the waistband applicator. On March 20, 2002 the United States District Court for the Middle District of Georgia entered a $4.0 million judgment in favor of the Plaintiffs. On March 29, 2002 an amended final order and judgment was entered by the United States District Court for the Middle District of Georgia awarding the Plaintiffs $10.4 million in actual and increased damages for patent infringement and prejudgment interest on the patent claim. Subsequent to the entering of this final order and judgment, the Company began to negotiate a settlement with the Plaintiffs. On April 9, 2002 the Company entered into a Settlement Agreement with the Plaintiffs. The terms of this Settlement Agreement required the Company to make a lump sum payment of $4.2 million to the Plaintiffs no later than April 18, 2002 to settle all asserted claims in the original lawsuit. The $4.2 million lump sum payment was made to the Plaintiffs on April 17, 2002. On April 18, 2002, the Company along with the Plaintiffs filed a “Stipulated Final Order of Dismissal” dismissing with prejudice both the judgment dated March 20, 2002 and the amended final order and judgment dated March 29, 2002. Effective with the filing of the “Stipulated Final Order of Dismissal”, the R&L lawsuit has been settled and the judgments of March 20th and March 29th have been vacated. The Company has recorded the $4.2 million settlement as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations for the ended December 31, 2001.

Item 4.    Information on the Company.

A.     History and Development of the Company

DSG International Limited, established in Hong Kong in 1973, is one of the world’s leading companies specializing in manufacturing disposable baby diapers, adult incontinence and training pants products, with over twenty-nine years of

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experience in this industry. The Company now operates ten manufacturing facilities in North America, Australia, Asia and Europe with extensive distribution activities around the world.

In 1984, the Company established a manufacturing facility in California through a joint venture with a large French disposable diaper manufacturer, and later that year acquired full ownership of that facility.

In 1987, the Company acquired the U.S. assets of a major private label disposable baby diaper manufacturer which was in bankruptcy, and was thus able to establish a second manufacturing facility at Norcross, Georgia to serve the central, southeastern and northeastern United States. As a result, the Company extended its “FITTI^®” brand into U.S. national distribution.

In 1988, the Company acquired all the assets of an unprofitable private label manufacturer of disposable baby diaper in Australia. Also in 1988, the Company acquired the assets, including brand names, of the unprofitable disposable baby diaper manufacturing division of a major U.K. consumer products company.

In September 1991, the Company opened a new manufacturing facility in Singapore to relieve capacity constraints at its Hong Kong facility and to better service South East Asian markets.

On March 6, 1992, the Company commenced the initial public offering in the United States of its Ordinary Shares.

In July 1993, the Company acquired all the assets of a private label disposable baby diaper and feminine napkin manufacturing division of a Swiss company. In September 1993, the Company acquired an unprofitable private label disposable baby diaper and feminine napkin manufacturing company in Canada. At the end of December 1993, the Company further acquired an unprofitable branded product disposable baby diaper manufacturer in the United Kingdom. The Company moved its manufacturing plant in Norcross, Georgia to Duluth, Georgia, where the Company further expanded its production capacity in the U.S.

In May 1994, the Company formed a joint venture company with its former distributor in Thailand. The joint venture acquired the entire capital of the distributor’s company and built a plant in Bangkok, Thailand to manufacture baby diapers and adult incontinence products. The Company currently holds an 80% interest in the joint venture company. In August 1994, the Company acquired a manufacturer of adult incontinence products in Switzerland. In November 1994, the Company opened its plant in Zhongshan, Guangdong in the People’s Republic of China.

In April 1995, the Company’s management group, led by the Chairman, Brandon Wang, and two other equity investors proposed a going private transaction to which the holders of all the outstanding shares of the Company held by the public would receive $19 per share. On May 26, 1995, after a review by a Special Committee of independent directors appointed to consider and advise on the proposal, the Board of Directors approved the going private transaction at a price of $19.25 per share and authorized the Company to enter into a merger agreement with corporations that had been formed by the management group. On July 7, 1995 the merger agreement that had been entered into as of May 26, 1995 to effect the going private transaction was terminated because there was no reasonable possibility that certain conditions of the merger agreement could be satisfied within the time period stipulated in the agreement as there was no reasonable prospect that

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financing would be available on satisfactory terms within such time period.

In September 1995, the Company opened a new plant in Bangkok, Thailand. In October 1995, the Company established a wholly owned subsidiary in Malaysia to assist with the marketing and distribution of the Company’s products in Malaysia.

In November 1996, the Company invited its public shareholders to tender their shares to the Company at prices not greater than $14.50 or less than $12.75 per share. The tender offer closed on December 13, 1996 and the Company purchased 1,003,641 shares from the public shareholders at a price of $14.50 per share.

In April 1997, the Company acquired the entire share capital of an adult incontinence and disposable baby diaper manufacturer in Wisconsin, United States, and the manufacturing assets of a company in the Netherlands and its related distribution company in Belgium.

In June 1997, the Company entered into a joint venture agreement with an Indonesian distributor to establish a manufacturing facility in Cikande, Indonesia to manufacture disposable baby diapers. The Company owns a 60% interest in the joint venture company.

During 1997, the Company closed its manufacturing operations in Canada, California and Singapore.

In March 1998, the Company closed its operations in Canada and later on in December, the factory facilities were sold. In November 1998, the Company opened its joint venture manufacturing facilities in Indonesia.

In March 1999, the Company sold its private label baby diaper business in Switzerland. In April and June 1999, the Company established two wholly owned subsidiaries in the United Kingdom and Germany to assist the marketing and distribution of the Company’s adult incontinence products in Europe. In June 1999, the Company opened its new plant and commenced its baby disposable diaper production in Selangor, Malaysia.

In October 2000, the Company sold its adult incontinence operation in Switzerland and its sales office in Germany.

In March 2001, the Company acquired all the U.S. assets including the “DRYPERS^®” brand name and the manufacturing facilities in Marion, Ohio and Vancouver, Washington of a major U.S. disposable baby diaper manufacturer which was in bankruptcy, and was thus able to substantially expand its sales in the U.S.

In November 2001, the Company announced the closure of its manufacturing facility in Duluth, Georgia. Production at this facility was discontinued on January 7, 2002. The Company currently has this facility for sale and it is categorized as an “Asset held for sale” on its consolidated balance sheets.

In March 2002, the Company closed its sales and distribution company in Belgium.

DSG International Limited is incorporated in the British Virgin Islands and has its principal executive office at 17/F

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Watson Centre, 16-22 Kung Yip Street, Kwai Chung, Hong Kong. Its telephone number is (852) 2484-4820.

CAPITAL EXPENDITURES, INVESTMENT AND DIVESTITURES

Principal capital expenditures, investment and divestitures over the last three years include the following:

	2001			2000		1999
Property, plant and equipment (net)	$	9,847,000		$	5,947,000	$	6,097,000
Investment in and advances to subsidiaries	$	(314,000	)	$	5,883,000	$	5,713,000
Recoupment of investment in subsidiaries	$	23,103,000		$	7,068,000	$	3,844,000

B.     Business Overview

1.    General

The Company manufactures and markets disposable baby diapers, training pants and adult incontinence products primarily under its own brand names, which include “DRYPERS^®”, “FITTI^®”, “PET PET^®”, “COSIES^®”, “COSIFITS^®”, “BABY LOVE^®”, “BABYJOY^®”, “LULLABY^®”, “CARES^®”, “CUDDLES^®”, “SUPER FAN-NIES^®”, “DISPO 123^™”, “HANDY^™”, “CERTAINTY^®” and “MERIT^®”. The “DRYPERS^®” brand was acquired in March 2001. The Company also manufactures and markets disposable baby diapers, adult incontinence and training pants products under private labels. The Company’s products are sold internationally, with its ten manufacturing facilities being in Hong Kong, the United States, Australia, the United Kingdom, the People’s Republic of China (“PRC”), Thailand, Indonesia and Malaysia.

The Company manufactures and distributes branded and private label disposable baby diapers, adult incontinence products, training pants and youth pants for the North American markets with its operations in Oconto Falls, Wisconsin, Marion, Ohio and Vancouver, Washington. With a strong regional presence, the Company’s “FITTI^®” and “CUDDLES^®” brands are some of the best selling brands of disposable baby diapers (excluding private labels) in many key markets. The Company’s newly acquired “DRYPERS^®” brand is the fourth best selling national brand of disposable baby diapers and training pants products in the North American market. The Company’s sales in adult incontinence products, training pants and youth pants have grown in their significance in the Company’s North American markets.

In Australia, the Company is the second largest manufacturer of disposable baby diapers and the leading manufacturer of private label brands holding an estimated 26% unit volume market share. The Australian market has three major retail sectors: grocery, variety and pharmacy. The Company supplies its own brands of both premium and economy quality to all three market sectors and markets disposable baby diapers under retail chain private labels. The Company also distributes adult incontinence products into the Australian institutional market sector. In 2001, the Company’s overall local currency sales grew by 13.6%, with strong growth experienced in both disposable baby diaper products and adult incontinence products.

In the PRC, the Company estimated that the baby diapers usage rate is around 3% and the market size is ever

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growing. The Company’s leading brands, “FITTI^®” and “PET PET^®”, are well established in most of the major cities including Shenzhen, Guangzhou, Shanghai and Beijing; and the Company’s economy brands, “BABY LOVE^®” and “BABYJOY^®”, expanded rapidly in the eastern and northeastern part of the PRC. The Company estimated that it has a 14% market share in the PRC. In the Guangdong province, the major southern province of the PRC, the Company has a well-established sales and distribution network that extends throughout the province and the Company believes that it is the market leader in the province, with around 30% market share. The Company established a sales office in Guangzhou in 2001 to further strengthen its position in the Guangdong province. In the northern part of the PRC, the Company’s sales operation in Beijing established direct sales and distribution in the Beijing and Tianjin markets and expanded its wholesale network into other northern and northeastern provinces such as Shandong, Shanxi, Hebei, Shaanxi, Jilin and Liaoning. In the eastern part of the PRC such as Fujian, Zhejiang, Jiangsu provinces, the Company established a strong sales and distribution network by working with a number of reputable territorial wholesalers and the Company is optimistic about the growth opportunity in these provinces. In Shanghai Municipal, the Company established its direct sales and distribution network with major foreign invested hypermarkets and state-owned supermarket chains. The Company also set up a nationwide sales and marketing center in Shanghai to focus and keep pace with the market development in the PRC. Overall, the Company expanded its sales and distribution networks in over 40 major cities in the PRC and continues its effort in exploring the potential of the PRC markets. In Hong Kong, the disposable diaper market remained stagnant due to a low birth rate, however, the Company’s sales in 2001 increased by a single digit percentage over 2000 and maintained its second place position in the market with an estimated market share of 20%.

In Singapore, the disposable diaper market has improved due to better economic conditions in the first half of the year and increased market penetration. The Company’s sales increased by almost 40% over the Company’s sales in 2000. In Malaysia, the Company recorded another year of strong volume growth of 35% over the volume in 2000 and the Company expects its sales will continue to grow recording further gains in market share. In Indonesia, the Company’s sales volume grew by 37% compared with the sales volume in 2000 as a result of improvement of the nation’s economy. The Company believes that it continues to maintain its leadership position and that its sales will continue an upward trend as the nation’s economy and political stability improves further. In Thailand, the Company’s “BABY LOVE^®” brand, gained a significant market share in the economy sector, and the Company’s volume grew by 47% over the volume in 2000 despite the intense competition in the market.

The Company manufactures and distributes adult incontinence products through its operation in Thailand to all other markets in Asia under its “DISPO 123^™”, “HANDY^™” and “CERTAINTY^™” brands. The Company believes that it is one of the market leaders in the adult incontinence market in Thailand. In other Asian markets, the sales of adult incontinence products have increased steadily over the years and the Company’s brands are well established both in the retail and institutional sectors. The Company remains optimistic about the market growth potential of the adult incontinence market in the Asian Pacific region.

In Europe, the Company scaled down its operations in 2001. The Company’s remaining operation in the United Kingdom continues to market its branded products to wholesalers and grocery retail accounts. The Company also manufactures private label disposable diapers on a selective basis.

The Company’s marketing strategy is to provide retailers and wholesalers with quality, value-oriented products

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which offer good profit margins, combined with a high level of service, rather than attempting to mass market its products in competition with the industry leaders. The Company believes that its attention to raw material costs and manufacturing efficiency, combined with careful control of advertising and promotional costs, enables it to produce and market value-oriented products at competitive prices.

The Company’s growth strategy is to target its branded products at selected sectors of mature markets, such as the United States, and to take a broader marketing approach in less developed markets where there is a high rate of growth in disposable diaper usage. The Company believes that its manufacturing facilities in Asia and Australia will enable it to participate in the expected growth of those markets. In the past, the Company has expanded its business into new markets by acquiring the assets of disposable baby diaper and adult incontinence manufacturers. The Company also expands through establishing its own manufacturing facilities in emerging markets which offer significant growth potential, such as the Company’s facilities in the PRC, Thailand, Indonesia and Malaysia, which were opened in 1994, 1995, 1998 and 1999, respectively.

The Company’s principal raw materials are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene backsheets, cloth-like breathable backsheets, polypropylene non-woven liners, adhesive tapes, mechanical closure tapes, hot melt adhesive, elastic, aloe vera and tissue. The cost of materials increased in 2000 and decreased slightly in 2001. Raw materials account for about three-quarters of the cost of goods sold.

Disposable diapers are designed and marketed with two basic objectives in mind : (1) to afford parents of infants up to two and one-half years of age the convenience of diapers which are disposed of after one use and (2) to reduce the risk of chapping (“diaper rash”) which often occurs when moisture from a soiled diaper remains in contact with the baby’s skin. The basic concept of most disposable diapers on the market is the same : to allow moisture to pass through a soft inner layer which is in contact with the baby’s skin into a highly absorbent inner core, from which the moisture is prevented from escaping by an outer moisture-proof backsheet. There are significant differences in quality among the various disposable diapers currently on the market. The most important quality features of disposable diapers are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure the diaper firmly without causing discomfort to the baby. Other features, such as innovative fastenings, attractive designs, extra-dry sub-layer, gender specific absorbent cores, stand-up leg gathers, cloth-like breathable backsheets, mechanical closure tapes, elastic waistband, aloe vera and packaging help to differentiate products from one another.

Adult incontinence products are designed for the convenience of males and females having various degrees of incontinence. The basic concept of most adult incontinence products is to prevent leakage of urine and faeces by absorbing the moisture into a highly absorbent inner core and retaining the soiled contents within an outer moisture proof backsheet. Similar to disposable diapers, the most important quality features of adult incontinence products are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure firmly without causing discomfort to the user. The absorption media for adult incontinence products are fluff wood pulp and super absorbent polymer. Other features, such as wetness indicator, stand-up leg gathers, elastic waistband, frontal tape closure system and packaging help to differentiate products from one another.

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The Company believes that there is a high potential for adult incontinence products due to the aging populations of the industrialized and developed countries. The Company entered the adult incontinence markets in North America, Europe and Australia, and established and acquired operations in Switzerland, Thailand and Wisconsin in the United States in 1994, 1995 and 1997, respectively. In October 2000, the Company sold its adult incontinence operation in Switzerland and ceased manufacturing adult incontinence products in Europe. The Company remains optimistic in its adult incontinence business in the markets in North America, Asia and Australia. The Company introduces adult incontinence products into its markets in a manner consistent with its niche market strategy. The Company believes that the key to successful marketing of this type of product is the high and prompt level of service from the manufacturer and distributor, regular contact with institutions to ensure proper knowledge of the products, and providing a range of products of high quality and performance.

2.    Geographic Segment and Product Category Information

The following table sets forth the percentage of the Company’s net sales by geographic market and product category activity:

	2001		2000		1999
Net sales
North America	59.2	%	43.0	%	45.4	%
Australia	15.1		20.8		20.7
Asia	23.6		28.3		22.2
Europe	2.1		7.9		11.7
	100.0	%	100.0	%	100.0	%
Product sales by category
Disposable baby diapers	81.5	%	74.7	%	71.7	%
Adult incontinence products	11.8		20.6		20.8
Training pants, youth pants and sanitary napkins	6.7		4.7		7.5
	100.0	%	100.0	%	100.0	%

3.     Seasonality

There is no significant seasonality impact on the Company’s business in most countries.

4.     Raw Materials

The raw material components used in the manufacturing process are fluff wood pulp, super absorbent polymer, polyethylene backsheet, cloth-like breathable backsheet, polypropylene non-woven liner, adhesive closure tape, mechanical closure tapes, hotmelt adhesive, elastic, aloe vera and tissue.

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The main raw material is fluff wood pulp, which is purchased from several suppliers in the United States, Scandinavia and Australia. The source from which the fluff wood pulp is shipped to the Company’s manufacturing facilities is dependent on price, quality and availability. The cost of fluff wood pulp increased significantly in 1995, softened in 1996, stabilized thereafter, increased in 1999, increased moderately until the third quarter in 2000 and decreased moderately in 2001. The Company believes it will increase moderately in 2002. Other raw materials are purchased from various sources, also depending on price, quality and availability. The Company maintains good and long-term relationships with its raw materials suppliers. The Company’s Chief Purchasing Officer oversees the purchasing and sourcing policies of each of the Company’s manufacturing facilities and is responsible for new material developments and keeping track of all world-wide producers of raw materials. He also negotiates and determines the purchase of the Company’s major raw materials with the Company’s key raw material suppliers.

The Company has negotiated supply contracts with several of its key suppliers. Such arrangements are generally designed to achieve volume discounts on price and to assure supply stability. In the event of unacceptable price increases, the Company usually has the right to terminate the arrangement upon specified notice periods, which generally range from two to three months.

Some of the suppliers of raw materials to the Company also manufacture disposable diapers which compete with the Company’s products. The Company has not experienced any difficulty with its raw material suppliers who are in competition with it on sales of finished product, but nevertheless it takes steps to ensure that it has alternative sources of supply available.

The main source of energy for the Company’s plants is electricity. The automated process for manufacturing disposable diapers consumes larger amounts of electricity than many other light industries, but none of the Company’s operating subsidiaries has experienced any problems with electricity supply.

5.    Marketing Channels

    a.     North America

i.  Products

The Company manufactures and distributes disposable baby diapers, disposable training and youth pants and adult incontinence products throughout North America under the brand names of “FITTI^®”, “CUDDLES^®”, “SUPER FAN-NIES^®” and “CERTAINTY^®”, as well as a growing number of different private label store brands. The “FITTI^®” brand is a full-featured value product, recognized for its unique wetness indicator, a cute print that fades away when the diaper becomes wet. The “FITTI^®” brand name is also used with the Company’s disposable training pants and the DRI-NITE JUNIOR disposable youth pants. The Company’s pant products feature tear-away side panels, soft cloth-like covers and comfortable waist and hip elastic. The “FITTI^®” training pants were the first North American product in this segment to offer the Company’s unique wetness indicators. In March 2001, the Company acquired the “DRYPERS^®” brand which is the fourth largest selling brand of disposable baby diapers and disposable training pants in the North

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American markets. The “DRYPERS^®” brand is a full-featured premium product including multi-strand leg elastic for a wide soft cuff, a reinforced tape landing zone for more secure fastening, a soft elastic waistband, a thin overall profile, leakage barrier inner cuffs, compression packaging and unique features such as “perfume free” and “baking soda” for odor control.

The Company continues to expand its private label diaper business throughout North America with such customers as Wal-Mart, Shoprite, Walgreens Drugs, Eckerd Drug, Kroger, Giant Eagle, Harris Teeter, A&P, Topco, Pathmark, Rite-Aid, Richfood, McLane (a division of Wal-Mart) and Medline Industries. The Company is the only full line manufacturer capable of producing and marketing a full range of disposable baby diapers as well as training pants and youth pants. This advantage should enhance the Company’s sales and private label partnership opportunities. With the acquisition of the Drypers operations and the “DRYPERS^®” brand, the Company has gained entry to sell both branded and private label products to major supermarket chains and mass merchandisers such as Wal-Mart and Kroger.

The Company’s primary focus on adult incontinence products is the development of profitable private label partnerships with retailers and institutional distributors such as Walgreens Drug and Medline Industries. The Company’s products are also available under the “CERTAINTY^®” brand name. The Company’s focus is on the brief products, offering a wide range of product and feature alternatives. The Company was the first to bring disposable adult pants to the North American market and the Company will continue to explore innovative product opportunities that will make a positive difference in this category and bring better solutions to the incontinence user.

ii.  Sales and Marketing

Disposable baby diapers account for more than 90% of the baby diaper changes in North America. The market can be divided into several segments: brands that are advertised and sold nationally; brands that are not widely advertised but are sold nationally; brands sold only in specific regional areas; and baby diapers that are sold under private label brands. The nationally advertised brands account for around 80% of all sales. The Company maintains a good distribution base on its “DRYPERS^®”, “FITTI^®” and “CUDDLES^®” brands, with new retail customers being added on a regular basis. Recently, the “DRYPERS^®” brand was added to all Walgreens Drug Stores, the leading drug chain nationally. The Company’s “DRYPERS^®” and “FITTI^®” brand training pants have enjoyed steady sales growth and excellent consumer acceptance. The new “DRYPERS^®” training pant is the first one in the value segment to offer stretchy side panels similar to the leading national brand. The Company’s “FITTI^®” DRI-NITE JUNIOR has a growing market share in the fast growing youth pant segment. This segment now accounts for more than 3% of total category sales.

The Company efficiently services the North American market from three manufacturing facilities. These facilities are located in Oconto Falls, Wisconsin, Marion, Ohio and Vancouver, Washington. The Company commissions a national network of independent brokers and non-food sales representatives to sell directly to retailers and distributors/wholesalers. These brokers and sales representatives, managed by the Company’s direct sales management team, serve as the Company’s agents within defined territories to monitor sales, implement trade promotions and handle the required merchandising activities and responsibilities. The Company’s direct sales management team is responsible for the Company’s marketing and headquarter sales functions. The Company remains committed to its marketing philosophy of direct servicing of its customers and accounts by the sales management personnel. This allows the Company to provide a high degree of category expertise and education to the trade and to be able to promptly respond to trade and market needs. In addition, the strategic

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locations of its North American manufacturing facilities has enabled the Company to achieve average shipping transit time of one to two days for most North American destinations.

Branded Products.    Due to the intense price and promotional pressure by the advertised brands, combined with a declining birth rate in the U.S. market, the “value brand” segment continues to shrink. By the end of 2001, the combined share of the Company’s “DRYPERS^®”, “FITTI^®” and “CUDDLES^®” brands was roughly 5% of the total units of disposable baby diapers and training pants sold in grocery outlets throughout North America. The grocery sector represents around 50% of the over $4 billion United States retail market. In certain markets, such as New York/New Jersey, the nations largest retail market, the Company believes that the “FITTI^®” brand share is much greater than conventional market share tracking companies would indicate. This is because a much higher percentage of “FITTI^®” diapers and training pants are sold through urban wholesalers and inner city retailers that typical market research does not track. The Company concentrates its efforts and marketing activities in providing wholesalers and retailers with above average category profits through the use of packaging with greater shelf impact, consumer preferred pre-priced packaging, creative promotional support, creative consumer marketing vehicles, efficient distribution, electronic data interchange and a high level of customer service. The Company has maintained its strategy of providing the best “everyday low price” (“EDLP”) on its “FITTI^®” and “CUDDLES^®” brands, offering the consumer “the best product for the price” all the time. The Company is pursuing a hybrid marketing program on the “DRYPERS^®” brand, which it acquired in March 2001. This hybrid is a combination of EDLP and targeted consumer and trade marketing, designed to increase sales while enhancing their marketing return on investment. The Company provides consumers with quality products at affordable price, unique product features and consistent value. The Company has grown its business with a concentrated effort against the primary diaper selling class of trade : grocery with key retail partners such as Shoprite, A&P, Pathmark, Fleming, Kroger, Albertsons, Harris Teeter and Super Value. However, excellent distribution and sales gains have been made in other non-grocery outlets such as Walgreens Drug, Meijer stores and the U.S. military. The Company continues to benefit from new product ideas and unique retailer profit opportunities to the disposable baby products segment.

The Company’s “CERTAINTY^®” brand is the brand under which the Company markets its adult incontinence products. However, the Company recognizes that private brands represent more than 30% of the category sales with steady growth at retail and it is this sector of adult incontinence where the greatest retail sales opportunity exists. The Company will continue to target this private brand segment with a range of superior products in terms of product features and performance. The Company’s strategy is to provide products to the marketplace that are superior to other available products and that are also more affordable than the advertised brands. The drug store trade still represents the majority of adult incontinence retail sales with approximately 50% share of the over $550 million category. Growth potential for the entire category remains high as the population continues to age, people who are incontinent become more open to treatment solutions and better products are developed.

Institutional Volume and Activity.    The institutional providers supply adult incontinence products to medical care facilities, nursing homes, extended care facilities and home health care outlets. It is worth noting that the institutional market still represents more than 60% of the total adult incontinence volume in North America or more than $720 million in sales. The adult category represents an area of significant sales and distribution growth for the Company, and significant gains have been captured. Since its launch in 1996, the adult category volume now represents more than 10% of the Company’s total sales. The Company enjoys an excellent working relationship with one of North America’s premier institutional suppliers

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of medical related products: Medline Industries, Inc.

Private Label.    This segment of the Company’s business is the major area of potential growth. The Company continues to strengthen its existing private label partnerships with major retailers like Wal-Mart, Kroger, Eckerd Drug, Shoprite, Walgreens, Pathmark, A&P, Uniprix Drug, Amway, Aldi, Federated, Topco etc. and by adding new products in both areas of disposable baby diapers and adult incontinence products. The Company will continue to target other major retailers to establish new profitable private label partnerships in all of its product categories. The Company recognizes that the private label segment remains somewhat more insulated than that of the typical “value” brands from the aggressive price/promotional strategies of the advertised brands, due to the protective/defensive posture that major retailers tend to take when it comes to protecting their corporate brand franchise. The Company is one of the few manufacturers capable of supplying a full range of quality disposable baby diapers and adult incontinence products and has a proven track record of quality products, category expertise and customer service.

    b.    Australia

i.  Products

The Company manufactures and markets disposable baby diapers under four core proprietary brand names and a number of retail chain private label brands. Proprietary brands “BABY LOVE^®” and “COSIES^®” are value priced, premium quality, feature driven ultra diapers, while “LULLABY^®” and “COSIFITS^®” are economy priced, basic feature driven ultra diapers. Proprietary brands accounted for 84% of the Company’s Australian diaper sales in 2001. The Company continues to hold a leading position in the private label sector producing corporate brands for a number of major grocery and variety sector retailers. The Company also distributes the “VLESI^®” and “MERIT^®” range of adult incontinence products into the Australian institutional market, primarily targeting the nursing home sector.

ii.  Sales and Marketing

The Australian combined grocery and pharmacy retail market for disposable baby diapers grew by 2.9% in local currency terms in 2001 with the grocery sector showing strong growth at the expense of pharmacy. Branded products comprise approximately 90% of the Australian market, with the remaining 10% made up of private label products.

The Company markets and distributes its proprietary branded products in Australia using exclusive independent brokers. Sales of private label brands are managed either on a direct basis with a retail customer, or through their selected “in-house broker” representative. Marketing strategies are focused on strong profit margins for the retailers, combined with good product performance, unique product features and “value” retail price points for the consumer. These strategies also include state and national promotions targeting consumer trial while focusing on “below the line” promotional support for the retailers. The Company also markets baby diapers through direct sales outlets and by export, primarily to New Zealand.

For adult incontinence products, the Company utilizes a direct sales force to sell to customers and manages the distribution of the products through selected independent distributors.

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Branded Products.    The Company’s branded products, “BABY LOVE^®” and “LULLABY^®” are targeted at the grocery and variety sectors. These two retail sectors accounted for an estimated 85% of all disposable baby diaper sales in Australia in 2001 and are highly concentrated, with over 80% of the sales volumes controlled by major retailers Woolworths Limited, under the Woolworths, Safeways and Big W banners, and Coles Myer Ltd, the owner of the Coles, Bi-Lo, Target and K-Mart chains. This concentration was compounded during 2001 by the closure of the Franklins grocery chain although independent grocers Metcash and Foodland both acquired some of the ex-Franklins stores.

The Company’s “COSIFITS^®” and “COSIES^®” branded products are targeted exclusively at the pharmacy sector. In 2001, the pharmacy sector accounted for an estimated 11% of all disposable baby diaper sales in Australia. This sector is highly fragmented, consisting of small and independent pharmacies that have restricted retail space, offer a limited selection of diaper brands and do not have their own private label diaper programs. The Company has successfully pursued a strategy of encouraging these independent pharmacies to carry these two proprietary brands as “pharmacy only brands”, which are supported by national advertising and promotion, and provide margins which are comparable to those typically offered by private label programs. The Company sells to the three major wholesalers of pharmaceutical products in Australia: Sigma, F.H. Faulding and Australian Pharmaceutical Industries. Each of these wholesalers operates and manages specific marketing (“banner”) groups which regularly promote the Company’s products. The major national marketing groups include Amcal, Guardian, ChemMart, ChemWorld and Health Sense, among others.

Private Label.    Private label products are sold primarily in the grocery and variety sectors. In the grocery sector, private label accounted for 9% of the total sales for disposable baby diapers in 2001(¹⁾. The Company has a 36% share of the total private label market in the grocery sector in 2001(2). Private label market data is not available for the variety sector, however the Company is recognized as a leading supplier of private label products in this sector. The Company has private label programs with a number of major retail chains, including Target, Woolworths and Coles Supermarkets. The Company has maintained and developed its leading market position within the private label sector by building close working partnerships with its retail chain customers and offering new product features with improved performance, while maintaining competitive pricing and high levels of customer service.

Adult Incontinence Products.    Approximately 75% of the total sales for adult incontinence products in Australia are concentrated in the institutional sector of the category, while the retail sector for these products has been slow to develop. This institutional sector is comprised primarily of nursing homes, hospitals and adult care hostels. The Company employs a team of state territory sales managers and selected distributors who target the nursing home sector of this market.

    c.    Asia

i.  Products

The Company manufactures disposable baby diapers primarily under its own brands in Asia. The Company’s leading brands are “FITTI^®” and “PET PET^®”, and economy brands are “BABY LOVE^®”, “COSIFITS^®”, “FITTI^®

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Basic” and “BABYJOY^®”. The Company also manufactures private labels on a selective basis. Both “FITTI^®” and “PET PET^®” enjoy substantial market share, are well supported by advertising and promotional activities, and are priced strategically lower than the major U.S. national brands and the Japanese brands sold in Asia. The Company’s economy brands are basic products targeted to compete strictly on price and value with local brands.

The Company manufactures and distributes adult incontinence products under its own brands “DISPO 123^™”, “HANDY^™” and “CERTAINTY^®”. The Company also manufactures adult incontinence products in private labels. The “DISPO 123^™” product is an ultra anatomic diaper, featuring multi-strand leg elastics, frontal tape closure system and stand-up leg gathers, “HANDY^™” and “CERTAINTY^®” has similar features as “DISPO 123^™” except for the stand-up leg gathers and slight specifications change.

ii.  Sales and Marketing

The Company continues to command strong market positions in the mature markets of both Hong Kong and Singapore. The Company enjoys first-mover advantages in most of the markets in the Asian region and has established invaluable brand image and strong positions for the Company’s products. The Company continues to focus on expansion of sales in the PRC, Thailand, Malaysia and Indonesia by capitalizing on the increasing usage of disposable baby diapers that are well supported by strategic pricing and wisely designed advertising and promotional activities. The Company also sells its products in India and, to a lesser extent, Brunei, Vietnam and Cambodia.

The volume of disposable baby diaper usage varies significantly in different markets, depending to a large extent on the level of per capita disposable incomes. The disposable baby diaper usage is relatively high in Hong Kong and Singapore. Although these two mature markets contracted since the aftermath of Asian financial turmoil, the Company has been able to pursue strategies to maintain its market share in these markets. Disposable baby diaper usage is relatively low in other Asian countries, but the Company believes that the usage will increase as income levels in these countries continue to increase.

In Asia, the Company has identified Malaysia, the PRC, Thailand and Indonesia as the markets that will expand rapidly in the next decade. The Company’s strategy is to offer a variety of premium branded products targeted to compete with major U.S. and Japanese brands and to offer economy brands to compete in the fastest growing segment of the markets. The Company also ensures flexibility in product features, packaging and marketing functions to satisfy the ever-changing needs and trends of the different markets in Asia.

In Hong Kong, the Company has its own sales force. Its products are sold in all major pharmacy outlets and department stores which account for 65% of all disposable baby diaper sales, while the remaining 35% are sold in major retail supermarket and hypermarket chains such as Park’N Shop, Wellcome and China Resources Company. The disposable baby diaper market in Hong Kong has contracted due to low birth rates and weak economy. Around 80% of the Company’s sales in Hong Kong are sales of “FITTI^®” and “PET PET^®” brands of products which collectively have around 20% share of the market. The “FITTI^®” and “PET PET^®” brands are supported by advertising and promotion programs, which not only impact sales in the local market but also in the Pearl River Delta area of Guangdong province in the PRC.

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In Singapore, the disposable baby diaper market is mature but relatively small. The Company sells and distributes its products, of which 77% were branded products and 23% were private label products, by its own sales force in major retail chains, department stores and hypermarkets.

In Malaysia, the disposable baby diaper market continues to grow particularly in the economy products segment. The Company’s “FITTI^®” and “PET PET^®” brands of products have been selling in the market for many years; however, with the establishment of the manufacturing facility in Selangor, Malaysia in 1999, the Company was able to compete with the local economy products manufacturers. The Company’s economy brands, “COSIFITS^®” and “FITTI^® Basic”, expanded rapidly and have gained a significant share in the economy segment of the market. The Company’s products are distributed nationwide by its own sales forces directly to the major chain stores such as The Store, Ocean, Giant and Carrefour, as well as to the other secondary chain stores, independent supermarkets and to lower-end retail outlets.

In the PRC, another fast growing market that the Company has identified, the Company’s leading brands are distributed in hypermarkets, supermarket chains, department stores and independent retail stores in most of the provinces, such as Guangdong, Fujian, Zhejiang, Jiangsu, Shandong, Shanxi, Hebei, Shaanxi, Liaoning, Jilin and major municipals and cities, such as Guangzhou, Shenzhen, Shanghai, Shantou, Zhongshan, Tianjin and Beijing. To cope with the rapid development of foreign invested hypermarkets and state-owned supermarket chains in the PRC, the Company cultivates good relationships with the major players like Carrefour, Wal-mart, Metro, Trust-Mart, Makro and Price-Mart, as well as Hualian, Century Lianhua, and others and the Company’s products are listed and sold in these hypermarkets and supermarket chains. The Company’s sales operation in Beijing directly services the Beijing and Tianjin markets and expands sales and distribution to northern and northeastern markets such as Shandong, Shanxi and Liaoning provinces. The Company also established a sales and marketing operation in Shanghai, not only directly servicing the Shanghai market and serving as a logistic center for the markets in the eastern part of the PRC, but also overseeing the nationwide market in the PRC. The Company has expanded its distribution network to the provinces and municipals in the mid-western part of the PRC, such as Sichuan, Chongqing, Yunan, Hunan and Hubei, and continues to expand its distribution network with the goal of covering all the provinces of the PRC. The Company’s sales expansion in the PRC is well supported by its strategic products and pricing together with customized advertising and promotion programs. The Company estimates that the current usage of disposable baby diapers in the PRC is around 3% and will grow in accordance with the anticipated rapid economic growth of the country.

In Thailand, although the usage of disposable baby diapers is relatively low, the disposable baby diaper market has been growing rapidly in the past few years. The Company’s major brands in the market are “FITTI^®”, “PET PET^®” and “BABY LOVE^®”. The Company’s sales have been increasing with the growth of the market and from the expansion of the Company’s distribution networks throughout the country. Over 70% of the Company’s sales in Thailand were in the Bangkok metropolitan area, with the rest of the sales coming from the suburban provinces. The Company’s products are distributed to supermarkets and department stores by its own nationwide sales force. The Company has been able to capitalize on the market growth and sustained a market share of about 16% in 2001. The Company also manufactures private label products for a supermarket chain. The Company’s adult incontinence products are distributed to hospitals, supermarkets and department stores. The Company estimates that its share of the Thailand adult incontinence market was approximately 61% in 2001, a more than 50% increase in its market share in 2000. The Company is also expanding itssales of adult incontinence products in other Asian markets.

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The Company’s brands “FITTI^®” and “PET PET^®” are the leading brands in the Indonesian market. With the joint venture manufacturing facility near Jakarta, the Company is able to reduce its product costs as a result of an import duty exemption on raw materials and minimize the adverse effect of currency fluctuation. The Company’s products are sold in all major hypermarkets and supermarket chains and its major competitors in the market are imported U.S. major brands and a local brand.

The Company presently does not plan to export its products to Japan, Taiwan and Korea because current non-tariff barriers and complex distribution arrangements make entry into these markets difficult for foreign products.

In countries that have high rates of import duties on products and high risk of currency fluctuation, the Company believes that it is more efficient and economical to service their markets through domestic manufacturing facilities. The Company presently has manufacturing facilities in Hong Kong, Thailand, the PRC, Indonesia and Malaysia.

    d.    Europe

i.  Products

The Company manufactures and markets branded and private label disposable baby diapers in the United Kingdom. The Company’s brands currently in production are “FITTI^®”, “COSIFITS^®” and “CARES^®”. “FITTI^®” is a value brand baby diaper with full features such as leg gathers, wetness indicator, cloth-like backsheet, extra-dry sub-layer and mechanical fasteners. “COSIFITS^®” and “CARES^®” are economy brands featuring frontal tape and an extra-dry sub-layer.

ii.  Sales and Marketing

The U.K. retail disposable baby diaper market in 2001 was approximately $667 million. Approximately 88.4%(1) of the market was branded products and the rest were made up of various private label brands of retailers supplied by European diaper manufacturers.

The Company focused on selling its branded products to regional retailers and wholesalers by offering a value-oriented product with good profit margins and a high level of service. The Company also produces its own label for certain U.K. grocery chains.

6.     Dependent Patents, Licenses and Contracts

    a.    Patents, Trademarks and Licenses

Brand identification is an important element in marketing the Company’s products, and the Company recognizes the importance of its trademarks to the success of its business. The Company has registered its major trademarks or has

(1) FSA Survey U.K.

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applications pending in each of the major markets in which its products are sold, and it has applications pending in several other countries for many of its other trademarks. As the Company decides to pursue opportunities in new markets, it seeks registration of the trademarks under which it will market its products in those countries.

The Company has licenses to use certain patented technology relating to certain features of the disposable diapers it manufactures, including multi-strand leg elastics and the “Wetness Indicator” feature of the Company’s products in the United States. In 1997, P&G claimed that certain of the Company’s diaper products infringe P&G’s patents and demanded payment for past infringement and an agreement to pay future royalties. The Company and P&G reached settlement of this claim for the United States market in 1998. On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company’s products in the Asian Pacific and Australian regions after December 31, 2000. The agreement encompasses fixed payments totaling $300,000 relating to the period prior to January 1, 2001 and payment of royalties based on a percentage of sales of certain products in the Asian Pacific region beginning January 1, 2001. The amount of $300,000 relating to periods prior to January 1, 2001 was recorded in the statement of operations for the year ended December 31, 2000 as a component of selling, general and administrative expenses.

    b.    Contracts

The Company is a contract manufacturer for certain customers to supply private label products for baby disposable diapers and adult incontinence products.

The Company entered into financial contracts with certain Banks and Financial Institutions for various financing facilities of revolving working capital line, equipment leasing and term loans. The information required is contained in Note 14 and Note 15 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders, and is incorporated herein by reference.

In March 2001, one of the Company’s U.S. subsidiaries (the “Subsidiary”) entered into an amended financing agreement with the existing financial institution (“its Senior Lender”) under which the Subsidiary received a Term Loan of $11 million (the “Term Loan”), a capital expenditure line of up to $5 million, and a revolving credit facility (based on the lesser of a percentage of eligible accounts receivable and inventory or $15 million). Such financing was entered into in connection with the Subsidiary’s purchase of certain assets of the North American operations of Drypers Corporation as discussed in Note 24 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders. The full amount of the $11 million Term Loan was borrowed, with interest payable at the LIBOR plus 4.25% or prime plus 2.75% per year at the election of the borrower, and the outstanding balance of an existing term note was repaid. The financing agreement was amended in December 2001, at which date the remaining principal balance on the Term Loan was $8.7 million, which was then divided into three separate term loans in the amount of $2.8 million, $2.9 million and $3.0 million. These loans are repayable in monthly installments of principal in the amount of $183,333 plus interest and is collateralized by the Subsidiary’s assets. In addition, the Subsidiary had outstanding borrowings of approximately $11.9 million of the $15 million revolving credit facility as of December 31, 2001. These amounts were recorded as a component of short-term borrowings in the Consolidated Balance Sheets of the Annual Report to Shareholders

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(see Note 14 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders). Among other things, the agreement contains certain restrictive covenants, including the maintenance of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and tangible net worth, and places limitations on acquisitions, dispositions, capital expenditures, and additional indebtedness. At December 31, 2001, the Company was not in compliance with the EBITDA covenant due to the legal settlement as discussed in Note 5 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders. The existing covenant violations were waived by the Senior Lender on April 17, 2002.

In connection with the waiver of these covenant violations, the Senior Lender and the Company amended the revolving credit facility to allow for additional advances of up to $1.5 million for the legal settlement, increased the capital expenditure line to $7.0 million and revised certain covenants including capital expenditures, payments and prepayments, and additional indebtedness. The Company had not borrowed any facility out of the capital expenditure line. As a result, the Company had approximately $2.3 million and $7.0 million available for additional borrowings under the Term Loan and capital expenditure line, respectively, at December 31, 2001.

In addition in March 2001, the Company borrowed $15 million under a term loan (the “$15 million Term Loan”) from an overseas financial institution. One of the Company’s non-executive directors holds a seat on the Board of Directors of this company. The loan bears annual interest at a rate of 14.5% increasing to 17.5% if any amounts payable under the loan are not repaid when due. Interest is payable monthly while principal is due in March 2002. The Company had the option to prepay all or a portion of the loan after the six-month anniversary of the initial borrowing. The loan was secured by the Company’s ownership interest in its Australian subsidiaries. In addition, the loan agreement contains certain restrictive covenants, including minimum tangible net worth and EBITDA of the Australian subsidiaries. The borrowings were guaranteed by the Company’s Chairman and Chief Executive Officer. The Company repaid the $15 million Term Loan in September 2001.

In conjunction with the $15 million Term Loan, the Company committed to issue share purchase warrants to the lender. The warrants allowed the lender to purchase Ordinary Shares of the Company at a price of $0.01 per share. The number of warrants issued equaled 0.75% of the Company’s diluted Ordinary Shares outstanding for each month the principal balance of the loan was outstanding. Due to the repayment of the $15 million Term Loan after the six-month anniversary of the initial borrowing, the Company issued 4.5% of the Company’s diluted Ordinary Shares, equivalent to 314,510 shares. The fair value of the warrants of $1.4 million was treated as interest expense in 2001. The fair value of the warrants was estimated using the Black-Scholes Model. The assumptions used included : fair value of ordinary shares of $4.81 per share, volatility rate of 80%, a discount rate of 3.41% and an estimated life of one year.

Under the Sale and Purchase agreement between Associated Hygienic Products LLC as buyer and Drypers Corporation as seller, dated February 20, 2001, and pursuant to the order of the U.S. Bankruptcy Court based in Houston, Texas the buyer agrees to buy and the seller agrees to sell its North American assets. The gross value of assets acquired was $39.6 million, which was subsequently reduced by $3.7 million due to a working capital adjustment. The transaction closed on March 14, 2001. See Note 24 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders for additional information regarding this acquisition.

7.     Competition

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The disposable baby diaper industry is dominated world-wide by the brands of two major U.S. manufacturers : P&G and KC. The market position of these manufacturers, relative to the Company, varies from one geographic area to another, but due to their substantial financial, technical and marketing resources, both of these major manufacturers have the ability to exert significant influence and gain substantial market share in any of their marketing areas. Despite the disparity in relative strength, however, the Company has been able to secure its position in the face of very strong competition from the industry leaders by remaining innovative, flexible and financially responsible.

    a.    North America

The North American disposable baby diaper market remains dominated by the brands of the two major U.S. manufacturers : P&G and KC. Their combined market share of the disposable baby diaper market is 77%; including the disposable training pant, youth pant and swim pant products. Total category unit sales are declining at a rate of about 9%, with volume continuing to shift from the grocery and drug classes of trade to the mass merchandisers. Consumers continue to move to larger packs for a lower price and more savings. These two major manufacturers continued their strategy of driving their business with aggressive retail pricing, rather than competing solely on the basis of consumer-driven marketing programs and product innovations. An increasing number of major retailers remain concerned with the negative impact that the advertised brand’s strategy has had on their own private label sales and margins, and some continue to take corrective actions to protect their own brands. All of the moves made by the advertised national brands have resulted in lower retail prices and the narrowing of retail price spreads between the advertised brands and private label offerings. Manufacturers and retailers alike are waiting anxiously to see how long this price strategy can be maintained in the face of continuous reductions in gross profit margins.

The continued moves by the major manufacturers to keep retail prices depressed, promote aggressively and keep the retailers satisfied with minimal margins in favor of sales volume, have put serious sales and margin pressure on smaller brand and private label manufacturers. In response to this competitive activity, the Company has reallocated its promotional spending and has maintained a strategy in line with “everyday low prices”, targeted trade promotions, enhanced product features and tightened cost controls. This strategy on its core “FITTI^®” and “DRYPERS^®” brands has allowed the Company to protect its share in critical markets and expand its private label base of business.

In the adult incontinence arena, the Company is in an excellent competitive position, having the capability to provide key retailers, institutions and consumers with product technology that is superior to what other manufacturers can currently provide. There is an added advantage that comes from the demand for better products in order to meet the performance and comfort requirements of incontinent consumers. In spite of the tough competitive climate, overall margins in the adult products remain better than in the baby products.

    b.    Australia

The major competition faced by the Company in Australia is from Kimberly-Clark Australia (“KCA”). KCA dominates the disposable baby diaper market in Australia, with a 2001 estimated market unit volume share of 65% as measured by AC Nielsen for the combined grocery and pharmacy sectors. Other disposable diaper competitors include local manufacturer, Naelfran, and imported product suppliers. The Company benefits from the desire of its retail customers

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for an alternative supplier to KCA for national brand diapers, and for a quality domestic supplier for their private label brands.

The adult incontinence market for disposable pads in Australia is more fragmented and without independent market share data. Tena, Hartmann and KCA are the Company’s major competitors in this market.

    c.     Asia

The Company’s main competition in Asia comes from the brands of the two major U.S. manufacturers, and several manufacturers from Japan and Taiwan. The Company believes that it has been able to maintain a significant share of the Asian market due to its longer presence and well established brands in that region and the logistical advantage which results from the strategic location of its manufacturing operations.

    d.     Europe

In the United Kingdom, the disposable baby diaper market continues to be dominated by P&G, which has a market share approximately 52.9%, and KC, which has a market share of approximately 35.5%. Both companies continued to heavily promote and discount their brands in the U.K. market. Due to such consistent promotion activities, the private label brands have been reduced to a level of about 10.2% market share.

8.    Government Regulations

    a.    Customs and Import Duties

Some of the raw materials used in manufacturing the Company’s products are subject to import duties at varying rates in the countries in which the Company’s manufacturing facilities are located. However, import duties on raw materials do not represent a significant part of the cost of the finished product and, in most cases, the import duties are refundable if the finished goods are exported from the countries of manufacture.

Imports of finished products to some of the markets are subject to import duties at various rates. However, such duties are usually incorporated in the selling price of the finished product.

    b.     Environment

The Company believes that operations at all of its manufacturing facilities are conducted in compliance with applicable environmental laws, and that none of the material substances used or disposed of by the Company in its manufacturing operations are considered to be toxic or hazardous substances under such laws.

The Company closely monitors environmental laws and regulations pertaining to disposal of solid waste, which includes household refuse, packaging and paper materials, and yardwaste, in addition to disposable diapers, in each of the markets in which its products are sold. The Company is not aware of any such laws or regulations which would have a material adverse effect on the Company’s business as presently conducted and proposed to be conducted. A number of

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states in the United States have passed legislation that is intended to discourage the use of disposable products such as beverage containers, certain packaging materials and disposable diapers, or to encourage the use of non-disposable or recyclable products. The Company believes that it will not have to make any changes to its products to comply with presently existing environmental laws and regulations in the markets in which its products are sold.

The Company endeavors to develop products which are environmentally responsible by closely monitoring world-wide developments in various raw material components and actively works with suppliers to develop and market products utilizing such components.

    c.    Insurance

All of the Company’s plant, machinery and inventories are covered by fire and extended coverage insurance. The Company maintains product liability insurance in amounts it believes to be adequate in all its operations, except for its operations in Asia where local manufacturers customarily do not carry product liability insurance because the risk of product liability lawsuits is considered to be slight.

C.    Organizational Structure

The Company’s significant subsidiaries are:

Name	Country of incorporation	Ownership interest
Advance Medical Supply Company Limited	Thailand	80%
Associated Hygienic Products Inc.	Wisconsin,USA	100%
Associated Hygienic Products LLC	Delaware, USA	100%
Disposable Soft Goods (Malaysia) Sdn. Bhd.	Malaysia	100%
Disposable Soft Goods (S) Pte Limited	Singapore	100%
Disposable Soft Goods (UK) Plc.	U.K.	100%
Disposable Soft Goods (Zhongshan) Limited	PRC	100%
Disposable Soft Goods Limited	Hong Kong	100%
DSG (Malaysia) Sdn. Bhd.	Malaysia	100%
DSG International (Thailand) Limited	Thailand	80%
DSG Pty. Limited	Australia	100%
PT DSG Surya Mas Indonesia	Indonesia	60%

D.    Description of Property

The Company now operates ten manufacturing facilities, with plants located in : the United States at Marion, Ohio, Vancouver, Washington and Oconto Falls, Wisconsin; the PRC at Hong Kong and Zhongshan, Guangdong; Melbourne, Australia; Chesterfield, U.K.; Bangkok, Thailand; Cikande, Indonesia and Selangor, Malaysia.

The Company utilizes an aggregate of approximately 1,522,615 square feet of space in its manufacturing operations. The Company believes that its plant facilities, with the acquisition of the North American operations of Drypers Corporation, are adequate for its present operations.

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The Company operates 29 productive disposable baby diaper, training pants and adult incontinence machines. The gross productivity of the machines ranges from 350 pieces to 600 pieces per minute for disposable baby diapers, 100 pieces to 150 pieces per minute for training pants and adult incontinence products. The productivity of the machines is dependent on the machine types, sizes and packing configurations of the products.

The following table summarizes the physical properties that are used by the Company in its manufacturing and distribution operations:

Location	Use	Approximate size (Sq. feet)		Owned/ leased	Lease expiration date	Productive capacity (1)
Marion, OH	Manufacturing	440,000		Leased	Oct. 2002	7
Melbourne, Australia	Manufacturing	179,200		Owned	N/A	5
Cikande, Indonesia	Manufacturing	174,000		Leased	Sep. 2027	1
Oconto Falls, WI	Manufacturing	165,684		Owned	N/A	3
Selangor, Malaysia	Manufacturing	130,681		Leased	Nov. 2004	2
Zhongshan, PRC	Manufacturing	122,321		Leased	Oct. 2044	3
Vancouver, WA	Manufacturing	106,029		Leased	N/A	2
Hong Kong, PRC	Manufacturing	70,895		Leased	Jun. 2003	2
Bangkok, Thailand	Manufacturing	68,805		Owned	N/A	2
Chesterfield, U.K.	Manufacturing	65,000		Leased	May 2008	2
Duluth, GA	Office	226,625	(2)	Owned	N/A	—
Bangkok, Thailand	Office	22,822		Leased	Dec. 2003	—
Singapore	Office	16,500		Leased	May 2003	—
London, U.K.	Office	3,500		Owned	N/A	—
Duluth, GA	Office	2,250		Leased	May 2004	—
Beijing, PRC	Office	2,166		Leased	Oct. 2003	—
Shanghai, PRC	Office	1,800		Leased	Sep. 2002	—
Guangzhou, PRC	Office	734		Leased	May 2003	—

(1) Refers to the number of diaper machines per location.

(2) This property is currently “Held for Sale”.

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Item 5.    Operating and Financial Review and Prospects.

A.    Operating Results

The information required is contained in the Consolidated Statements of Operations of the Annual Report to Shareholders, and is incorporated herein by reference.

B.    Liquidity and Capital Resources

The information required is contained in the Operating and Financial Review and Prospects of the Annual Report to Shareholders, and is incorporated herein by reference.

C.    Critical Accounting Policies

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and judgments, including those related to bad and doubtful debts, inventories, income taxes, impairment of assets, intangible assets and litigation. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

Bad and doubtful debts—The Company maintains allowances for its bad and doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers changed, changes to these allowances may be required, which would impact the Company’s future operating results.

Inventories—Inventories, consisting of finished goods, raw materials and packaging materials, are stated at the lower of cost or market with cost determined using the first-in, first-out method. The Company makes certain obsolescence and other assumptions to adjust inventory based on historical experience and current information. The Company writes down inventory for estimated obsolete or unmarketable inventory equal to the difference between the costs of inventory and estimated market value, based upon assumptions about future demand and market conditions. These assumptions, although consistently applied, can have a significant impact on current and future operating results and financial position.

Income taxes—The Company records a valuation allowance to reduce its deferred tax assets to the amount that the Company believes is more likely than not to be realized. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Impairment of assets—The Company reviews all assets on a regular basis to ensure that there is no impairment in

25

the carrying value. If the Company determines that there has been a permanent decline in, or the Company has become unable to recover the carrying value of the asset, an impairment charge will be recorded, which will have an adverse effect upon the Company’s future operating results.

Intangible assets—The Company makes assumptions regarding estimated future cash flows and other factors to determine the fair value of intangible assets. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment charge if the estimated fair value of intangible assets are less than their recorded amount. Through December 31, 2001, the Company has not recorded an impairment charge for intangible assets. Beginning January 1, 2002, the Company will be required to adopt Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, and will be required to analyze goodwill and other intangible assets for impairment issues during the year 2002, and on a periodic basis thereafter.

Litigation—The Company records contingent liabilities relating to litigation or other loss contingencies when it believes that the likelihood of loss is probable and the amount of the loss can reasonably be estimated. Changes in judgments of outcome and estimated losses are recorded, as necessary, in the period such changes are determined or become known. Any changes in estimates would impact its future operating results. Significant contingent liabilities, which the Company believes are at least possible, are disclosed in the Notes to the Consolidated Financial Statements.

D.    Recent Changes in Accounting Standards

In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. This statement provides that goodwill and other intangible assets with indefinite lives not be amortized, but will be tested for impairment on an annual basis. The Company will adopt SFAS No. 142 on January 1, 2002 as required. Management is assessing, but has not yet determined, the impact that SFAS No. 142 will have on its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addressed the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will be required to adopt this standard on January 1, 2003. Management has determined that the adoption of SFAS No. 144 does not have a material impact on its financial position or results of operations.

The FASB also recently issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and portions of APB Opinion No. 30, “Reporting the Results of Operations”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. Management has determined that the adoption of SFAS No. 144

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does not have a material impact on its financial position or results of operations.

E.    Research and Development, Patents and Licenses

The Company actively monitors trends in the United States and Europe in relation to changes in product features, consumer preferences, and the impact of environmental laws and regulations on the disposable diaper industry. Although the Company does not devote substantial expenditure to research and development, it constantly seeks to improve its products by substitution of materials and components, and of product features, to systematically improve the performance of its diapers for better absorbency and improved leakage protection. In particular, the Company monitors world-wide developments in various raw material components to enable the Company to take advantage of the latest developments, and in certain cases the Company has worked closely with suppliers to pioneer the use of such materials in the manufacture of disposable diapers.

F.    Trend Information

1.    Industry Trends

The Company believes that the most significant industry trends are:

• fluff wood pulp costs and other raw material costs decreased moderately in 2001, however, it is expected that the fluff wood pulp costs will increase moderately in 2002;

• increasing demand for mechanical closure tape and cloth-like breathable backsheet products, which the Company is meeting through modifications to its machinery;

• the domination of industry leaders in most of the markets putting pressure on retailers’ margins, which the Company is finding difficult to respond to by providing retailers with higher profit margins under current highly competitive market conditions.

The Company is unable to predict whether the other trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative.

2.    Inventory Practice and Order Backlog

The disposable diaper industry is generally characterized by prompt delivery by manufacturers and rapid movement of the product through retail outlets. The lead-time between placing an order and shipment to the local customer averages five to ten days. The Company maintains varying levels of raw materials and finished products inventory depending on lead-time and shipping schedules. The Company’s inventory levels generally vary between three to eight weeks. Due to the short lead-time between order and delivery of products, the Company does not maintain a significant backlog.

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Item 6.    Directors, Senior Management and Employees.

A.    Directors and Senior Management

The directors and executive officers of the Company are:

Name	Age	Present position
Brandon Wang	56	Director, Chairman of the Board and President
Philip Leung *	54	Director and Vice President
Johnny Tsui	61	Director, Vice President and Secretary
Patrick Tsang	56	Director and Vice President
Terence Leung	51	Director and Vice President
Peter Chang	55	Director and Vice President
Owen Price	75	Director
Anil Thadani	56	Director
Allister McLeish	62	Director

* Deceased—March, 2002

Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang’s sister. Peter Chang is married to Brandon Wang’s sister.

Brandon Wang founded the Company in Hong Kong in 1973 and has been a director and the Company’s Chairman and Chief Executive Officer since that time. Mr. Wang is a graduate of St. Francis Xavier’s College in Kowloon, Hong Kong.

Philip Leung helped Brandon Wang establish the Company in 1973 and had served as a director and Vice President of the Company since that time. He was the Company’s Chief Purchasing Officer and oversaw and implemented the global purchasing and product development of the Company. Mr. Leung held a diploma of Management Studies from Hong Kong Polytechnic University and a M.B.A. degree from the University of East Asia, Macau. Mr. Leung passed on March 25, 2002.

Johnny Tsui helped Brandon Wang establish the Company in 1973 and has served as a director and Vice President of the Company since that time. In September 1995, he was appointed as Secretary of the Company. He has also served as Chief Operating Officer of the Company’s Asian operations since 1991.

Patrick Tsang has been a director of the Company since 1980, and was appointed a Vice President in January 1992. He was Secretary of the Company from March 1992 to September 1995. In 1988, he started up the Company’s Australian operations. Since July 1993 he has also served as Chief Operating Officer of the Company’s European operations. Mr.

Tsang has a Ph.D. in Engineering from the University of London. He also attended a Management Science course at Imperial College, London.

Terence Leung was the Company’s Chief Financial and Accounting Officer from 1988 to 2001. He was

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appointed a director in 1991 and a Vice President in January 1992. Before joining the Company in 1978, Mr. Leung worked as an accountant with several major trading corporations in Hong Kong. Mr. Leung is a certified public accountant in the United Kingdom and Hong Kong.

Peter Chang has been the Chief Operating Officer of the Company’s U.S. operations from 1988 to 2001. Mr. Chang became a director in 1991 and a Vice President in January 1992 and currently serves as the Chairman of the Company’s North American operations. Prior to joining the Company, Mr. Chang held various engineering and management positions with major U.S. airlines, based in New York. Mr. Chang has a Master’s Degree in Operations Research from Kansas State University.

Owen Price became a director in April 1994. In 1993 he retired as the Managing Director of Dairy Farm International Holdings Limited which he joined in 1974. Prior to that time, he had 27 years experience with a large Australian retailer, Woolworths Ltd., where he started as an Executive Trainee and worked his way through to become Chief Executive in 1971. He has served on a number of retail councils in different countries and has been an adviser to the Australian government on trade matters. He is a director of numerous companies in the Asia-Pacific region including three other listed public companies : Dairy Farm International Holdings Limited, Cycle And Carriage Limited (alternate director), and The Hour Glass Limited.

Anil Thadani advises the Company on financial matters, corporate strategy and development, and was a director of the Company from 1989 until April 1995, when he resigned as a result of his interest in the going private transaction. He was re-elected to the Board in September 1995. Mr. Thadani is the Chairman of Schroder Capital Partners (Asia) Limited, a direct investment company, which he founded in July 1992 in joint venture with the Schroders Group of the United Kingdom. Prior to this, he was the Managing Director and a founding partner of Arral & Partners Limited, a private investment company based in Hong Kong. He is also a director of numerous companies, some of which are public listed companies in Singapore, Thailand and India. Mr. Thadani has a Master’s Degree in Chemical Engineering from the University of Wisconsin, Madison, and an M.B.A. from the University of California at Berkeley.

Allister McLeish became a director in October 2000. He previously served as a non-executive director in the 1970’s of one of the Company’s subsidiaries in Hong Kong. Mr. McLeish is a Scottish chartered accountant and a chartered management accountant who recently retired from a publicly listed industrial chemicals group, Yule Catto & Co. Plc., where he had held the position of finance director for the past twenty years. Mr. McLeish has had over forty years’ experience with internationally based manufacturing companies and has worked in the U.K. and in several Far Eastern countries.

OTHER KEY MANAGEMENT PERSONNEL

In addition to the above-named officers and directors, the following persons hold key management positions with the Company:

Edmund Schwartz, joined the Company in October 2001 as its Chief Financial Officer. Prior to joining the Company, Mr. Schwartz was with Lund International Holdings, Inc. a manufacturer of automotive accessory parts and served as its Chief Financial Officer from 1999 to 2001. Prior to Lund, Mr. Schwartz was with Electrolux Corporation, a manufacturer of floor care products from 1984 to 1999 and served

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as its Chief Financial Officer from 1990 to 1999. He holds a B.S. degree in Business Administration – Accounting from the University of Hartford, West Hartford, CT and an M.B.A. degree from the University of New Haven, New Haven, CT.

George Jackson was appointed to the position of Chief Executive Officer of the Company’s North American operations in March 2001. Prior to that, Mr. Jackson was Chief Executive of the Company’s Australian operation from mid 1997 to 2001. Mr. Jackson joined the Company in 1987 and prior to his transfer to Australia, he was the National Sales Manager with the Company’s U.S.A. operations. Prior to joining the Company, he held various management positions in accounting and manufacturing with Weyerhaeuser Company. He holds a B.A. degree in Business Administration – Accounting (1977) from the University of Washington, Seattle, WA.

Patrick Wong was promoted in 2001 to Chief Operating Officer of the Company’s South East Asian region. Mr. Wong graduated from Centro Escolar University (Philippines) as a Doctor of Dentistry in 1982. He started his career in sales and marketing in 1984 as a detailman in the pharmaceutical industry in Hong Kong. In 1990, Mr. Wong worked for U.S. Secure Co. Ltd., a Hong Kong company engaged in the marketing of disposable adult diapers in Hong Kong. Mr. Wong joined the Company’s Hong Kong operation in 1993 as Marketing Manager (Asia Pacific) for Thailand, Philippines and Indonesia markets. He was promoted to Executive Director of DSG International (Thailand) Ltd. in 1994 and transferred to Thailand in the same year for the establishment of the Company’s Thailand operation. From 1997 to 2001, he worked for the Company’s Hong Kong operation to establish its Health Care Division.

Colin Lamond commenced working for the Company’s Australian operation as Chief Operating Officer in November 2001. Prior to joining the Company, he was Managing Director of a privately owned Australian manufacturer of retail shelving equipment and shopping carts. Prior to that, Mr. Lamond was Executive General Manager for an Australian manufacturing conglomerate Email Limited, responsible for the Industrial Products group of businesses. He holds a Bachelor of Science degree in Mechanical Engineering from Southampton University and an M.B.A. from Harvard Business School.

B.    Compensation

In 2001 the aggregate remuneration paid by the Company and its subsidiaries to all directors of the Company as a group (9 persons) for services in all capacities was approximately $4,765,623.

C.    Board Practices

All directors are elected for a one-year term at the Annual Meeting of the shareholders. The appointment of all officers is subject to the discretion of the Board of Directors.

The Executive Committee of the Board of Directors consists of Brandon Wang, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The Executive Committee has authority to take any action, other than appointment of auditors, election and removal of directors and appointment of officers, which can be taken only by the Board of Directors.

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Neither the Company nor any of its subsidiaries provide benefits for directors upon termination of employment.

During 2001, the Company’s Audit Committee consisted of Anil Thadani, Owen Price and Allister McLeish. The principal functions of the Audit Committee are (i) to recommend the independent auditors to be employed by the Company; (ii) to consult with the independent auditors with regard to the plan of audit; (iii) to review, in consultation with the independent auditors, their audit report or proposed audit report; and (iv) to consult with the independent auditors with regard to the adequacy of the Company’s internal accounting controls. The Company’s Audit Committee met twice in 2001.

During 2001, the Company did not appoint a compensation committee.

D.    Employees

The Company has a total of approximately 1,899 full time employees at its manufacturing facilities as of December 31, 2001 :

	2001	2000	1999
North America	700	383	399
Australia	233	218	181
Asia	906	760	508
Europe	60	54	126
Total	1,899	1,415	1,214

The Company does not have a significant number of temporary employees.

The Company considers its relationships with its employees to be good in all of its plants, and none of the Company’s plants has ever experienced any material work stoppage.

The Company believes that all of its manufacturing facilities are in compliance with applicable occupational, health and safety legislation.

E.    Share Ownership

For information concerning the beneficial ownership of the Company’s Ordinary Shares by Directors and Senior Management and major shareholders, see Item 7 of this Report.

During March 2002, the Company filed an S-8 Registration Statement on March 21, 2002 establishing an Equity Participation Plan (the “Option Plan”). As of the filing date of this Form 20-F, the Company has not granted the directors, senior management and employees options to purchase shares of the Company under this Option Plan.

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In conjunction with the $15 million Term Loan, the Company committed to issue share purchase warrants to the lender. The warrants allowed the lender to purchase Ordinary Shares of the Company at a price of $0.01 per share. The number of warrants issued equaled 0.75% of the Company’s diluted Ordinary Shares outstanding for each month the principal balance of the loan was outstanding. Due to the repayment of the $15 million Term Loan after the six-month anniversary of the initial borrowing, the Company issued 4.5% of the Company’s diluted Ordinary Shares, equivalent to 314,510 shares. The fair value of the warrants of $1.4 million was treated as interest expense in 2001. The fair value of the warrants was estimated using the Black-Scholes Model. The assumptions used included : fair value of ordinary shares of $4.81 per share, volatility rate of 80%, a discount rate of 3.41% and an estimated life of one year.

Item 7.    Major Shareholders and Related Party Transactions.

A.    Major Shareholders

As of December 31, 2001, the total number of record holders was 36, of which 24, representing 36.57% of the Company’s Ordinary Shares, were in the United States.

The Company is not owned or controlled by another corporation or by any foreign government. The following table sets forth information regarding beneficial ownership of the Ordinary Shares of the Company by each person who on December 31, 2001 is known by the Company to own 5% or more of the Company’s outstanding Ordinary Shares and by all directors and officers as a group.

	Ordinary Shares beneficially owned
Name of Beneficial Owner	Number		Percent
10% or more shareholders (Brandon Wang)	3,321,680	(1)	47.53	%
Directors and officers as a Group (9 persons)	4,222,680	(1)	60.42	%
Philip Leung	234,000		3.35	%
Johnny Tsui	234,000		3.35	%
Peter Chang	124,000		1.77	%
Patrick Tsang	122,000		1.75	%
Terence Leung	117,000		1.67	%
Anil Thadani	70,000		1.00	%
Owen Price	—		—
Allister McLeish	—		—
Benedict Wang	123,000	(2)	1.76	%
S.L. Wang	117,000	(2)	1.67	%

(1) Includes 140,580 Ordinary Shares owned by Brandon Wang’s wife, Eileen Wang, as to which he disclaims beneficial ownership.

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(2) Includes 123,000 Ordinary Shares owned by Benedict Wang’s wife, Suk Yee Heyley Sham, as to which he disclaims beneficial ownership; and 117,000 Ordinary Shares owned by S.L. Wang’s wife, Pei Fang Wang, as to which he disclaims beneficial ownership.

Brandon Wang and seven other members of Management own more than 50% of the Company’s outstanding Ordinary Shares and, acting together, are able to control the election of the Board of Directors, and thus the direction and future operations of the Company, including decisions regarding acquisitions and other business opportunities, the declaration of dividends and the issuance of additional Ordinary Shares and other securities, in each case without the supporting vote of any other shareholder of the Company. In addition, Brandon Wang is a controlling shareholder of the Company and thus may be deemed to be a parent of the Company under the rules and regulations of the Securities Exchange Act of 1934.

The Company knows of no arrangements the operation of which may at a subsequent date result in a change in control of the Company.

B.    Related Party Transactions

The information required is contained in Note 16 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders, and is incorporated herein by reference.

The following table sets forth the aggregate amount of loans made by the Company to Brandon Wang, the founder, principal shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary since January 1, 1996 :

	Loan balance at beginning of year		Loans extended		Loans repaid		Balance at end of year
	(dollars in thousands)
Year ended December 31, 2001	$	11,612	$	3,046	$	3,914	$	10,744
Year ended December 31, 2000	$	2,811	$	10,744	$	1,943	$	11,612
Year ended December 31, 1999	$	3,472	$	1,879	$	2,540	$	2,811

In 2001, 2000 and 1999 the Company advanced $3.0 million, $10.7 million and $1.9 million, respectively, to Brandon Wang, the founder, substantial shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Brandon Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes (the “Notes”) bearing interest at a rate equal to 1.5% over LIBOR or such other rate that the Board of Directors and the borrower shall agree in writing. In January 2000, the Company’s U.S. subsidiary borrowed amounts under a term loan facility which was used to repay the balance of a loan payable by Brandon Wang to a bank, amounting to $5.3 million. This amount has been aggregated with the receivable from Brandon Wang under the Notes, which amounted to $2.8 million at December 31, 1999, and is repayable on demand and carries the same interest terms as those of the Notes. Brandon Wang is required to provide as collateral shares of the Company

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held by him. The security agreement with Mr. Wang requires that the total amounts due from him should not exceed 80% of the fair market value of the pledged shares. Subsequent to December 31, 2001, the loan balance exceeded 80% of the fair value of the shares pledged as collateral as a result of a decline in the quoted market price of such shares. The Board of Directors of the Company has approved a plan whereby Mr. Wang has committed to make payments such that the outstanding balance decreases by $1 million each year beginning in 2002. The Board of Directors of the Company also has decided not to take any further action on this matter at this time, including any available to it as a result of the decrease in the fair value of the shares pledged as collateral during 2002. At December 31, 2001 and 2000, the Company has classified the balances owed by Brandon Wang as a reduction from shareholders’ equity. During 2001, 2000 and 1999, Brandon Wang and a trust controlled by him repaid $3.9 million, $1.9 million and $2.5 million, respectively, to the Company. In addition, in April 2002, Mr. Wang repaid $750,000. Interest of $445,000, $470,000 and $243,000 was charged on these advances in 2001, 2000 and 1999, respectively.

Item 8.    Financial Information.

A.    Consolidated Statements and Other Financial Information

Our Consolidated Financial Statements are set forth under Item 18.

DIVIDENDS AND DIVIDEND POLICY

It is the Company’s general policy to determine the actual annual amount of future dividends based upon the Company’s growth during the preceding year. Future dividends will be in the form of cash or stock or a combination of both. There can be no assurance that any dividend on the Ordinary Shares will be declared, or if declared, what the amounts of dividends will be or whether such dividends, once declared, will continue for any future period. The Company did not pay any dividends in 2001, 2000 and 1999.

LEGAL PROCEEDINGS

The Company and its subsidiaries are from time to time involved in routine legal matters incidental to their business.

In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by the Plaintiffs John M. Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the United States District Court for the Middle District of Georgia. The complaint alleged that the Company, its U.S. subsidiary and certain European suppliers of disposable diaper manufacturing equipment (the “Defendants”) have infringed U.S. Patent No. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers; that the Company and its U.S. subsidiary breached a confidentiality agreement with the Plaintiffs by using certain information relating to the waistband applicator disclosed to them in confidence by the Plaintiffs; and theft by the Defendants of the Plaintiffs’ trade secrets concerning the waistband applicator. On March 20, 2002 the United States District Court for the Middle District of Georgia entered a $4.0 million judgment in favor of the Plaintiffs. On March 29, 2002 an amended final order and judgment was entered by the United States District Court for the Middle District of Georgia awarding the Plaintiffs $10.4 million in actual and increased damages for patent infringement and prejudgment interest on the

34

patent claim. Subsequent to the entering of this final order and judgment, the Company began to negotiate a settlement with the Plaintiffs. On April 9, 2002 the Company entered into a Settlement Agreement with the Plaintiffs. The terms of this Settlement Agreement required the Company to make a lump sum payment of $4.2 million to the Plaintiffs no later than April 18, 2002 to settle all asserted claims in the original lawsuit. The $4.2 million lump sum payment was made to the Plaintiffs on April 17, 2002. On April 18, 2002, the Company along with the Plaintiffs filed a “Stipulated Final Order of Dismissal” dismissing with prejudice both the judgment dated March 20, 2002 and the amended final order and judgment dated March 29, 2002. Effective with the filing of the “Stipulated Final Order of Dismissal”,the R&L lawsuit has been settled and the judgments of March 20th and March 29th have been vacated. The Company has recorded the $4.2 million settlement as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations of the Annual Report to Shareholders for the year ended December 31, 2001.

A claim was made by Ms. Rhonda Tracy, the owner of U.S. Patent No. 5,797,824 for disposable diapers with a padded waistband and leg holes, asserting that the Company has been manufacturing and/or selling diapers which infringe her patent. No lawsuit has been filed against the Company to date. The Company, however, had filed a lawsuit against Ms. Tracy in the U.S. District Court for the Northern District of Georgia for a declaration that her patent is invalid and/or not infringed. The Company settled this claim with Rhonda Tracy on March 15, 2002 for $375,000. The Company has recorded the $375,000 as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations of the Annual Report to Shareholders for the year ended December 31, 2001.

B.    Significant Changes

The information required is contained in Note 5, Note 17 and Note 24 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders, and is incorporated herein by reference.

Item 9.    Stock Price History.

A.    Listing Details

The Company’s Ordinary Shares are listed on the NASDAQ National Market System under the trading symbol DSGIF, and are not listed for trading in any foreign trading market.

ORDINARY SHARE PRICE :

	2001		2000		1999		1998		1997
High	$	7.906	$	7.000	$	10.625	$	9.500	$	17.250
Low		3.450		4.000		2.750		2.813		7.375

	2002				2001				2000
Quarter	High		Low		High		Low		High		Low
First	$	4.220	$	3.190	$	7.906	$	4.063	$	7.000	$	5.500
Second		—		—		7.125		5.410		5.938		4.750
Third		—		—		6.100		4.350		5.500		4.000
Fourth		—		—		4.400		3.450		5.563		4.000
	May 2002		Apr 2002		Mar 2002		Feb 2002		Jan 2002		Dec 2001
High	$	3.299	$	3.499	$	3.690	$	3.599	$	4.220	$	4.400
Low		3.075		3.040		3.190		3.204		3.300		3.620

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B.    Plan of Distribution

Not applicable.

Item 10.    Other Information.

A.    Share Capital

The Company’s authorized share capital consists of 20,000,000 Ordinary Shares, $0.01 par value per share. At April 30, 2002, there were 6,989,116 Ordinary Shares of the Company outstanding, all of which was fully paid.

B.    Memorandum and Articles of Association

The following is a brief description of the rights of holders of fully paid Ordinary Shares. This description does not purport to be complete and is qualified in its entirety by reference to the Memorandum and Articles of Association of the Company, which have been previously filed as an exhibit, and to the relevant provisions of the British Virgin Islands International Business Companies Act.

1.    General

All of the issued Ordinary Shares are credited as fully paid and non-assessable, except that a share issued for a promissory note or other written obligation for payment of a debt may be subject to forfeiture, and accordingly no further contribution of capital may be required by the Company from holders of Ordinary Shares. Under British Virgin Islands (“BVI”) law, non-residents of the BVI may freely hold, vote and transfer their Ordinary Shares in the same manner as BVI residents.

2.    Dividends

Holders of Ordinary Shares are entitled to participate in the payment of dividends in proportion to their holdings. The Board of Directors may declare and pay dividends in respect of any accounting period out of the profits legally available for distribution. Dividends, if any, will be paid in U.S. dollars.

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The Company’s dividend policy will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors. For a discussion of taxation of dividends, see “Taxation”.

The Company did not pay any dividend in 2001.

3.    Voting Rights

In order to avoid certain adverse U.S. income tax consequences to the Company, the voting rights of any shareholder who holds more than 10% of the Company’s outstanding shares will be suspended as to shares held by such shareholder in excess of 10% of the Company’s outstanding shares (“Excess Shares”). Excess Shares are not counted as voting shares for purposes of establishing a quorum at shareholders’ meetings. However, the Board of Directors has discretion to exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company’s outstanding shares by such shareholder will not result in the Company being classified as a controlled foreign corporation (“CFC”), foreign personal holding company (“FPHC”) or personal holding company (“PHC”) within the meaning of the U.S. Internal Revenue Code (“Code”). See “Taxation”; “Restrictions on Transfer and Voting; Redemption of Ordinary Shares”.

Every shareholder who is present in person or by proxy at a meeting of the Company shall have one vote for each Ordinary Share of which he is the holder. A poll may be demanded by the chairman of the meeting, or by any shareholder present in person or by proxy.

The Articles of Association of the Company make no provision for cumulative voting. Accordingly, the controlling shareholders have a sufficient number of Ordinary Shares to elect all of the Company’s directors.

4.    Restrictions on Transfer and Voting; Redemption of Ordinary Shares

The Company’s Memorandum and Articles of Association contain certain provisions which are intended to avoid situations in which the Company may be classified as a CFC, FPHC or PHC. See “Taxation”. These provisions are intended only to avoid the adverse U.S. income tax consequences which would result from such classification.

The following is a summary of the relevant provisions of the Memorandum and Articles:

(i)  Restricted Transfers of Ordinary Shares. The Board of Directors may, but is not obliged to, refuse to register the transfer of any of the Ordinary Shares of the Company if, in the opinion of the Board, such transfer might cause the Company to be classified as a CFC, FPHC or PHC.

(ii)  Restrictions on Voting Rights. In the event that any person holds more than 10% of the Company’s outstanding shares, any shares in excess of 10% of the Company’s outstanding shares shall be “Excess Shares”, which shall not be entitled to any voting rights and shall not be considered voting shares for purposes of establishing a quorum. However, the Board of Directors may exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company’s outstanding shares by such shareholder will not

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result in the Company being classified as a CFC, FPHC or PHC. In addition, these restrictions on voting rights do not apply to shares acquired in a cash tender offer for all outstanding shares of the Company where a majority of the outstanding shares of the Company are duly tendered and accepted pursuant to such cash tender offer.

(iii)  Disclosure of Certain Information to the Company. Any person who directly owns 5% or more of the Company’s outstanding shares is required to file with the Company, within 60 days of the end of the Company’s taxable year (which is currently the calendar year) and prior to any transfer of shares by or to such person, an affidavit setting forth the number of shares (1) owned directly by such person or by a nominee of such person, and (2) owned indirectly or constructively by such person by reason of the attribution rules of Sections 542, 544 and 958 of the Code or by reason of application of the attribution rules of Rule 13(d) of the U.S. Securities Exchange Act of 1934 (“Exchange Act”). The affidavit filed with the Company must set forth all the information required to be reported (1) in returns of shareholders required to be filed under U.S. Income Tax Regulations Section 1.6035-1 (including shareholder related information for inclusion in IRS Form 5471), and (2) in reports required to be filed under Section 13(d) of the Exchange Act. All shares held by any person who fails to comply with this reporting requirement shall be deemed Excess Shares and shall be subject to the voting restrictions and redemption provisions described herein.

(iv)  Redemption of Ordinary Shares. The Company may, in the discretion of the Board of Directors, redeem any Excess Shares at a price equal to (1) the average of the high and low sales price of the shares on the last business day prior to the redemption date on the principal national securities exchange on which such shares are listed or admitted to trading, or (2) if the shares are not listed or admitted to trading, the average of the highest bid and lowest asked prices on such last business day as reported by the National Quotation Bureau Incorporated or similar organization selected from time to time by the Company, or (3) if not determinable as aforesaid, as determined in good faith by the Board of Directors.

The directors of the Company, in a meeting held on January 6, 1992, resolved that the principal shareholder, Brandon Wang, is exempt from the foregoing restrictions. The directors have also approved exemption of certain institutional shareholders from the foregoing restrictions as the Board was satisfied that such exemption would not have any of the adverse tax consequences described above.

5.    Rights of Shareholders under British Virgin Islands Law may be less than in U.S. Jurisdictions

The Company’s corporate affairs are governed by its Memorandum and Articles of Association and by the International Business Companies Act of the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of Management and the rights of the Company’s shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States. The rights of shareholders under British Virgin Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent in existence in most U.S. jurisdictions. Thus, the public shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Board of Directors or the principal shareholders than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. In addition, it is unlikely that the courts of the British Virgin Islands would enforce, either in an original action or in an action for enforcement of judgments of U.S. courts, liabilities which are predicated upon the securities laws of the United States. See “Description of Securities”.

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6.    Directors

Under the Company’s Articles of Association, the subscribers to the Memorandum of Association must appoint the first directors, and thereafter the directors may be appointed by the shareholders, or by the directors to fill a vacancy or as an addition to the existing directors. Directors may be removed, with or without cause, by a resolution of the shareholders of the Company, or with cause by a resolution of the other directors.

7.    Powers of Directors

The business and affairs of the Company is managed by the directors of the Company who exercise all such powers of the Company as are not by the Act or by the Memorandum or these Articles required to be exercised by the members of the Company, subject to any delegation of such powers as may be prescribed by a resolution of members; but no requirement made by a resolution of members shall prevail if it be inconsistent with the Articles nor shall such requirement invalidate any prior act of the directors which would have been valid if such requirement had not been made.

The directors may, by a resolution of directors, appoint any person, including a person who is a director, to be an officer or agent of the Company. The resolution of directors appointing an agent may authorize the agent to appoint one or more substitutes or delegates to exercise some or all of the powers conferred on the agent by the Company.

Every officer or agent of the Company has such powers and authority of the directors, including the power and authority to affix the Seal, as are set forth in the Articles or in the resolution of directors appointing the officer or agent, except that no officer or agent has any power or authority with respect to the matters requiring a resolution of directors under the Memorandum, the Articles, or the Act.

The continuing directors may act notwithstanding any vacancy in their body, save that if their number is reduced to their knowledge below the number fixed by or pursuant to these Articles as the necessary quorum for a meeting of directors, the continuing directors or director may act only for the purpose of appointing directors to fill any vacancy that has arisen or for summoning a meeting of members.

The directors may, by resolution of directors exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed, or as security for any debt, liability or obligation of the Company or of any third party.

All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for moneys paid to the Company, shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as shall from time to time be determined by resolution of directors.

The Company may determine by resolution of directors to maintain at its registered office a register of mortgages, charges and other encumbrances in which there shall be entered the following particulars regarding each mortgage, charge and other encumbrance: (a) the sum secured; (b) the assets secured; (c) the name and address of the mortgagee/chargee or other encumbrancer; (d) the date of creation of the mortgage, charge or other encumbrance; and (e) the date on which the

39

particulars specified above in respect of the mortgage, charge or other encumbrance are entered in the register.

The Company may further determine by a resolution of directors to register a copy of the register of mortgages, charges or other encumbrances with the Registrar of Companies.

8.    Quorum

The quorum required to constitute a valid general meeting of shareholders consists of shareholders present in person or by proxy holding at least a majority of all issued Ordinary Shares entitled to vote. If a meeting is adjourned for lack of quorum, it will stand adjourned to the next business day at the same time and place or to such other day and at such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting at least one-third of the shares entitled to vote at the meeting, the shareholder or shareholders present shall be a quorum. However, a meeting convened on the requisition of the shareholders shall be dissolved if a quorum is not present at the first meeting.

9.    Resolutions

Resolutions may be adopted at shareholders’ meetings by the affirmative vote of a simple majority of the Ordinary Shares entitled to vote thereon.

Certain actions may be taken by a resolution of the directors. Such actions include an amendment of the Company’s Memorandum and Articles of Association, an increase or reduction in the Company’s authorized capital, and a change in the Company’s name.

10.    Rights in a Winding-up

Holders of Ordinary Shares are entitled to participate in proportion to their holdings in any distribution of assets after satisfaction of liabilities to creditors in a winding-up.

11.    Authorized but Unissued Shares

Under the Company’s Memorandum and Articles of Association, there are 13,010,884 authorized but unissued Ordinary Shares. Those additional authorized but unissued Ordinary Shares may be utilized for a variety of corporate purposes, including future public or private offerings to raise additional capital or for facilitating corporate acquisitions. In addition, the Company cancelled 603,000 shares in 1996 and 1,037,394 shares in 1997, which were repurchased under the share repurchase plan adopted during 1994 and amended in 1995 and the tender offer transaction which was completed in December 1996. The Company does not currently have any plans to issue additional Ordinary Shares.

12.    Transfers of Ordinary Shares

The Company’s Memorandum and Articles of Association do not restrict the transferability of fully paid Ordinary Shares, except that the Board of Directors may refuse to register the transfer of any of the Ordinary

40

Shares if, in the opinion of the Board, such transfer might result in the Company becoming a CFC, FPHC or PHC. See “Restrictions on Transfer and Voting; Redemption of Ordinary Shares”.

13.    New Issues of Ordinary Shares

Under the Company’s Articles of Association, the Board of Directors is authorized to exercise the power of the Company to offer, allot, grant options over or otherwise dispose of all of the remaining unissued Ordinary Shares of the Company, which comprise 13,010,884 Ordinary Shares. The Board of Directors may, without further shareholder action, increase the number of authorized shares of the Company.

In addition the Board of Directors may, without further shareholder action, designate any of the authorized but unissued Ordinary Shares as preferred shares by amending the Company’s Memorandum of Association. Upon filing such amendment with the BVI Registrar of Companies, the Board of Directors would have authority to fix the dividend rights and rates, voting rights, redemption provisions and liquidation preference, all of which may take precedence over comparable rights of the existing Ordinary Shares.

The Company issued 314,510 Ordinary Shares in 2001.

14.    Merger; Dissenters’ Rights

BVI law provides for mergers whereby there occurs either an absorption by one company of another company and the simultaneous dissolution of the other company, or the formation of a new company that absorbs two companies and the automatic dissolution of both absorbed companies. BVI law provides for compulsory acquisition or appraisal of the interests of a shareholder who objects to the transfer of the ownership or assets of a company.

Under section 83 of the BVI International Business Companies Act, a shareholder of a company incorporated under the Act has the right to object to a proposed merger of the Company. If the shareholder complies fully with the requirements of section 83 and the merger is approved by a majority of shareholders, the dissenting shareholder may require the Company to pay fair value (as agreed or appraised) for his shares.

Pursuant to section 83 (11) of the Act, a shareholder who chooses to enforce dissenting shareholders’ rights may not enforce other remedial rights to which he might otherwise be entitled by virtue of his holding shares, except that the shareholder shall retain the right to institute proceedings to obtain relief on the ground that the merger is illegal.

15.    Joint Shareholders

If two or more persons who hold shares jointly are present at a meeting in person or by proxy they must vote as one. Dividends and notices may be paid or sent, in the case of joint holders, to any one of the persons named as joint shareholders in the register of members.

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16.    Fiduciary Responsibilities

Under U.S. law majority and controlling shareholders generally have certain “fiduciary” responsibilities to the minority shareholders. Shareholder action must be taken in good faith and actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in U.S. jurisdictions.

While BVI law does permit a shareholder of a BVI company to sue its directors derivatively (i.e., in the name of and for the benefit of the Company) and to sue the Company and its directors for his benefit and for the benefit of others similarly situated, the circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders in a U.S. company.

17.    Indemnification of Officers and Directors

Under its Memorandum and Articles of Association, the Company is authorized to indemnify any person who is made or threatened to be made a party to a legal or administrative proceeding by virtue of being a director, officer or agent of the Company, provided such person acted in the best interests of the Company and, in the case of a criminal proceeding, such person had no reasonable cause to believe that his conduct was unlawful. The Company is obliged to indemnify any director, officer or agent of the Company who was successful in any proceeding against reasonable expenses incurred in connection with the proceeding, regardless of whether such person met the standard of conduct described in the preceding sentence.

18.    Transfer Agent and Registrar

Mellon Investor Services, LLC serves as the Transfer Agent and Registrar for the Ordinary Shares.

C.    Material Contracts

The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which the Company or any subsidiary of the Company is a party, for the two years immediately preceding the filing of this report, and which are filed as Exhibits hereto :

Sale and Purchase Agreement between DSG-TEK Limited, a wholly owned subsidiary of the Company as seller and IVF Hartmann AG as buyer dated October 20, 2000 under which the seller sells to the buyer all shares of Vlesia AG, a wholly owned subsidiary of the seller, for the consideration of Swiss Franc 8.5 million.

Loan and Security Agreement between Associated Hygienic Products LLC as borrower and Foothill Capital Corporation as lender dated March 14, 2001 under which the lender agrees to make a term loan, a capital expenditure line and revolver advances to the borrower up to $31.0 million. See “Dependent Patents, Licenses and Contracts” in Item 4.B.6 and Notes 11, 14 and 15 of the Notes to Consolidated Financial Statements.

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Short Term Financing Agreement between DSG International Limited as borrower and Breakers Investment Holding Limited as lender dated March 14, 2001 under which the lender agrees to make a term loan of $15.0 million to the borrower. DSG International Limited granted the lender 314,510 warrants priced at $0.01 per share.

Sale and Purchase agreement between Associated Hygienic Products LLC as buyer and Drypers Corporation as seller dated February 20, 2001 under which and pursuant to the order the U.S. Bankruptcy Court based in Houston, Texas the buyer agrees to buy and the seller agrees to sell its North American assets. The gross value of assets acquired was $39.6 million, which was subsequently reduced by $3.7 million due to a working capital adjustment. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, “Business Combinations”. This transaction closed March 14, 2001.

D.    Exchange Controls

There are no exchange control restrictions on payment of dividends, interest, or other payments to non-resident holders of the Company’s securities or on the conduct of the Company’s operation in Hong Kong, where the Company’s principal executive offices are located or the British Virgin Islands, where the Company is incorporated. Other jurisdictions in which the Company conducts operations may have various exchange controls and the Company believes that such controls will not have a material effect on the Company’s liquidity or cash flow.

E.    Taxation

The following discussion is a summary of certain anticipated U.S. federal income tax and BVI tax consequences of ownership of Ordinary Shares. The discussion does not address all possible tax consequences relating to ownership of Ordinary Shares and does not purport to describe the tax consequences applicable to all categories of owners, some of which (such as dealers in securities, insurance companies and tax-exempt entities) may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other national (e.g., non-U.S. and non-BVI) tax laws. Accordingly, each shareholder should consult its own tax advisor regarding the particular tax consequences to it of its ownership of the Ordinary Shares. The following discussion is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change.

1.    United States Federal Income Taxation

The following discussion only addresses the U.S. federal income taxation of a U.S. person (e.g., an individual who is a citizen or resident of the U.S., a U.S. corporation, an estate subject to U.S. tax on all of its income regardless of source, and a trust if a court within the U.S. may exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control substantial decisions of the trust.) (a “U.S. Investor”) owning Ordinary Shares. In addition, the following discussion does not address the tax consequences to a person who owns (or will own) directly, indirectly or constructively, 10% or more of the Ordinary Shares (a “10% Shareholder”). Non-U.S. persons and 10% Shareholders are advised to consult their own tax advisors regarding the tax considerations incident to ownership of the Ordinary Shares.

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A U.S. Investor receiving a distribution with respect to the Ordinary Shares will be required to include such distribution in gross income as a taxable dividend to the extent such distribution is paid from earnings and profits of the Company as determined under U.S. federal income tax principles. Any distributions in excess of the earnings and profits of the Company will first be treated, for U.S. federal income tax purposes, as a nontaxable return of capital to the extent of the U.S. Investor’s basis in the Ordinary Shares, and then as a gain from the sale or exchange of a capital asset, provided that the Ordinary Shares constitute capital assets in the hands of the U.S. Investor. U.S. corporate shareholders will not be entitled to any deduction for distributions received as dividends on the Ordinary Shares.

Gain or loss on the sale or exchange of the Ordinary Shares will be treated as capital gain or loss if the Ordinary Shares are held as a capital asset by the U.S. Investor. Such capital gain or loss will be a long-term capital gain or loss if the U.S. Investor has a holding period of more than one year with respect to the Ordinary Shares at the time of the sale or exchange.

Various provisions contained in the U.S. Internal Revenue Code (the “Code”) impose special taxes in certain circumstances on non-U.S. corporations and their shareholders. The following is a summary of certain provisions which could have an adverse impact on the Company and the U.S. Investors :

    a.    Personal Holding Companies

Sections 541 through 547 of the Code relate to the classification of certain corporations (including foreign corporations) as personal holding companies (“PHCs”) and the consequent taxation of such corporations on certain of their U.S.-sourced income (including certain types of foreign sourced income which are effectively connected with the conduct of a U.S. trade or business) to the extent amounts at least equal to such income are not distributed to their shareholders. A PHC is a corporation (i) more than 50% of the value of the stock of which is owned, directly or indirectly, by five or fewer individuals (without regard to their citizenship or residence), and (ii) which, if a foreign corporation, receives 60% or more of such U.S.-related gross income, as specially adjusted, from certain passive sources (such as dividends, interest, royalties or rents). If the Company is classified as a PHC, a tax will be levied at the rate of 39.6% on the Company’s undistributed U.S. taxable income.

While more than 50% of the Ordinary Shares may be treated as owned (either directly or indirectly) by five or fewer individuals, the Company intends to cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with such corporation’s immediate U.K.-resident parent corporation, to distribute any amounts which would otherwise be characterized as “undistributed personal holding company income” in the hands of either corporation with the intent that such distributions would cause such distributed amounts to lose their character as “United States source” taxable income subject to the PHC tax.

    b.    Foreign Personal Holding Companies

Sections 551 through 558 of the Code relate to foreign personal holding companies (“FPHCs”) and impute undistributed income of certain foreign corporations to U.S. persons who are shareholders of such corporations. A foreign corporation will be classified as a FPHC if (i) five or fewer individuals, who are U.S. citizens or residents, directly or

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indirectly own more than 50% of the corporation’s stock (measured either by voting power or value) (the “shareholder test”) and (ii) the Company receives 60% or more of its gross income (regardless of source), as specially adjusted, from certain passive sources (the “income test”).

The Company believes that it is not currently and has not been a FPHC for any taxable year since its formation because for each such year either or both of the income test and the shareholder test were not met. It is possible that subsequent events would cause the Company to meet either or both of the income test and the shareholder test. In the opinion of the Company, however, it is unlikely that the shareholder test would be met, especially in view of the inclusion of certain transfer restrictions in the Company’s governing documents. See “Description of Securities”.

If the Company is classified as a FPHC after application of the shareholder test and the income test, a pro rata portion of its undistributed income would be imputed to its shareholders who are U.S. persons (including U.S. corporations) and would be taxable to such persons as a dividend, even if no cash dividend is actually paid. In that event (promptly after receiving an opinion of counsel or final determination) the Company intends to distribute to its shareholders sufficient amounts so that U.S. shareholders would receive cash at least equal to the product of 150% of the highest federal income tax rate which could apply to any U.S. shareholder and the amount of the dividend that would otherwise be imputed to them. If the Company is classified as a FPHC in the year preceding the death of a shareholder, the Ordinary Shares held by such shareholder would obtain a tax basis equal to the lesser of their fair market value or their tax basis in the hands of the decedent.

    c.    Passive Foreign Investment Companies

Sections 1291 through 1297 of the Code relate to passive foreign investment companies (“PFICs”) and impose an interest charge on “excess distributions” made from a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross income for the taxable year is passive income as defined under Section 954(c) of the Code (the “passive income test”), or (ii) 50% or more of the average value (or adjusted tax basis if the corporation is a CFC) of the assets held by the corporation during the taxable year consist of assets that produce or are held for the production of passive income (the “passive asset test”). Certain look-through rules take into account the assets and activities of related corporations from which the foreign corporation either receives income or in which it holds an interest. Although a determination whether a corporation is a PFIC is made annually, in general, once a corporation has been classified as a PFIC, it cannot thereafter lose its status as a PFIC.

Distribution from a PFIC will generally be characterized as an excess distribution to the extent such distribution, when combined with all other distributions received by the U.S. Holder in such taxable year, exceeds 125% of the average distributions received by such shareholder in the three preceding taxable years (or its holding period if shorter). Once the amount of the excess distribution is determined, it is allocated ratably to all days in the shareholder’s holding period for the shares of the PFIC. Amounts allocated to the current year or a year prior to the date upon which the corporation was a PFIC are included in the shareholder’s income as ordinary income. Amounts allocated to prior years in which the corporation was a PFIC are subject to the highest rate of tax for the year to which allocated, and each of the resulting amounts of tax is subject to an interest charge as if it were an underpayment of taxes for such tax year.

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The Company does not believe that it should, in the current year or any prior year, be classified as a PFIC. Under Section 1296(c) of the Code for purposes of determining PFIC status, a foreign corporation is deemed to hold its proportionate share of the assets and to receive directly its proportionate share of the income of its subsidiaries in which it owns 25 percent or more of the stock (determined by value). The Company, through its more than 25 percent owned subsidiaries, is engaged in substantial manufacturing activities and holds few assets (and receives little income) which would be classified as passive assets or would be classified as passive income under the applicable authorities.

    d.    Controlled Foreign Corporations

Sections 951 through 964 and section 1248 of the Code relate to controlled foreign corporations (“CFC”) and impute undistributed income to certain shareholders and convert into dividend income gains on dispositions of shares which would otherwise qualify for capital gains treatment. The CFC provisions only apply if 10% Shareholders (as defined above), who are also U.S. persons, own, in the aggregate, more than 50% (measured by voting power or value) of the shares of a foreign corporation. Even if the Company were to become classified as a CFC, however, the income imputation rules referred to above would only apply with respect to such 10% Shareholders.

    e.     United States Backup Withholding

A holder of an Ordinary Share may be subject to “backup withholding” at the rate of 31% with respect to dividends paid on such Ordinary Share if such dividends are paid by a paying agent, broker or other intermediary in the United States or by a U.S. broker or certain United States-related brokers to such holder outside the United States. In addition, the proceeds of the sale, exchange or redemption of an Ordinary Share may be subject to backup withholding if such proceeds are paid by a paying agent, broker or other intermediary in the United States.

Actual backup withholding may be avoided by the holder of an Ordinary Share if such holder (i) is a corporation or comes within certain other exempt categories, and when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of Ordinary Shares who are not U.S. persons (“non-U.S. holders”) are generally exempt from backup withholding, although such holders may be required to comply with certification and identification procedures in order to prove their exemption. In the case of Ordinary Shares held by a foreign partnership, this certification requirement would generally be applied to the partners of such partnerships pursuant to certain regulations which will generally become effective after 2000.

Any amounts withheld under the backup withholding rules from a payment to a holder will be refunded (or credited against the holder’s U.S. federal income tax liability, if any) provided that the amount withheld is claimed as federal taxes withheld on the holder’s U.S. federal income tax return relating to the year in which the backup withholding occurred. A holder who is not otherwise required to file a U.S. income tax return must generally file a claim for refund (or, in the case of non-U.S. holders, an income tax return) in order to claim refunds of withheld amounts.

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2.    British Virgin Islands Taxation

Under the laws of the BVI as currently in effect, a holder of Ordinary Shares who is not a resident of the British Virgin Islands is exempt from BVI income tax on gains realized during that year on sale or disposal of such shares; the British Virgin Islands does not impose a withholding tax on dividends paid by the Company.

There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands. In addition, the Ordinary Shares are not subject to any transfer taxes, stamp duties or similar charges in the BVI.

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands, nor is any such treaty or convention currently being negotiated.

F.    Dividends and Paying Agents

Not applicable.

G.    Statement by Experts

Not applicable.

H.    Documents on Display

The Annual Report on Form 20-F of DSG International Limited as filed with the Securities and Exchange Commission and Exhibits thereto and documents referenced therein will be made available upon written request to the Company’s Principal Executive Office.

Item 11.    Quantitative and Qualitative Disclosures about Market Risk.

A.    Currency Fluctuation

1.    Exchange Rate Information

The Consolidated Financial Statements of the Company are prepared in U.S. dollars. The financial statements of foreign subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52.

The Australian dollar, Pound Sterling, Deutsche Mark, Belgian Franc, Singapore dollar, Thai Baht, and Indonesian Rupiah are convertible into U.S. dollars at freely floating rates. The Hong Kong dollar and Malaysian Ringgit are tied to and allowed to fluctuate within a narrow range against the value of the U.S. dollar. There are currently no restrictions on the flow of such currencies, except Renminbi, Thai Baht and Malaysian Ringgit, between such countries and the United States.

Fluctuations in the value of foreign currencies cause U.S. dollar translated amounts to change in comparison with previous periods and, accordingly, the Company cannot quantify in any meaningful way, the effect of such fluctuations upon

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future income. This is due to the number of currencies involved, the constantly changing exposure in these currencies, and the fact that all foreign currencies do not react in the same manner against the U.S. dollar.

The exchange rate in the Asian countries such as Thailand and Indonesia and the exchange rate of Australian dollars devalued in 2001 compared with 2000. The Company is unable to predict whether the trends noted above would have a material effect in its future financial condition or results of operations and, if so, whether such an effect will be positive or negative.

2.     Exchange Rate Fluctuation

	2001			2000
	High	Low	Average	High	Low	Average
First quarter
Australian dollar	2.02	1.83	1.92	1.63	1.56	1.60
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.74	1.72	1.73	1.71	1.70	1.71
Thai Baht	42.79	42.44	42.55	37.82	37.44	37.64
Indonesian Rupiah	10,465.00	9,750.00	9,988.46	7,782.50	7,072.91	7,311.20
Pound Sterling	0.70	0.69	0.69	0.63	0.62	0.62
Belgian Franc	44.98	43.43	44.09	42.15	41.03	41.56
Hong Kong dollar	7.80	7.80	7.80	7.78	7.78	7.78
Renminbi	8.28	8.28	8.28	8.30	8.30	8.30
Second quarter
Australian dollar	1.96	1.92	1.95	1.75	1.65	1.70
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.82	1.80	1.81	1.73	1.70	1.72
Thai Baht	45.48	45.09	45.26	39.26	37.94	38.74
Indonesian Rupiah	11,675.00	11,058.00	11,391.00	8,661.33	7,788.20	8,369.29
Pound Sterling	0.71	0.69	0.70	0.67	0.64	0.65
Belgian Franc	46.93	44.77	46.14	44.05	42.62	43.30
Hong Kong dollar	7.80	7.80	7.80	7.79	7.78	7.79
Renminbi	8.28	8.28	8.28	8.30	8.30	8.30
Third quarter
Australian dollar	2.03	1.88	1.96	1.83	1.69	1.76
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.80	1.74	1.77	1.74	1.71	1.73
Thai Baht	45.62	44.07	44.68	42.26	40.78	41.43
Indonesian Rupiah	9,700.00	8,918.00	9,356.00	8,667.22	8,663.33	8,664.93
Pound Sterling	0.70	0.68	0.69	0.69	0.67	0.68
Belgian Franc	45.64	43.75	44.44	45.54	43.54	44.71
Hong Kong dollar	7.80	7.80	7.80	7.80	7.79	7.80

48

Renminbi	8.28	8.28	8.28	8.30	8.30	8.30
Fourth quarter
Australian dollar	1.97	1.91	1.94	1.94	1.80	1.88
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.84	1.82	1.83	1.75	1.73	1.74
Thai Baht	44.57	43.98	44.18	43.63	43.14	43.42
Indonesian Rupiah	10,490.00	10,400.00	10,440.00	8,667.56	8,666.44	8,666.89
Pound Sterling	0.70	0.69	0.69	0.71	0.67	0.69
Belgian Franc	45.12	44.09	44.72	47.80	43.28	46.01
Hong Kong dollar	7.80	7.80	7.80	7.80	7.80	7.80
Renminbi	8.28	8.28	8.28	8.30	8.30	8.30

3.    Forward-Looking Statements

The Company continues to expand its markets in the Asian region and the Company expects that its market share in the region will increase. The Company expects that the exchange rate of the currency of certain countries in the Asian Pacific region will fluctuate in greater magnitude in 2002. The cost of raw materials, primarily fluff wood pulp cost is expected to increase moderately in 2002.

From time to time, the Company may make certain statements that contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as “anticipate”, “estimate”, “project”, “believe” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of the Operating and Financial Review and Prospects and as part of other sections of this Annual Report on Form 20-F and the Company’s other filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including without limitation to those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates.

B.     Foreign Currency Risk

As of December 31, 2001, the Company had no open forward contracts or option contracts. The Company’s cash on hand as of December 31, 2001 was $9,364,000 of which $2,286,000 equivalent was held in various foreign currencies, such as Australian dollar, Hong Kong dollar, Renminbi, Thai Baht, Malaysian Ringgit, Indonesian Rupiah, Singapore dollar and Pound Sterling. The U.S. dollar equivalents of the cash in foreign currencies may vary subject to exchange rate fluctuation.

49

C.    Interest Rate Fluctuations

The Company’s interest expenses and income are sensitive to change in interest rates. The Company had short-term debts and long-term debts of $47,931,000 as of December 31, 2001, bearing various rates of interest, any fluctuation in the interest rate will have direct impact on the Company’s interest expenses.

The Company will be exposed to interest rate fluctuations on any borrowings under the various loan facilities and any change in interest rate could affect its results of operations and cash flows. The potential effect of a hypothetical 0.5% increase in interest rate for year 2001 outstanding indebtedness would be a reduction in net income of approximately $132,000.

Item 12.    Description of Securities Other than Equity Securities.

Not applicable.

PART II

Item 13.    Defaults, Dividend Arrearages and Delinquencies.

During the second and third quarters of 2001, the Company failed to achieve certain financial covenants under two of Loan Agreements. In both cases, the Company’s lenders waived all of the financial covenants, defaults and amended and modified the financial covenants related to these Loan Agreements for the remainder of 2001 and for 2002. As a result of recording the R&L lawsuit settlement of $4.2 million in 2001, the Company defaulted on certain loan agreement covenants in the fourth quarter of 2001. The Company has received a waiver of all defaults on its loan agreement covenants from its lenders for the fourth quarter 2001.

Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds.

Not applicable.

Item 15.    [Reserved]

Item 16.    [Reserved]

50

PART III

Item 17.    Financial Statements.

Financial statements are presented in Item 19.A.

Item 18.    Financial Statements.

The information required by Item 18 is contained in Item 19.A.

Item 19.    Financial Statements and Schedules and Exhibits.

A.    Financial Statements

The following financial statements are contained in the Annual Report to Shareholders at the pages referred to below, which pages are incorporated herein by reference:

	Page
Management Report	24
Independent Auditors’ Report	25
Consolidated Statements of Operations and Comprehensive Income for the three years ended December 31, 2001	26
Consolidated Balance Sheets as of December 31, 2001 and 2000	27-28
Consolidated Statements of Cash Flows for the three years ended December 31, 2001	29-30
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2001	31
Notes to Consolidated Financial Statements	32-50

B.    Financial Statement Schedule

Schedule 1—Condensed Financial Information

	Page
Unconsolidated Statements of Operations for the three years ended December 31, 2001	S-1
Unconsolidated Balance Sheets as of December 31, 2001 and 2000	S-2
Unconsolidated Statements of Cash Flows for the three years ended December 31, 2001	S-3
Note to Schedule 1	S-4

51

No other financial statement schedules are provided because the information is not required or is contained in the Notes to Consolidated Financial Statements of the Annual Report to Shareholders.

C.    Exhibit Index

Exhibit Number		Description
3.1		Sub-Tenancy Agreement dated April 25, 2001 between A.S. Watson & Co., Limited as Landlord and Disposable Soft Goods Limited as Tenant
3.2	*	Purchase Contract No. 01014 dated July 27, 2001 between Fameccanica, Data S.p.a. as Vendor and DSG (Malaysia) Sdn. Bhd. as Purchaser
3.3		Tenancy Agreement dated August 24, 2001 between Angeles Rubber Products Sdn. Bhd. as Landlord and DSG (Malaysia) Sdn. Bhd. as Tenant
3.4	*	License Agreement dated August 29, 2001 between Mitsubishi Corporation and DSG International Limited
3.5		Third Amendment & Waiver to Loan Agreement between Associated Hygienic Products LLC and Foothill Capital Corporation dated September 10, 2001
3.6		Fourth Amendment to Loan Agreement between Associated Hygienic Products LLC and Foothill Capital Corporation dated December 19, 2001
3.7		Contract dated April 9, 2002 between Shanghai Waigaoqiao Free Trade Zone 3UDC as Transferor and DSG International Limited as Transferee
3.8		Fifth Amendment to Loan Agreement between Associated Hygienic Products LLC and Foothill Capital Corporation dated April 17, 2002
4.1		Equity Participation Plan filed as Form S-8 Registration Statement on March 21, 2002 (incorporated by reference as filed with the SEC on March 21, 2002 file number 333-84898)
5.1		Settlement Agreement dated April 9, 2002 between John M. Tharpe, Robert M. Herrin and R & L Engineering, Inc. and DSG International Limited
11		Computation of Net Income Per Ordinary Share
13		2001 Annual Report to Shareholders
23		Independent Auditors’ Consent

* To be filed by Amendment

52

SIGNATURES

Pursuant to the requirement of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 20-F and has duly caused the Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Hong Kong, on June 4, 2002.

DSG INTERNATIONAL LIMITED
By:	/s/    EDMUND J. SCHWARTZ
	Edmund J Schwartz Chief Financial Officer

53

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and the Board of Directors of

DSG International Limited

We have audited the consolidated financial statements of DSG International Limited and its subsidiaries as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated June 4, 2002; such financial statements and report are included in your 2001 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of DSG International Limited, listed in Item 19. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Deloitte Touche Tohmatsu

Hong Kong

June 4, 2002

54

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statement No. 333-84898 of DSG International Limited on Form S-8 of our report dated June 4, 2002, appearing in this Annual Report on Form 20-F of DSG International Limited for the year ended December 31, 2001.

                                    

Deloitte Touche Tohmatsu

Hong Kong

June 13, 2002

55

SCHEDULE 1

CONDENSED FINANCIAL INFORMATION

UNCONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31,
	2001			2000			1999
	(in thousands)
Equity in (losses) earnings of subsidiaries	$	(22,518	)	$	3,936		$	5,049
Operating expenses:
Administration		2,676			2,959			2,785
Selling		—			300			—
Depreciation		43			25			23
Total operating expenses		2,719			3,284			2,808
Operating (loss) income		(25,237	)		652			2,241
Interest expense		(2,586	)		(159	)		(223	)
Exchange loss		(2,451	)		(524	)		(861	)
Interest income		4,551			3,821			3,721
Other finance expenses		(3	)		—			(2	)
Other (loss) income		(109	)		730			546
(Loss) income before income taxes		(25,835	)		4,520			5,422
Provision for income taxes		(1,728	)		(1,557	)		(987	)
Net (loss) income	$	(27,563	)	$	2,963		$	4,435

See note to Schedule 1

S-1

SCHEDULE 1

CONDENSED FINANCIAL INFORMATION

UNCONSOLIDATED BALANCE SHEETS

	Year ended December 31,
	2001			2000
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,458		$	4,667
Other receivables		135			796
Prepaid expenses and others		83			7
Total current assets		1,676			5,470
Equipment:
Machinery and equipment		2			2
Furniture		216			216
Motor vehicles		139			139
Total		357			357
Less: accumulated depreciation		199			156
Net property		158			201
Investment in subsidiaries (on the equity method)		40,379			62,942
Other assets		621			—
Total assets	$	42,834		$	68,613
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	162		$	234
Accrued payroll and employee benefits		90			50
Accrued expenses		223			449
Income taxes payable		49			54
Total current liabilities		524			787
Shareholders’ equity:
Ordinary shares		70			67
Additional paid-in capital		19,673			18,301
Retained earnings		38,101			65,664
Translation reserve		(8,119	)		(8,973	)
Less : net receivable from shareholder		(7,415	)		(7,233	)
Total shareholders’ equity		42,310			67,826
Total liabilities and shareholders’ equity	$	42,834		$	68,613

See note to Schedule 1

S-2

SCHEDULE 1

CONDENSED FINANCIAL INFORMATION

UNCONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2001			2000			1999
	(in thousands)
Cash flows from operating activities
Net cash (used in) provided by operating activities	$	(25,826	)	$	2,723		$	4,734
Cash flows from investing activities
Expenditures for equipment		—			(79	)		—
Investments in and advances to subsidiaries		314			(5,883	)		(5,713	)
Recoupment of investment in subsidiaries		23,103			7,068			3,844
Advances to shareholder		(4,096	)		(8,837	)		(1,879	)
Repayments by shareholder		3,914			4,415			2,540
Increase in other assets		(621	)		—			—
Net cash provided by (used in) investing activities		22,614			(3,316	)		(1,208	)
Cash flows from financing activities
Issue of Ordinary Shares		3			—			—
(Decrease)/increase in cash and cash equivalents		(3,209	)		(593	)		3,526
Cash and cash equivalents, beginning of year		4,667			5,260			1,734
Cash and cash equivalents, end of year	$	1,458		$	4,667		$	5,260
Cash dividends from :
Consolidated subsidiaries	$	35		$	4,818		$	1,329

See note to Schedule 1

S-3

DSG INTERNATIONAL LIMITED

NOTE TO SCHEDULE 1

1.    APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES

Accounting for subsidiaries—DSG International Limited (“the Company”) has accounted for the earnings of its subsidiaries on the equity method in the unconsolidated condensed financial information.

S-4

EX-3.1

                                                                     EXHIBIT 3.1

                         Dated the 25 day of April 2001

                         A.S. WATSON & COMPANY, LIMITED
                                   as LANDLORD

                                       and

                          DISPOSABLE SOFT GOODS LIMITED
                                    as TENANT

                                   ----------

                              SUB-TENANCY AGREEMENT

                                       of

                      UNIT C and UNIT D on FIFTEENTH FLOOR
                                       and
            ALL THAT Portion on SIXTEENTH FLOOR and SEVENTEENTH FLOOR
                                of WATSON CENTRE,
                       16-22 KUNG YIP STREET, KWAI CHUNG,
                      NEW TERRITORIES, HONG KONG erected on
                          KWAI CHUNG, TOWN LOT NO.258.

                                   ----------

Term                :   Two years fixed commencing from 1st July 2001 to 30th
                        June 2003.
Rent-Free Periods   :   One month from 1st June 2002 to 31st June 2002 &
                        One month from 1st June 2003 to 30th June 2003.
Rent                :   HK$283,592.00 per month, exclusive
Management Fee      :   HK$54,212.00 per month, subject to review.
Deposit             :   HK$675,608.00 (equivalent to two months' rent and
                        management fee)

                                   ----------

                           A.S. WATSON & CO., LIMITED.
                         Property Development Department



                                    SECTION I
                                    ---------

                                    AGREEMENT
                                    ---------

Parties        AN AGREEMENT made this 25 day of April TWO THOUSAND AND ONE
               between the person or company detailed as the Landlord in Part I
               of the Schedule hereto (hereinafter called "the Landlord") of the
               one part and the person or company detailed as the Tenant in Part
               I of the Schedule hereto (hereinafter called "the Tenant") of the
               other part.

               WHEREAS:-

Head Lease     By a Lease made on the 31st day of May 1996 between LYNNORE LTD.
               as Landlord of the one part and the Landlord as Tenant of the
               other part (the "Head Lease") ALL THAT Building erected at 16-22
               Kung Yip Street registered at the Land Registry as Lot No.258
               (the "Property") was let by the said Lynnore Ltd. to the Landlord
               for a term of six years commencing from 1st June 1996 subject to
               the covenants and conditions therein mentioned.

               The Landlord is desirous of entering into a sub-tenancy agreement
               with the Tenant over a portion of the Property the particulars of
               which are set out in the schedule hereto in manner hereinafter
               appearing.

               WHEREBY IT IS AGREED as follows:-

Premises       The Landlord as principal tenant shall let and the Tenant as
               sub-tenant shall take ALL THOSE the premises (hereinafter
               referred to as "the PREMISES") forming part of all that building
               ("hereinafter referred to as "the Building") and more
               particularly described and set out in Part II of the Schedule
               attached hereto Together with the use in common with the Landlord
               and all others having the like right of the entrances staircases
               landings passages and toilets in the Building in so far as the
               same are necessary for the proper use and enjoyment of the
               Premises and except in so far as the Landlord may from time to
               time restrict such use and together with the right in common with
               others having the like right to use the lift service in the
               building (whenever the same shall be operating) for the term set
               forth in Part III of the Schedule hereto YIELDING AND PAYING
               therefor throughout the said term the rent as are set out in Part
Term           IV of the Schedule hereto which sums shall be payable exclusive
               of other charges payable under Section II in advance without any
               deductions on the first day of each calendar month of first and
Rent           last of such payments to be apportioned according to the number
               of days in the month included in the said term.

- -------------------                                     ------------------------
     [GRAPHIC]                                          DUPLICATE or COUNTERPART
     HONG KONG
                                   [SEAL]                Original Stamped with
       005,00
  STAMP DUTY PAID                                               $ 15598
- -------------------                                     ------------------------

                                       1



User           Subject as hereinafter mentioned the Tenant agrees not to use the
               Premises for any purpose other than for godown, workshop and
               ancillary office purpose only.

Subletting     The Tenant acknowledges that this Agreement is made subject to
               the Head Lease and hereby undertakes with the Landlord that the
               Tenant will duly observe and perform all the covenants terms and
               conditions in the Head Lease and all the obligations of the
               Landlord therein referred to as "the Tenant" so far as they
               relate to the Premises and are not hereby expressly assured by
               the Landlord, and will give to the Landlord a full and sufficient
               indemnity in respect of any claim made against the Landlord
               arising from the Tenant's failure or non-performance or
               non-observance of the covenants terms and provisions thereof.

               The subletting is subject to the observance and performance by
               the Tenant herein of all such obligations and restrictions on the
               part of the Landlord as are contained in the Head Lease (other
               than the payment of rent therein mentioned) in so far as the same
               are applicable to the Premises hereby sublet.

                                       2



                                   SECTION II
                                   ----------

                             RENT AND OTHER CHARGES
                             ----------------------

               The Tenant agrees with the Landlord as follows :-

Rent           1.(a) To pay on the days and in the manner hereinbefore
                     provided :-

                    (i)  the said rent as set forth in Part IV of the Schedule.

Maintenance         (ii) the maintenance charges (if any),
Charges

Cleaning            (iii) the cleaning charges (if any),
Charges

Management     1.(b) To pay on the days and in manner hereinbefore provided the
Fees                management fees as set forth in Part V of the Schedule
                    hereto ("the management fees") provided always that if at
                    any time during the said term the cost and expenses to the
                    Landlord of providing the services the subject of the
                    management fees shall have risen the Landlord shall be
                    entitled from time to time to serve a notice in writing upon
                    the Tenant (accompanied by an explanatory memorandum setting
                    out details of such increased cost) increasing the
                    management fees at the relevant time payable as set out in
                    Part V of the Schedule hereto by an amount equivalent to the
                    increased cost to the Landlord of providing such services
                    and thereafter such increased charge provided for herein and
                    in the Schedule. The management fees shall not include any
                    sums expended in the repair or decoration of the exterior or
                    structure of the Building or the main pipes drains and
                    cables therein. Rates

Rates          2.   To pay and discharge all rates taxes assessments duties
                    impositions charges and outgoings whatsoever now or
                    hereafter to be imposed or levied on the Premises or upon
                    the owner or occupier in respect thereof by the Government
                    of Hong Kong or other lawful authority (Government Rent and
                    Property Tax alone excepted). Without prejudice to the
                    generality of this Clause the Tenant shall pay all rates
                    imposed on the Premises in the first place to the Landlord
                    who shall settle the same with the Hong Kong Government and
                    in the event of the Premises not yet having been assessed to
                    rates the Tenant shall pay to the Landlord a sum equal to
                    the rates which would be charged by the Hong Kong Government
                    on the basis of a rateable value equal to twelve months'
                    rent payable by the Tenant on account of the Tenant's
                    liability under this clause.

                                       3



Utilities      3.   To pay and discharge all deposits and charges in respect of
                    gas water deposits electricity air conditioning and
                    telephone as may be shown by or operated from the Tenant's
                    own metered supplies or by accounts rendered to the Tenant
                    in respect of all such utilities consumed on or in the
                    Premises.

                                       4



                                   SECTION III
                                   -----------

                              TENANT'S OBLIGATIONS
                              --------------------

Compliance     l.   To obey observe and comply with and to indemnify the
with                Landlord against the breach of all ordinances regulations
Ordinances          bye-laws rules and requirements of any Governmental or other
                    competent authority relating to the use and occupation of
                    the Premises or any other act deed matter or thing done
                    permitted suffered or omitted therein or thereon by the
                    Tenant of any employee agent or licensee of the Tenant and
                    without prejudice to the foregoing to obtain any approval
                    licence or permit required by any Governmental or other
                    competent authority in connection with the Tenant's use and
                    occupation of the Premises prior to the commencement of the
                    Tenant's business and to indemnify the Landlord against the
                    consequences of a breach of this provision.

Fitting out    2.   To fit out the interior of the Premises in accordance with
                    such plans and specifications as shall have been first
                    submitted to and approved by the Landlord in writing in a
                    good and proper workmanlike fashion and safety and in all
                    respects in a style and manner appropriate to a first class
                    industrial building and so to maintain the same throughout
                    the said term in good condition and repair to the
                    satisfaction of Landlord.

Good Repair    3.   To keep all the interior of the Premises including the
of Interior         flooring and interior plaster or other finishing material or
                    rendering to the walls floors and ceilings and the
                    Landlord's fixtures and fittings therein including all doors
                    windows electrical installations and wiring light fittings
                    suspended ceilings fire fighting apparatus and ducting in
                    good clean tenantable substantial and proper repair and
                    condition and as may be appropriate from time to time
                    maintain the same at the expenses of the Tenant and to
                    deliver up the same to the Landlord at the expiration or
                    sooner determination of the said term in like condition.

Replacement    4.   To pay to or reimburse the Landlord cost of replacing any
of Windows          reflective film (if any) which is damaged and all broken or
                    damaged windows whether the same be broken or damaged by the
                    negligence of the Tenant or owing to circumstances beyond
                    the control of the Tenant.

                                       5



Repair of      5.   To repair or replace if so required by the appropriate
Electrical          company or authority by duly authorised contractor statutory
Installation        undertake or authority as the case may be under the terms of
                    the Electricity Supply Ordinance (Cap. 8) or any statutory
                    modification or re-enactment thereof or any Orders in
                    Council or regulations made thereunder all the electrical
                    wiring installations and fittings within the Premises and
                    the wiring from the Tenant's meter or meters to and within
                    the same.

Good Repair    6.   At the expense of the Tenant to maintain all toilets and
of Toilets          water apparatus as are located within the Premises (or
and Water           elsewhere if used exclusively by the Tenant its employees
Apparatus           invitees and licensees) in good clean and tenantable state
                    and in proper repair and condition at all times during the
                    said term to the satisfaction of the Landlord and in
                    accordance with the Regulations of the Public Health or
                    other Government Authority concerned.

Cleaning of    7.   To pay on demand to the Landlord the cost incurred by the
Drains              Landlord in cleaning and clearing any of the drains choked
                    or stopped up owing to the improper or careless use by the
                    Tenant or its employees invitees or licensees.

Indemnify      8.   To be wholly responsible for any damage or injury caused to
against             any person whomsoever directly or indirectly through the
Loss/ Damage        defective or damaged condition of any part of the interior
from                of the Premises or in any way owing to the spread of fire or
Interior            smoke or the overflow of water from the Premises or any part
Defects             thereof or through the act default or neglect of the Tenant
                    its servants agents licensees or contractors and to make
                    good the same by payment or otherwise and to indemnify the
                    Landlord against all costs claims demands actions and legal
                    proceedings whatsoever made upon the Landlord by any person
                    in respect of any such loss damage or injury and all costs
                    and expenses incidental thereto and to effect adequate
                    insurance cover in respect of such risks with such company
                    as the Landlord may at its sole discretion nominate.

                    The Tenant hereby further undertakes to produce to the
                    Landlord as and when required by the Landlord such policy of
                    insurance together with a receipt for the last payment of
                    premium and a certificate from the insurance company that
                    the policy is fully paid up and in all respects valid and
                    subsisting.

                                       6



Protection     9.   To take all reasonable precautions to protect the interior
from Typhoon        of the Premises from storm or typhoon damage.

To permit      10.  To permit the Landlord its agents and all persons authorised
Landlord to         by it with or without workmen or others and with or without
enter and           appliances at all reasonable times to enter upon the
view                Premises to view the condition thereof and upon prior notice
                    to the Tenant to take inventories of the fixtures and
                    fittings therein and to carry out any work or repair
                    required to be done provided that in the event of an
                    emergency the Landlord its servants or agents may enter
                    without notice and forcibly if need be.

To execute     11.  To make good all defects and wants of repair to the Premises
repairs on          for which the Tenant may be liable within the period of one
receipt of          month from the receipt of written notice from the Landlord
notice              to amend and make good the same and if the Tenant shall fail
                    to execute such works or repairs as aforementioned to permit
                    the Landlord to enter upon the Premises and execute the same
                    and in such case the cost thereof shall be a debt due from
                    the Tenant to the Landlord and be recoverable forthwith by
                    action.

Inform         12.  To give notice to the Landlord or its agent of any damage
Landlord of         that may be suffered to the Premises and of accident to or
Damage              defects in the water and gas pipes electrical wiring or
                    fittings fixtures or other facilities provided by the
                    Landlord.

Refuse and     13.  To be responsible for the removal of refuse and garbage from
Garbage             the Premises to such location as shall be specified by the
Removal             Landlord from time to time. In the event of the Landlord
                    providing a collection service for refuse and garbage the
                    same shall be used by the Tenant to the exclusion of any
                    other similar service and the use of such service provided
                    by the Landlord shall be at the sole cost of the Tenant.

                                                                          [SEAL]

Installation   14.  The Tenant shall make its own arrangements with the
of                  Telecommunications companies in Hong Kong with regard to the
Telephone/          installation of telephones in the Premises but the
Cables              installation of telephone lines outside the Premises must be
                    in accordance with the Landlord's directions.

Observe and    15.  To be bound by and to be observed and perform all the terms
Perform             conditions stipulations and covenants contained in the Crown
Covenant in         Lease and the Deed of Mutual Covenant relating to the
the Crown           Building. To obey and comply with such Building Rules and
Lease and           House Rules as may from time to time be made or adopted by
Deed of             the Landlord or the Manager of the Building in accordance
Mutual              with any Deed of Mutual Covenant and/or by the Management
Covenant            Committee of the Incorporated Owners of the Building and/or
                    any Management Agreement is relation to the management of
                    the Building.

                                       7



Contractors    16.  To be liable for any act default negligence or omission of
Employees           the Tenant's contractor employees invitees or licensees as
Invitees and        if it were the act default negligence or omission of the
Licensees           Tenant and to indemnify the Landlord against all costs
                    claims demands expenses or liability to any third party in
                    connection therewith.

Yield up       17.  To yield up the Premises with all fixtures fittings and
Premises            additions therein and thereto at the expiration or sooner
and Handover        determination of this Agreement in good clean and tenantable
                    repair and condition in accordance with the stipulations
                    hereinbefore contained provided that where the Tenant has
                    made any alterations installation fixtures fittings
                    partitioning or additions to the Premises with or without
                    the Landlord's written consent the Landlord may at its
                    discretion require the Tenant to reinstate remove dismantle
                    or do away with such alterations installation fixtures
                    fittings partitioning or additions or any part or portion
                    thereof and make good and repair in a proper and workmanlike
                    manner any damage to the Premises and the Landlord's
                    fixtures and fitting therein as a result thereof before
                    delivering up the Premises to the Landlord.

User           18.  Not to use the Premises for any purpose other than that set
Restriction         out in Section I.

                                       8



                                   SECTION IV
                                   ----------

                             LANDLORD'S OBLIGATIONS
                             ----------------------

               The Landlord agrees with the Tenant as follows :-

Quiet          1.   To permit the Tenant (duly paying the rent and other charges
Enjoyment           payable under Section II hereby agreed to be paid on the
                    days and in manner herein provided for payment of the same
                    and observing and performing the agreements stipulations
                    terms conditions and obligations herein contained) to have
                    quiet possession and enjoyment of the Premises during the
                    said term without any interruption by the Landlord or any
                    person lawfully claiming under or through or in trust for
                    the Landlord.

Roof and       2.   To maintain and keep main drains water pipes main walls and
Main                exterior window frames of the Building (except in so far as
Structure           the same are within the responsibility of the Tenant
                    hereunder) in a proper state of repair and condition
                    provided that Landlord shall not be liable for breach of
                    this clause (so far as it relates to the Premises) unless
                    and until written notice of any defect or want of repair has
                    been given to the Landlord by the Tenant and the Landlord
                    has failed to take reasonable steps to repair or remedy the
                    same.

                                       9



                                    SECTION V
                                    ---------

                          RESTRICTIONS AND PROHIBITIONS
                          -----------------------------

               The Tenant hereby agrees with the Landlord as follows :-

Installation   1(a) Not to make or permit or suffer to be made any alterations
and                 in or additions to the Premises or to the electrical wiring
Alterations         installation air-conditioning ducting (if any) lighting
                    fixtures or other Landlord's fixtures or to install any
                    plant apparatus or machinery therein without first having
                    obtained the written consent of the Landlord therefor.

               (b)  Not to place on any part of the Premises object of any kind
                    of the weight of which is in excess of the floor loading of
                    the Premises.

               (c)  Not to erect install or alter any partitioning of any kind
                    in the Premises or any part thereof without having obtained
                    the Landlord's prior written approval. Any such partitioning
                    or alteration thereof approved by the Landlord shall be
                    constructed or made at such position and with such material
                    and in accordance with such other requirement (if any) as
                    shall be directed or approved by the Landlord. All fees and
                    expenses incurred by the Landlord in obtaining the approval
                    of the Landlord's architects or consultants on the location
                    of such partitioning or alteration shall be borne by the
                    Tenant including the costs and expenses of the removal or
                    alteration of the fixtures and fittings of the Landlord as
                    may be required by the Landlord and payment therefor to the
                    Landlord as may be imposed as a pre-requisite of the Tenant
                    receiving such permission.

Injury to      2.   Not to cut maim or injure or permit or suffer to be cut
Main Walls          maimed or injured any doors windows walls beams structural
                    members or other part of the fabric of the Premises.

Alteration     3.   Save as provided in Clause 7 of Section V hereof not to
to Exterior         affix anything or paint or make any alteration whatsoever to
                    the exterior of the Premises.

                                       10



Obstructions   4.   Subject to Clause 6 of Section III hereof not to block up
to Outside          darken or obstruct or obscure any of the windows or lights
Windows             belonging to Premises without having obtained the previous
                    written consent of the Landlord. The Landlord may in giving
                    such consent impose such condition as it shall consider fit
                    for the purpose of maintaining the desired appearance of the
                    building's facade.

Noise          5.   Not to cause or produce or suffer or permit to be produced
                    on or in the Premises any sound or noise which is or are or
                    may be a nuisance or annoyance to the tenants or occupiers
                    of adjacent or neighbouring premises.

Signs          6.   Not without the prior written approval of the Landlord to
                    exhibit or display within or on the exterior of the Premises
                    any writing sign signboards or other device whether
                    illuminated or not which may be visible from outside the
                    Premises nor to affix any writing signs signboards or other
                    device in at or above any common area lobby landing or
                    corridor of the Building.

Auction        7.   Not to conduct or permit to be taken place any auction fire
& Sale              bankruptcy close out or similar sales of things or
                    properties of any kind on the Premises.

Illegal or     8.   Not to use or cause permit or suffer to be used any part of
Immoral Use         the Premises for gambling or for any illegal immoral or
                    improper purposes or in any way so as to cause nuisance
                    annoyance inconvenience or damage or danger to the Landlord
                    or the Tenants or occupiers of adjacent or neighbouring
                    premises.

Sleeping or    9.   Not to use the Premises or any part thereof as sleeping
Domestic Use        quarters or as domestic premises within the meaning of any
                    ordinance for the time being in force or to allow any person
                    to remain on the Premises overnight unless with the
                    Landlord's prior permission in writing. Such permission
                    shall only be given to enable the Tenant to post watchmen to
                    look after the contents of the Premises and the names of the
                    watchmen shall first be registered with the Landlord prior
                    to its giving such permission.

Obstructions   10.  Not to place or leave or suffer or permit to be placed or
in Passages         left by any contractor employee invitee or licensee of the
                    Tenant any boxes furniture articles or rubbish in the
                    entrance or any of the staircases car park area loading bay
                    passages or landings of the Building used in common with
                    other tenants or the Landlord or otherwise encumber the
                    same.

                                       11



Preparation    1l.  Not to prepare or permit or suffer to be prepared any food
of food and         in the Premises or to cause or permit any offensive or
Prevention of       unusual odours to be produced upon or emanate from the
Odours              Premises.

Animals        12.  Not to keep or permit or suffer to be kept any animals or
Pets and            pets inside the Premises and to take all such steps and
Infestation         precautions to the satisfaction of the Landlord to prevent
                    the Premises or any part thereof from becoming infested by
                    termites rats mice roaches or any other pests or vermin and
                    for the better observance hereof the Landlord may require
                    the Tenant to employ at the Tenants cost such pest
                    examination contractors as the Landlord may nominate and at
                    such intervals as the Landlord may direct.

Subletting,    13.  Not to assign sublet or otherwise part with the possession
and Assigning       of the Premises or any part thereof in any way whether by
                    way of sub-letting lending sharing or other means whereby
                    any person or persons not a party to this Agreement obtains
                    the use or possession of the Premises or any part thereof
                    irrespective of whether any rental or other consideration is
                    given for such use or possession and in the event of any
                    such transfer sub-letting sharing assignment or parting with
                    the possession of the Premises (whether for monetary
                    consideration or not) this Agreement shall absolutely
                    determine and the Tenant shall forthwith vacate the Premises
                    on notice to that effect from the Landlord. The Tenancy
                    shall be personal to the Tenant named in the First Schedule
                    to this Agreement and without in any way limiting the
                    generality of the foregoing the following acts and events
                    shall unless approved in writing by the Landlord be deemed
                    to be breaches of this Clause :-

                    (i)  In the case of a tenant which is a partnership the
                         taking in of one or more new partners whether on the
                         death or retirement of an existing partners or
                         otherwise.

                    (ii) In the case of a tenant who is an individual (including
                         a sole surviving partner of a partnership tenant) the
                         death insanity or disability of that individual to the
                         intent that no right to use possess occupy or enjoy the
                         Premises or any part thereof shall vest in the
                         executors administrators personal representatives next
                         of kin trustee or committee of any such individual.

                    (iii)In the case of a tenant which is a corporation any
                         takeover reconstruction amalgamation merger voluntary
                         liquidation or change in the person or persons who owns
                         or own a majority of its voting shares or who otherwise
                         has or have effective control thereof.

                                       12



                    (iv) The giving by the Tenant of a Power of Attorney or
                         similar authority whereby the donee of the Power
                         obtains the right to use possess occupy or enjoy the
                         Premises or any part thereof or does in fact use
                         possess occupy or enjoy the same.

                    (v)  The change of the Tenant's business name without the
                         previous written consent of the Landlord which consent
                         the Landlord may give or withhold at its discretion.

Breach of      14.  Not to cause or suffer or permit to be done any act or thing
Insurance           whereby the policy or policies of insurance on the Premises
Policy              against damage by fire or liability to third parties for the
                    time being subsisting may become void or voidable or whereby
                    the rate or premium or premiums thereon may be increased and
                    to repay to the Landlord on demand all sums paid by the
                    Landlord by way of increased premium or premiums thereon and
                    all expenses incurred by the Landlord in and about any
                    renewal of such policy or policies arising from or rendered
                    necessary by a breach of this Clause.

                                       13



                                   SECTION VI
                                   ----------

                                   EXCLUSIONS
                                   ----------

               IT IS HEREBY FURTHER EXPRESSLY AGREED AND DECLARED that the
               Landlord shall not in any circumstances be liable to the Tenant
               or any other person whomsoever:-

Lift, Air-     1.   In respect of any loss or damage to person or property
conditioning,       sustained by the Tenant or any other person caused by or
Utilities           through or in any way owing to any defect in or breakdown of
                    the lifts air-conditioning system electric power or any
                    other building service provided in Building, or

Fire and       2.   In respect of any loss or damage to person or property
overflow            sustained by the Tenant or any other person caused by or
                    through in any way owing to the escape of fumes smoke fire
                    or any other substance or thing or the overflow of water
                    from anywhere within the Building, or

Security       3.   For the security of safekeeping of the Premises or any
                    contents therein and in particular but without prejudice to
                    the generality of the foregoing the provision by the
                    landlord of watchmen and caretakers shall not create any
                    obligation on the part of the Landlord as to the security of
                    the Premises or any contents therein and the responsibility
                    for the safety of the Premises and the contents thereof
                    shall at all times rest with the Tenants, nor shall the rent
                    and other charges hereinbefore mentioned or any part thereof
                    abate or cease to be payable on account of any of the
                    foregoing.

                                       14



                                   SECTION VII
                                   -----------

                                ABATEMENT OF RENT
                                -----------------

Suspension     If the Premises or the Building or any part thereof shall at any
of rent in     time during the tenancy be destroyed or damaged or become
case of        inaccessible owing to fire water storm typhoon defective
fire, etc.     construction white ants earthquake subsidence of the ground or
               any calamity beyond the control of the Landlord so as to render
               the Premises unfit for industrial use or inaccessible and the
               policy or policies of insurance effected by the landlord shall
               not have been vitiated or payment of the policy moneys refused in
               whole or in part in consequence of any act or default of the
               Tenant or if at any time during the continuance of this tenancy
               the Premises or the Building shall be condemned as a dangerous
               structure or a demolition order or closing order shall become
               operative in respect of the Premises or the Building then the
               rent hereby reserved or a fair proportion thereof according to
               the nature and extent of the damage sustained or order made shall
               after the expiration of the then current month be suspended until
               the Premises or Building shall again be rendered accessible and
               fit for industrial use provided that should the Premises or the
               Building not have been reinstated in the meantime either the
               Landlord or the Tenant may at any time after six months from the
               occurrence of such damage or destruction or order give to the
               other of them notice in writing to determine this present tenancy
               and thereupon the same and everything herein contained shall
               cease and be void as from the date of the occurrence of such
               destruction or damage or order or of the Premises becoming
               inaccessible or unfit for industrial use but without prejudice to
               the rights and remedies of either party against the other in
               respect of any antecedent claim or breach of the agreements
               stipulations terms and conditions herein contained or of the
               Landlord in respect of the rent payable hereunder prior to the
               coming into effect of the suspension.

                                       15



                                  SECTION VIII
                                  ------------

                                     DEFAULT
                                     -------

               It is hereby expressly agreed and declared as follows :-

Default        1.   If the rent and other moneys (if any) payable under Section
                    II or any part thereof shall be in arrears for fifteen (15)
                    days after the same shall have become payable (whether
                    formally demanded or not) or if there shall be any breach or
                    non-performance of any of the stipulations conditions or
                    agreements herein contained and on the part of the Tenant to
                    be observed or performed or if the Tenant shall suffer
                    execution to be levied upon the Premises or otherwise on the
                    Tenant's goods then and in any such case it shall be lawful
                    for the Landlord at any time thereafter to re-enter on and
                    upon the Premises or any part thereof in the name of the
                    whole and thereupon this Agreement shall absolutely
                    determine but without prejudice to any right of action by
                    the Landlord in respect of any outstanding breach or
                    non-observance or non-performance by the Tenant of any of
                    the terms of this Agreement. All costs and expenses incurred
                    by the Landlord in demanding payment of the rent and other
                    charges aforesaid (if the Landlord elects to demand) arising
                    out of this Clause shall be paid by the Tenant and shall be
                    recoverable from the Tenant as a debt or be deductible by
                    the Landlord from any deposit held by the Landlord
                    hereunder.

Acceptance     2.   The acceptance of any rent by the Landlord hereunder shall
of Rent             not be deemed to operate as a waiver by the Landlord of any
                    right to proceed against the Tenant in respect of any breach
                    non-observance or non-performance by the Tenant of any of
                    the agreements stipulations terms and conditions herein
                    contained and on the part of the Tenant to be observed and
                    performed.

Acts of        3.   For the purpose of these presents any act default neglect or
Employees           omission of any guest visitor servant contractor employee
Invitees and        agentinvitee or licensee of the Tenant shall be deemed to be
Licensees           the act default neglect or omission of the Tenant.

Distraint      4.   For the purpose of Part III of the Landlord and Tenant
                    {Consolidation) Ordinance (Cap.7) and of these presents the
                    rent payable in respect of the Premises shall be deemed to
                    be in arrears if not paid in advance at the times and in the
                    manner hereinbefore provided for payment thereof.

                                       16



Interest,      5.   Notwithstanding anything hereinbefore contained if the
etc.                Tenant shall fail to pay the rent and/or other moneys
                    payable under this Agreement or any part thereof on due date
                    the Landlord shall be entitled to recover from the Tenant as
                    a debt the following expenses incurred by the Landlord in
                    the course of recovering the rental in arrears and/or other
                    moneys aforesaid unpaid or any part thereof :-

                    (i)  a collection charge of such sum as the Landlord shall
                         determine from time to time for the additional work
                         incurred by the Landlord's staff in collecting the rent
                         and/or other moneys aforesaid unpaid or any part
                         thereof from the Tenant;

                    (ii) all Solicitors' and/or Counsels' fees (on a solicitors
                         and own client basis) and court fees incurred by the
                         Landlord for the purpose of recovering the rent and/or
                         other moneys aforesaid unpaid or any part thereof from
                         the Tenant;

                    (iii)any other fees paid to debt-collectors appointed by the
                         Landlord for the purpose of collecting the rent and/or
                         other moneys aforesaid unpaid or any part thereof from
                         the Tenant;

                    (iv) interest calculated at the rate of 2% per month or 3%
                         over the Prime Rate of Hong Kong & Shanghai Banking
                         Corporation whichever is the higher on the rent/or
                         other moneys aforesaid unpaid or any part thereof from
                         the date due for payment to the date of actual payment.

                                       17



                                   SECTION IX
                                   ----------

                                     DEPOSIT
                                     -------

Deposit        1.   The Tenant shall on the signing hereof and at such other
                    times (if any) during the term of tenancy hereby created as
                    are specified in Part IV of the Scheduled hereto deposit
                    with the Landlord the sum or sums specified in Part VI of
                    the Schedule to secure the due observance and performance by
                    the Tenant of the agreements stipulations terms and
                    conditions herein contained and on the part of the Tenant to
                    be observed and performed which said deposit shall be held
                    by the Landlord throughout the currency of this Agreement
                    free of any interest to the Tenant with the right for the
                    Landlord (without prejudice to any other right or remedy
                    hereunder) to deduct therefrom the amount of any rent rates
                    and other charges payable hereunder and any costs expenses
                    loss or damage sustained by the Landlord as the result of
                    any non-observance or non-performance by the Tenant of any
                    of the said agreements stipulations terms or conditions. In
                    the event of any deduction being made by the Landlord from
                    the said deposit in accordance herewith during the currency
                    of this Agreement the Tenant shall forthwith on demand by
                    the Landlord make a further deposit equal to the amount so
                    deducted and failure by the Tenant so to do shall entitle
                    the Landlord forthwith to re-enter upon the Premises and to
                    determine this Agreement as hereinbefore provided.

Repayment      2.   Subject as aforesaid the said deposit shall be refunded to
of Deposit          the Tenant by the Landlord without interest within thirty
                    days after the expiration or sooner determination of this
                    Agreement and delivery of vacant possession to the
                    Landlord and after settlement of the last outstanding
                    claim by the Landlord against the Tenant for any arrears
                    of rent rates and other charges and for any breach
                    non-observance or non-performance of any of the agreements
                    stipulations terms and conditions herein contained and on
                    the part of the Tenant to be observed or performed
                    whichever shall be the later.

                                       18



                                    SECTION X
                                    ---------

                        INTERPRETATION AND MISCELLANEOUS
                        --------------------------------

Marginal       1.   The Marginal Notes, Headings and Index are intended for
Notes,              guidance only and do not form part of this Agreement nor
Headings and        shall any of the provisions of this Agreement be construed
Index               or interpreted by reference thereto or in any way affected
                    or limited thereby.

Landlord and   2.   The Tenant hereby expressly agrees to deprive itself of
Tenant              any and all rights to protection against eviction provided
Legislation         by any existing legislation or by any further enactment in
                    substitution or amendment thereof or addition thereto to
                    the intent that the Tenant shall deliver up vacant
                    possession of the Premises to the Landlord at the
                    expiration or sooner determination of the tenancy hereby
                    created.

Condonation    3.   No condoning, excusing or overlooking by the Landlord of
Not a Waiver        any default breach or non-observance or non-performance by
                    the Tenant at any time or times of any of the agreements
                    stipulations terms and conditions herein contained shall
                    operate as a waiver of the Landlord's rights hereunder in
                    respect of any continuing or subsequent default, breach of
                    non-observance or non-performance or so as to defeat or
                    affect in any way the rights and remedies of the Landlord
                    hereunder in respect of any such continuing or subsequent
                    default or breach and no waiver by the Landlord shall be
                    inferred from or implied by anything done or omitted by
                    the Landlord unless expressed in writing and signed by the
                    Landlord. Any consent given by the Landlord shall operate
                    as a consent only for the particular matter to which it
                    relates and shall in no way be considered as waiver or
                    release of any of the provisions hereof nor shall it be
                    construed as dispensing with the necessity of obtaining
                    the specific written consent of the Landlord in future
                    unless expressly so provided.

Letting        4.   During the three months immediately before the expiration
Notice              or sooner determination of the term of this Agreement the
and Entry           Landlord shall be at liberty to affix and maintain without
                    interference upon any external part of the Premises a
                    notice stating that the Premises are to be let and such
                    other information in connection therewith as the Landlord
                    shall reasonably require during the aforementioned period
                    of three months.

                                       19



Service of     5.   Any notice required to be served on the Tenant shall be
Notice              sufficiently served if delivered to or despatched by
                    registered post or left at the Premises or at the last
                    known address of the Tenant. A notice sent by registered
                    post shall be deemed to be given at the time and date of
                    posting.

Gender         6.   In this Agreement if the context permits or requires words
                    importing the singular number shall include the plural
                    number and vice versa and words importing the masculine
                    feminine or neuter gender shall include the other of them,

Stamp Duty     7.   The Stamp Duty on this Agreement and its counterpart shall
and Costs           be borne by the Landlord and the Tenant in equal shares.
                    Each party shall pay its own solicitors costs for the
                    preparation or approval of this Agreement.

Re-            8.   It is hereby agreed and declared that if the owner of the
development         Building of which the Premises form part shall enter into
                    a contract for the sale of the Building or if the owner
                    shall resolve to demolish and rebuild the Building or
                    redevelop the lot on which the Building has been erected
                    whether alone or in conjunction with the owners of any
                    adjoining lot or lots (which intention to demolish and
                    rebuild or redevelop shall be sufficiently evidenced by a
                    copy of the resolution of its Directors certified to be a
                    true and correct copy of its Secretary) then in any such
                    event the Landlord shall be entitled to give six clear
                    months' notice in writing at any time during the tenancy
                    hereby created terminating this Agreement and immediately
                    upon the expiration of such notice this Agreement and
                    everything herein contained shall cease and be void and be
                    of no effect but without prejudice to the rights and
                    remedies of either party against the other in respect of
                    any antecedent claim or breach of any of the agreements or
                    stipulations herein set out and the Tenant shall forthwith
                    vacate the Premises.

                                       20



                         THE SCHEDULE ABOVE REFERRED TO
                         ------------------------------

                                     PART I
                                     ------

LANDLORD       A.S. WATSON & COMPANY, LIMITED whose registered office is situate
               at 22nd Floor, Hutchison House, 10 Harcourt Road, Hong Kong.

TENANT         DISPOSABLE SOFT GOODS LIMITED whose registered office is situate
               at 17th Floor, Watson Centre, 16-22 Kung Yip Street, Kwai Chung,
               N.T., Hong Kong.

                                     PART II
                                     -------

PREMISES       UNIT C and UNIT D an FIFTEENTH FLOOR and ALL THAT Portion on
               SIXTEENTH FLOOR and SEVENTEENTH FLOOR of WATSON CENTRE, 16-22
               Kung Yip Street, Kwai Chung, New Territories erected on KWAI
               CHUNG TOWN LOT NO.258.

                                    PART III
                                    --------

TERM           Two (2) Years fixed commencing from 1st July 2001 to 30th June
               2003.

                                       21



                                     PART IV
                                     -------

                               PARTICULARS OF RENT

RENT           HONG KONG DOLLARS TWO HUNDRED EIGHTY THREE THOUSAND FIVE HUNDRED
               AND NINETY TWO ONLY (HK$283,592.00) per calendar month (exclusive
               of government rates and management fee) to be paid on the first
               day of each and every calendar month without any deduction
               whatsoever.

RENT-FREE      The Tenant shall be entitled to two rent-free periods of one
PERIODS        (1) months each from 1st June 2002 to 31st June 2002 and
               1st June 2003 to 30th June 2003. The Tenant is required to pay
               Government Rates, management fee and all other outgoings during
               the said two periods.

                                     PART V
                                     ------

MANAGEMENT     Subject always to Section II Clause 1(b), the management fee
FEES           shall be at the following rates:

               HK$54,212.00 per calendar month to be paid on the first day of
               each and every calendar month without any deduction whatsoever.

                                     PART VI
                                     -------

DEPOSIT        A total of HONG KONG DOLLARS SIX HUNDRED SEVENTY FIVE THOUSAND
               SIX HUNDRED AND EIGHT ONLY (HK$675,608.00) being two months' rent
               and management fee.

                                    PART VII
                                    --------

GOVERNMENT     Government Rates shall be solely borne by the Tenant.
RATES

                                       22



As WITNESS the hands of the parties hereto the day and year first above written.

SIGNED BY                                   )     A. S. Watson & Co., Limited
                                            )
for and on behalf of the Landlord           )
                                            )     /s/ Illegible
                                            )     ------------------------------
in the presence of:-                        )

For and on behalf of

A. S. Watson & Co., Limited


/s/ Winnie Ng
- --------------------
  Winnie Ng (MRS.)
      Manager
Property Development


SIGNED BY                                   )     For and on behalf of
                                            )     DISPOSABLE SOFT GOODS LTD.
for and on behalf of the Tenant in the      )
                                            )
                                            )     /s/ Illegible
                                            )     ------------------------------
                                            )                           Director
presence of:-                               )


/s/ Chung Chui Wan
- ----------------------
  Chung Chui Wan
     Manager
  Administration

RECEIVED on or before the day               )
and year first above written of and         )
from the Tenant the deposit of HONG         )
KONG DOLLARS SIX HUNDRED                    )
SEVENTY FIVE THOUSAND SIX                   )     HK$675,608.00
HUNDRED AND EIGHT ONLY                      )     =============

For and on behalf of
A. S. Watson & Co.,Limited


/s/ Winnie Ng
- --------------------
  Winnie Ng (MRS.)
      Manager
Property Development

                                       23

EX-3.3

                                                                     EXHIBIT 3.3

                                                                        ORIGINAL

                       Dated this 24th day of August, 2001

                                     BETWEEN

                        ANGELES RUBBER PRODUCTS SDN. BHD.
                                    (27778-M)

                                       AND

                            DSG (MALAYSIA) SDN. BHD.
                                   (472990-P)

                                   ----------

                                TENANCY AGREEMENT

                                   ----------

MESSRS VERNON ONG & ASSOCIATES
ADVOCATES & SOLICITORS
130-l, (1ST FLOOR)
JALAN TUN SAMBANTHAN
50470 KUALA LUMPUR



THIS TENANCY AGREEMENT is made the 24th day of August, 2001 BETWEEN ANGELES
RUBBER PRODUCTS SDN. BHD. (27778-M), a company incorporated in Malaysia with its
registered office at AG-10, Block A, Happy Mansion, Jalan 17/13, 46400 Petaling
Jaya, Selangor Darul Ehsan (hereinafter referred to as "the Landlord") of the
one part AND DSG (MALAYSIA) SDN. BHD. (472990-P), a company incorporated in
Malaysia with its registered office at No. 62C, Jalan SS 21/62, Damansara
Utama, 47400 Petaling Jaya, Selangor Darul Ehsan (hereinafter referred to as
"the Tenant") of the other part.

WHEREAS:-

(a)  The Landlord is the registered owner of all that piece of land held under
     No. G.M. 87, Lot No. 542, Tempat Sungai Penaga, Mukim Damansara, Daerah
     Petaling, Negeri Selangor measuring approximately 1.214 hectare in area
     (hereinafter referred to as "the Land") together with a factory lot erected
     thereon known as Lot No. 542, Jalan Subang 2, Sungai Penaga Industrial Park
     47500 Subang Jaya, Selangor Darul Ehsan and more particularly delineated in
     the site and building plans annexed hereto in Schedule 1 together with the
     existing fixtures and fittings in the factory lot specified in Schedule 2.
     The Land and the factory lot erected thereon together with the fixtures and
     fittings are hereinafter collectively referred to as "the said Premises".

(b)  The said Premises is presently charged to Public Bank Berhad of B2 & B4,
     Jalan SS 15/4D, 47500 Subang Jaya, Selangor Darul Ehsan (hereinafter
     referred to as "the Chargee") vide Presentation Nos. 1227/92 Jilid 171
     Folio 95, 1228/92 Jilid 171 Folio 96, 2623/95 Jilid 272 Folio 53, 2624/95
     Jilid 272 Folio 54, 173/98 Jilid 355 Folio 63 and 597/2000.

(c)  The final Certificate of Fitness for Occupation (hereinafter referred to as
     "Certificate of Fitness") to the said Premises has not yet been issued.

(d)  The Landlord agrees to let and the Tenant agrees to take on let the said
     Premises upon the terms and conditions hereinafter contained.

NOW THIS AGREEMENT WITNESSETH as follows:-

l.   In consideration of the Tenant entering into this Tenancy Agreement the
     Landlord shall do the following :-

                                                       -------------------------
                                                              [Illegible]
                                                       -------------------------

                                                       -------------------------
                                                       PUSAT SETEM
                                                       19.9.01         [GRAPHIC]
                                                       PETALING JAYA
                                                       -------------------------

                                                       -------------------------
                                                       MALAYSIA
                                                       862200          [GRAPHIC]
                                                       -------------------------

                                                                   [SEAL] [SEAL]

                                       1



     a)   To procure and obtain the Certificate of Fitness to the said Premises.

     b)   To obtain the approval from Tenaga Nasional Bhd. and/or other relevant
          authorities for the upgrading in the power supply serving the said
          Premises to 2,000 Amp.

     c)   Upon receipt of all approvals from the relevant authorities, the
          Landlord shall complete the upgrade in the power supply serving the
          said Premises to 2,000 Amp.

     d)   To carry out the following renovation works at the said Premises:-

          (1)  To construct an office space at the front portion of the said
               Premises measuring in area of approximately 12,000 square feet.
               For the purposes of identification, the office space area is
               delineated and coloured RED in the floor plans annexed hereto in
               Schedule 3.

          (ii) To build and to provide facilities such as the following at every
               floor of the said Premises in accordance with the floor plans
               annexed hereto in Schedule 3:-

               1.   One (1) male wash room consisting of 1 squatting lavatory, 1
                    sitting lavatory, 2 standing urinary bowls and 2 wash
                    basins; and

               2.   One (1) female wash room consisting of 1 squatting lavatory,
                    2 sitting lavatories and 2 wash basins.

               3.   To build a pantry complete with one (1) sink.

     e)   To install two (2) power supply switch boxes, one at each floor of the
          said Premises.

     f)   To level the floor of the said Premises to not more than 2 inches
          gradient from all sides of the walls.

     g)   To procure and obtain the Chargee's written consent to this Agreement
          and to deliver to the Tenant a copy of the Chargee's written consent
          to this Agreement (said copy to be duly certified true copy by the
          Chargee).

                                                                   [SEAL] [SEAL]

                                       2



     h)   To deliver all the documents listed in Schedule 1 and Schedule 2
          herein to the Tenant.

2.   The Landlord hereby lets and the Tenant hereby takes on let the said
     Premises for a term of three (3) years commencing on the 1st day of
     December 2001 and expiring on the 30th day of November, 2004 at the monthly
     rent of Ringgit Malaysia Ninety Thousand (RM90,000.00) only payable monthly
     in advance on or before the seventh day of each and every month during the
     term of this Tenancy without any deduction whatsoever and upon the terms
     and conditions herein contained.

3.   The Landlord shall allow the Tenant to have vacant possession of the said
     Premises rent free with effect from the 1st day of December 2001 for the
     purposes of renovation of the said Premises.

4.   It is hereby agreed that in the event the Tenant requires to move the
     Tenant's machineries or part thereof into the said Premises before the 1st
     December 2001 for the purposes of storage, the Tenant shall forward a
     written request to the Landlord to obtain the Landlord's consent in respect
     thereof but such consent shall not be unreasonably withheld.

5.   The Landlord agrees that he shall comply with all conditions in Clause 1
     above except for Clause 1(b) and 1(c) on or before the 30th day of
     November 2001.

6.   If all the conditions in Clause 1 above including Clause 1(b) and 1(c) have
     not been fully complied with by the Landlord on or before the 30th day of
     November 2001, the Landlord shall provide the Tenant with a portable
     generator set of 200 amps for the use of the Tenant at the said Premises
     until all conditions in Clause 1 have been fully satisfied.

7.   If all conditions in Clause 1 above have been complied with by the Landlord
     on or before the 15th day of December 2001, the Tenant shall commence to
     pay rental to the Landlord on the 1st day of January 2002.

8.   In the event that all the conditions in Clause 1 have not been fully
     satisfied by the Landlord on or before the 15th day of December 2001, the
     Landlord agrees that the Tenant shall be entitled to possession of the said
     Premises rent free with effect from 1st January 2002 for the corresponding
     number of days delayed ("Delay Period"). In such event, rental shall only
     be payable to the Landlord on the next working day following the expiry of
     the Delay

                                                                   [SEAL] [SEAL]

                                       3



     Period calculated with effect from 1st January 2002. The rental payment for
     the fourth month shall be adjusted accordingly after making such
     deductions, as the case may be.

9.   THE TENANT HEREBY COVENANTS WITH THE LANDLORD as follows:-

     (a)(i) On the execution of this Agreement to pay the Landlord the rental
          payment in advance in respect of the second and third month in the sum
          of Ringgit Malaysia One Hundred and Eighty Thousand (RM180,000.00)
          only.

     (a)(ii) On the execution of this Agreement to pay the sum of Ringgit
          Malaysia Ninety Thousand (RM90,000.00) only which together with the
          earnest deposit of Ringgit Malaysia Ninety Thousand (RM90,000.00) only
          paid prior to the execution of this Agreement by the Tenant to the
          Landlord (the receipt whereof is acknowledged by the Landlord) as a
          security deposit for the performance and due observance by the Tenant
          of all the Tenant's covenants herein contained. The said security
          deposit of Ringgit Malaysia One Hundred and Eighty Thousand
          (RM180,000.00) only shall be maintained at the same sum throughout
          the term of this Tenancy and shall not be deemed to be or treated as
          payment of rent, provided that the Landlord shall be entitled on the
          expiration of the term of this Tenancy or earlier determination
          thereof and with prior notice to the Tenant, deduct therefrom whatever
          sum or sums that may be due to the Landlord as rent or for the costs
          of any repairs or replacements or of any damage to or loss caused to
          the said Premises or the fixtures and fittings thereon and therein and
          in the event the utilities deposit is not sufficient to pay for the
          charges for water, electricity and other outgoings due to the
          appropriate authority by the Tenant, then the Landlord is entitled to
          deduct from the security deposit whatever sum or sums to pay same to
          the appropriate authority. The Landlord shall thereafter return the
          balance, if any, to the Tenant without interest thereon PROVIDED
          ALWAYS THAT any deduction made by the Landlord from the said security
          deposit shall not prejudice the right or claim of the Landlord against
          the Tenant for any breach of the provisions of this Agreement by the
          Tenant. If the Landlord fails to refund the monies to the Tenant
          within fourteen (14) days of payment to the appropriate authority, the
          Landlord shall

                                                                   [SEAL] [SEAL]

                                       4



          pay interest at the rate of 8% per annum on the said sum calculated
          daily from the 15th day until the actual receipt of the monies by the
          Tenant.

     (a)(iii) On the execution of this Agreement to further pay the Landlord the
          sum of Ringgit Malaysia Ninety Thousand (RM90,000.00) only as utility
          deposit for all charges of water, sewerage, electricity and other
          utilities in respect of the said Premises. Such aforesaid deposit for
          utilities shall be refunded free from any interest to the Tenant upon
          the expiry of the term hereby created or sooner determination thereof
          after the Tenant has furnished to the Landlord documentary evidence
          that all outstanding charges for water, electricity and other
          outgoings payable by the Tenant in respect of the said Premises have
          been paid by the Tenant. If the Landlord fails to refund the monies to
          the Tenant within fourteen (14) days of the Tenant furnishing the
          said documentary evidence to the Landlord, the Landlord shall pay
          interest at the rate of 8% per annum on the said sum calculated daily
          from the 15th day until the actual receipt of the monies by the
          Tenant.

     (b)  Upon execution of this Agreement, the Tenant shall forward the
          following documents to the Landlord or their solicitors :-

          i)   A certified true copy of the Tenant's Memorandum and Articles of
               Association; and

          ii)  A certified true copy of a board resolution ratifying the letting
               of the said Premises.

     (c)  To pay to the Landlord the rent hereby reserved in accordance to
          Clause 2 preceding.

     (d)  To promptly pay all charges in respect of conservancy water
          electricity and telephone supplied to or used in the said Premises and
          any other outgoings in respect of the said Premises as are not
          specifically provided in this Agreement to be paid by the Tenant.

     (e)  To keep the interior and exterior of the said Premises including
          generally all windows, glass shutters, locks, fastenings, keys, bells,
          electric, wiring and fittings and other fixtures and particularly the
          flooring in upon and belonging to the said Premises and the water

                                                                   [SEAL] [SEAL]

                                       5



          closets lavatories including partitions and conveniences of which the
          Tenant has the exclusive use as the sole occupants, the wall,
          finishes, skirting and all walls clean and in good and tenantable
          repair and conditions (fair wear and tear only excepted) to the
          satisfaction of the Landlord and the public health and/or any other
          relevant authority and shall replace any glass fixtures or fittings
          which shall be broken or damaged due to the negligence or careless
          acts or omission of the Tenant or its agents or servants.

     (f)  Not to damage cut or alter any of the walls ceilings partitions
          timbers or floors of the said Premises without the Landlord's
          previous consent nor without the like consent and the consent (if
          necessary) of the local authority to make any structural or other
          alterations or additions to the said Premises or any part thereof.

     (g)  Not to do or permit or suffer anything to be done in or upon the said
          Premises or any part thereof which may be or become a nuisance or
          annoyance or disturbance to the other tenant occupiers or lessees of
          the neighbouring premises.

     (h)  To use the said Premises for the purpose of the manufacture and
          distribution of disposable soft goods and for purposes ancillary
          thereto and not to use the said Premises or suffer or permit the same
          to be used for any other purposes whatsoever except with the previous
          consent of the Landlord which consent shall not be unreasonably
          withheld.

     (i)  Not to bring or permit or suffer to be brought in or upon the said
          Premises or any part thereof any goods articles or things of an
          objectionable noxious combustable inflammable explosive or dangerous
          nature and not do to or permit or suffer to be done on the said
          Premises anything whereby the policy or policies of insurance against
          loss or damage by fire and against such other causes as the Landlord
          may deem necessary for the time being subsisting may become void and
          voidable or whereby the rate or rates of premium thereof may be
          increased and to repay to the Landlord on demand all sums from time to
          time paid by way of increase premium in respect of the said Premises
          and all expenses incurred in or about the renewal of any policy or
          policies rendered necessary by a breach of this covenant.

                                                                   [SEAL] [SEAL]

                                       6



     (j)  To comply with all written laws, bye-laws, rules and regulations and
          directives of the appropriate authority affecting the said Premises or
          for the health, safety and welfare of persons employed to work in the
          said Premises which are now in force or which may hereinafter be
          enacted or issued.

     (k)  To notify the Landlord immediately in writing upon receipt of any
          notice which may affect the said Premises or the Landlord.

     (l)  Not to assign underlet or part with the possession of the said
          Premises or any part thereof without the prior written consent of the
          Landlord.

     (m)  To permit the Landlord or his authorised agents upon giving one (1)
          week's previous notice in writing at all reasonable and convenient
          times to enter the said Premises and examine the state of repair and
          condition thereof and to check and take inventories of the Landlord's
          fixtures and fittings and equipment therein and that the Tenant shall
          repair and make good all defects decays and wants of repair thereto of
          which notice of writing shall be given by the Landlord to the Tenant
          and for which the Tenant may be liable hereunder within one (1)
          calendar month after the receipt of such notice PROVIDED that in case
          of default by the Tenant, the Landlord may make good such defects
          decays and wants of repair and the cost of the same shall be repayable
          by the Tenant to the Landlord on demand.

     (n)  Should any damage be done by the Tenant, its agents or servants to the
          said Premises or any part thereof by the installation use or removal
          of any plant machinery sign or other fittings, the Tenant shall repair
          forthwith and made good such damage to the satisfaction of the
          Landlord

     (o)  To take such measures as may be necessary to ensure that any effluent
          discharged into the drains or sewers which belong to or are used for
          the said Premises in common with other premises will not be corrosive
          or in any way harmful to the said drains or sewers or cause any
          obstruction or deposit therein and to ensure that all measures taken
          shall be in compliance with the requirements of the Department of
          Environment (DOE).

     (p)  To be responsible for and to indemnify the Landlord against all

                                                                   [SEAL] [SEAL]

                                       7



          damage occasioned to the said Premises or any adjacent or neighbouring
          premises or to any person caused by any act default or negligence of
          the Tenant or the servants agents or invitees or licensees of the
          Tenant and to pay and make good to the Landlord all and every loss and
          damage whatsoever incurred or sustained by the Landlord as consequence
          of every breach or non-observance of the Tenant's covenants herein
          contained and to indemnify the Landlord from and against all cost
          claims liability and expenses thereby arising.

     (q)  Not to make any alterations or additions to the said Premises or erect
          any new buildings thereon without the consent of the Landlord and the
          approval of the Landlord to the plans and specification thereof and if
          such consent and approval is given to make such alterations or
          additions in conformity with such plans and specifications and to the
          approval of the Landlord and upon such terms as the Landlord may
          consider just.

     (r)  At the expiration or sooner determination of this Tenancy, peaceably
          and quietly to yield up the said Premises to the Landlord in
          tenantable repair and condition (fair wear and tear only excepted) and
          to make good at the Tenant's own cost and expense any damage caused by
          the Tenant in any way and in the removal of the sign signboard
          lettering posters or advertisement or any fixtures or fittings from
          the said Premises. The Tenant shall also at its own costs restore the
          said Premises to its original state and condition if so required by
          the Landlord.

     (s)  To obtain and maintain or cause to be obtained and maintained at the
          Tenant's own costs and expense all licences, permits, approvals and
          other consents from the relevant authorities for the carrying on or
          conduct of the business of the Tenant in the said Premises.

     (t)  To indemnify and keep indemnified the Landlord against summonses
          actions proceedings claims and demands costs damages and expenses
          which may be levied brought or made against the Landlord or which the
          Landlord may pay sustain or incur by reason directly as a result of
          any act or omission of the Tenant or use of the said Premises.

     (u)  In the event the road(s) within the compound of the said Premises is

                                                                   [SEAL] [SEAL]

                                       8



          damaged by the vehicles or things brought in by the Tenant (fair wear
          and tear excepted), the Tenant shall within one (1) month after
          service of a notice from the Landlord requiring repair to be carried
          out proceed diligently with the execution of such repairs or works,
          failing which, the Landlord, its authorised agents or workmen shall be
          entitled to enter upon the said Premises and execute such repairs or
          works and the costs thereof shall be a debt due from the Tenant to the
          Landlord and be forthwith recoverable by action.

     (v)  Subject to prior written notice specifying the date and time to the
          Tenant, the Tenant shall at all times during the three (3) calendar
          months immediately preceding the determination of the term of this
          Tenancy permit intending tenants and others with the authority from
          the Landlord and its agents at reasonable times of the day to view the
          said Premises.

     (w)  To procure and do whatever necessary to effect the registration of the
          water and electricity account in the name of the Tenant and to pay all
          deposit and connection charges thereof with effect from the date
          vacant possession of the said Premises is delivered to the Tenant.

     (x)  At all times through the term hereby granted:-

          i)   insure and or caused to be insured all such goods, merchandise,
               plant, equipment, machinery, effects and things whatsoever of the
               Tenant in the said Premises against such loss or damage by fire
               and such other comprehensive risks and the Landlord shall not be
               liable for any loss which may be suffered by the Tenant in
               defaulting to insure the same.

          ii)  cause to be effected an all risk public liability insurance
               policy against any claims for loss or damages arising out of any
               injuries or death caused to or damage to any person or persons
               and or their effects in the said Premises or part thereof

     (y)  To keep the said Premises free of rodents, insects and pests and in
          breach whereof it shall be lawful for the Landlord (without prejudice
          to any other rights or remedies conferred upon the Landlord against
          the Tenant under any other provisions of this Agreement) to engage
          such firm of pest exterminators to carry out

                                                                   [SEAL] [SEAL]

                                       9



          periodic inspection of the said Premises and take such steps and
          precautions as may be necessary to rid the said Premises of such
          rodents, insects and pests at the cost and expense of the Tenant.

     (z)  To install the central air conditioning system in the said Premises in
          the A.H.U. room provided for by the Landlord. In the event separate
          units of air conditioners need to be installed, the Tenant shall
          install split units of air conditioners only.

     (aa) To carry out all internal electrical wiring works in the office space
          of the said Premises and to conceal the said wiring in the office
          space.

10. THE LANDLORD HEREBY COVENANTS WITH THE TENANT as follows:-

     (a)  To comply with all the terms and conditions in Clause 1 herein.

     (b)  The Landlord shall deliver all the documents specified in Schedule 4
          herein to the Tenant and shall ensure that the said Premises are
          equipped with fire fighting equipments and safety features in
          compliance with the requirements of the fire department within one (1)
          month after receipt by the Landlord of a confirmation from the Tenant
          that the Tenant's renovations in the said Premises are complete.

     (c)  Upon execution of this Agreement, the Landlord shall forward the
          following documents to the Tenant or its solicitors:-

          i)   A certified true copy of the Landlord's Memorandum and Articles
               of Association; and

          ii)  A certified true copy of a board resolution ratifying the letting
               of the said Premises.

     (d)  To pay all present and future rates, taxes, quit rents and assessments
          in respect of the said Premises.

     (e)  To maintain and keep the roof and structure of the said Premises in
          good repair and condition throughout the tenancy hereby created.

                                                                   [SEAL] [SEAL]

                                       10



     (f)  To insure and keep insured the said Premises during the term hereby
          granted against loss or damage by fire or tempest and against such
          other cause as the Landlord may deem necessary in the full value
          thereof (the goods and belongings of the Tenant in the said Premises
          which are to be insured by the Tenant are excepted) and to cause all
          monies received by virtue of such insurance to be laid out forthwith
          in rebuilding and reinstating the said Premises and to make up any
          deficiency out of their own money provided that the Landlord's
          obligation under this covenant shall cease if the insurance shall be
          rendered void by reason of any act or default of the Tenant, and in
          case the said Premises or any part thereof shall at any time be
          destroyed or damaged by fire or tempest so as to be unfit for
          substantial occupation or use and the policy or policies effected by
          the Landlord shall not have been invalidated or payment of the policy
          monies refused in consequence of some act or default of the Tenant,
          the rent hereby reserved or a just and fair proportion thereof
          according to the nature and extent of the actual damage done or as
          certified by an independent surveyor appointed by both parties, shall
          be suspended as from the happening of the said fire and tempest until
          the said Premises shall be again rendered fit for occupation and use
          but the tenancy shall in no way be invalidated.

     (g)  To permit the Tenant to exhibit on the said Premises any sign
          signboards lettering poster advertisement or any of such kind for the
          purpose of carrying out its business Provided Always that the Tenant
          shall have first obtained the approval of the local authority or
          relevant authority.

     (h)  That the Tenant paying the rent hereby reserved and performing and
          observing the terms and conditions herein contained and on the
          Tenant's part to be observed and performed shall and may peaceably and
          quietly hold and enjoy the said Premises during the said Tenancy
          without any interruption or disturbance from or by the Landlord or any
          person or persons rightfully claiming under or in trust for the
          Landlord.

                                                                   [SEAL] [SEAL]

                                       11



11.  PROVIDED ALWAYS AND IT IS HEREBY AGREED BETWEEN THE PARTIES HERETO as
     follows:-

     (a)  This tenancy shall be read and construed as if it had been executed by
          both parties on the day of the commencement of the term hereby
          granted.

     (b)  If the rent hereby reserved or any part hereof shall be in arrears and
          unpaid at any time for seven (7) days after becoming due whether
          formally demanded or not or if any of the other covenants stipulations
          or agreements on the part of the Tenant herein contained shall not be
          performed or observed or if the Tenant or other persons or person in
          whom for the time being during the term hereby created shall be vested
          shall have a receiving order made against them or him or shall become
          bankrupt or upon the liquidation or winding up of the Tenant otherwise
          than upon reconstruction or amalgamation or if the Tenant shall make
          any assignment for the benefit of or enter into any arrangement with
          their or his creditors or if the Tenant shall permit any execution to
          be levied on the said Premises then and in any such cases it shall be
          lawful for the Landlord at any time thereafter to re-enter upon the
          said Premises or any part thereof in the name of the whole and
          thereupon this Tenancy shall absolutely determine but without
          prejudice to the right of action of the Landlord in respect of any
          breach of the Tenant's covenants herein contained.

     (c)  The Landlord sha11 on the written request of the Tenant made not less
          than three (3) months before the expiration of the term hereby created
          and if there shall not at the time of such request be any existing
          breach or non-observance of any of the covenants on the part of the
          Tenant herein contained grant to the Tenant a tenancy of the said
          Premises for a further term of two (2) years from the expiration of
          the term hereby created subject to the same terms and conditions as
          are herein contained Provided That the rental shall be such sum as the
          parties hereto shall mutually agree to having regard to the then
          prevailing market rate for similar tenancies within the vicinity of
          the said Premises.

     (d)  Notwithstanding clause 8(b) preceding, in the event the quit rent and
          assessment payable by the Landlord in respect to the said Premises or
          the factory lot on which the Land is built being increased from

                                                                   [SEAL] [SEAL]

                                       12



          time to time above those payable as at the date of this Agreement,
          then and in such an event the Tenant shall pay to the Landlord on
          demand the said increase SAVE AND EXCEPT that any increase in the
          assessment in respect of the said Premises for the year 2002 only
          shall be borne by the Landlord.

     (e)  Without prejudice to any other rights and remedies the Landlord may
          have, in the event the Tenant shall default in the payment on the due
          date of any rent payable by the Tenant herein reserved the Tenant
          shall pay to the Landlord interest at the rate of eight per centum
          (8%) per annum calculated from the date of such default until the date
          of payment of the amount thereof.

     (f)  Any waiver, knowledge or acquiescence by either of the parties hereto
          of any breach of any provision of this Agreement shall not be deemed
          to be a waiver of such term and condition or any subsequent breach of
          the same or of any other provision.

     (g)  Each party shall bear their own solicitor's costs of and incidental to
          the preparation and completion of this Agreement but the stamp duty
          payable thereon shall be borne by the Tenant.

     (h)  Any notice or other documents or writing required to be served,
          delivered or given under this Agreement by one party to the other
          party shall be in writing and may be given by hand or sent (by first
          class post, by prepaid Registered Post, telex, facsimile transmission)
          to the last known address of the Tenant or to the said Premises and
          on the Landlord addressed to the last known address of the Landlord
          and every such notice or the like shall be deemed to have been given
          at the time when in the ordinary course of transmission it should have
          been delivered at the address to which it was sent.

     (i)  This Agreement contains the entire agreement between the parties
          hereto, supersedes all previous agreement and understandings between
          the parties with respect thereto, and may not be modified except by an
          instrument in writing signed by the duly authorised representatives of
          the parties.

     (j)  This Agreement shall be binding on the successors in title, heirs,
          assigns and/or representatives of the parties herein.

                                                                   [SEAL] [SEAL]

                                       13



     (k)  In this Agreement where the context so admits the expression
          "Landlord" and "Tenant" include the respective permitted assigns of
          the parties hereto and word importing the singular number shall
          include the plural number and vice versa and word importing the
          masculine gender only include the feminine and neuter genders and the
          word "month" means "calendar month".

                              ********************

                    (This space is intentionally left blank)

                                                                   [SEAL] [SEAL]

                                       14



IN WITNESS WHEREOF the parties hereto have hereunto set their hands the day and
year abovewritten.

                                       ANGELES RUBBER PRODUCTS SDN BHD
                                                  (27778-M)

SIGNED by                         )
for and on behalf of the Landlord )    /s/ Illegible
in the presence of :-             )    -----------------------------------------
                                                           Authorised Signatures


/s/ Pauline Ong Gim Choo
- ------------------------
  PAULINE ONG GIM CHOO
  Advocate & Solicitor
        Selangor


SIGNED by                         )    /s/ Illegible
for and on behalf of the Tenant   )    -----------------------------------------
in the presence of :-             )    DSG (MALAYSIA) SDN BHD
                                       (CO. NO. 472990-P)
                                       NO. 9 (LOT 136), JALAN U1/19, SECTION U1,
                                       HICOM GLENMARIE INDUSTRIAL PARK,
                                       40150 SHAH ALAM,
                                       SELANGOR DARUL EHSAN.
                                       TEL :603-5569 4282
                                       FAX :603-5569 4286

/s/ Tan Chiew Guat, Cindy
- ----------------------------------
 TAN CHIEW GUAT, CINDY
Peguambela & Peguamcera
    Mahkamah Tinggi
     Kuala Lumpur



PREMISES INVENTORY LIST                                 Date: 29th November 2001
- -----------------------                                       ------------------

Property Address:

Lot 542 Jalan Subang 2 Sungai Penaga Industrial Park
47500 Subang Jaya Selangor Darul Ehsan
- --------------------------------------------------------------------------------

FACTORY AREA
- ------------

Build-up Area         :   68,341.70 square feet (6,349.1 square meter).
Wall                  :   Half brick and half metal sheet.
Column                :   Steel column.
Ground Floor          :   R.C. Slab on piled flooring.
Roof Structure        :   Structural steelwork with metal roofing sheet.
Windows               :   Adjustable glass louvres windows.
Entrances             :   Metal sliding doors.
Washroom              :   2 nos.
TNB Substation        :   1 no.
Refuse Chamber        :   1 no.
Water Tank            :   9,600 gallons metal tank.
Height Clearance      :   30 feet approximately.
Services              :   Car Park and Tarmac Driveway.

Fire Protection System
- ----------------------

Fire Alarm and Detection System.
Sprinkler System.
Hose Reel System.
Hydrant System.
Water Tank            :   Press  metal.
Capacity              :   20,000 gallons.
Fire extinguisher     :   13 nos powder type and 2 nos carbon type

Electricity Facility
- --------------------

Incoming Electricity  :   2000 Amp. 3 phase.
Main Switch Box       :   1 no (Consumer switch room).
For Factory Block     :   Industrial down light   -   68 nos.
                                                      ==
                      :   Switch socket outlet    -   20 nos.
                                                      ==
                      :   Emergency light         -   20 nos.
                                                      ==
                      :   "KELUAR" light          -   15 nos.
                                                      ==
Guard House           :   Light                   -    1 nos.
                                                      ==
                      :   Switch socket outlet    -    3 nos.
                                                      ==
External Area         :   Sodium compound light   -    8 nos.
                                                      ==
                      :   Awning light            -   20 nos.
                                                      ==



OFFICE AREA
- -----------

Front Portion Office
- --------------------

Build-up Area         :   8,000 sq. feet per level (2 levels).
Wall                  :   Plastered brick walls with R.C. floors.
Column                :   Steel column.
Ground Floor          :   R.C. Slab with cement rendering.
Roof Structure        :   Structural steelwork with metal roofing sheet.
Windows               :   Aluminium frame casement with glass panels.
Entrances             :   Aluminium frame casement with glass panels.
Washroom              :   2 nos with ceramic tiles.
                          =
Pantry                :   2 nos with ceramic tiles.
                          =

Electricity Facility
- --------------------

Main switch box       -   2 nos.
                          =
Lighting point        -   8 nos.
                          =
Switch socket outlet  -   8 nos.
                          =

Back Portion Office
- -------------------

Build-up Area         :   2,000 sq. feet per level (2 levels) including
                          TNB substation.
Wall                  :   Plastered brick walls with R.C. floors.
Column                :   Steel column.
Ground Floor          :   R.C. Slab with cement rendering.
Roof Structure        :   Structural steelwork with metal roofing sheet.
Windows               :   Aluminium frame casement with glass panels.
Entrances             :   Aluminium frame casement with glass panels.
Washroom              :   2 nos with ceramic tiles.
Prayer room           :   2 nos with ceramic tiles.

Electricitv Facility
- --------------------

Lighting              -   36 nos.
                          ==
Switch socket outlet  -   28 nos.
                          ==
Air condition unit    -    6 nos.
                          ==
Emergency light       -    5 nos.
                          ==
"KELUAR" light        -    3 nos.
                          ==

Water Supply Meter Reading   :   Big meter     -   146886(2).
                             :   Small meter   -   10740(676).



Others:

1.   To repair the fire protection system water tank leakage.
- --------------------------------------------------------------------------------
2.   To cover manholes surrounding the factory with grille covers.
- --------------------------------------------------------------------------------
3.   To repair the guardhouses at the premises.
- --------------------------------------------------------------------------------
4.   To replace one unit of the "KELUAR" light that is broken in the factory
- --------------------------------------------------------------------------------
     area.
- --------------------------------------------------------------------------------
5.   To touch up paint work :
- --------------------------------------------------------------------------------
     -    l unit sliding door at the factory area.
- --------------------------------------------------------------------------------
     -    the black & white road divider blocks.
- --------------------------------------------------------------------------------
6.   Roof leaking at the centre of the factory area only.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Remarks : Should there be any other defect, the Tenant shall inform The Landlord
- --------------------------------------------------------------------------------
within 14 days in writing from the date of handing over the premises.
- --------------------------------------------------------------------------------

We hereby acknowledged of the handing over of the premises from the Landlord to
the Tenant according to the above inventory list and conditions.


/s/ Lam Mei Yuk                                      /s/ Ong Boon Kee
- ----------------------------                         ---------------------------
Signed by the Tenant                                 Signed by the Vendor (s).

Name LAM MEI YUK                                     Name ONG BOON KEE
     -----------------------                              ----------------------

NRIC No 611387461                                    NRIC No 5667554
        --------------------                                 -------------------

Date 30 Nov 2001                                     Date 30/11/01
     -----------------------                              ----------------------


/s/  Wong Chun Wah                                   /s/  Kam Chee Wai
- ----------------------------                         ---------------------------
Witnessth by:                                        Witnessth by:

Name WONG CHUN WAH                                   Name KAM CHEE WAI
     -----------------------                              ----------------------

NRIC No 611786816                                    NRIC No [Illegible]
        --------------------                                 -------------------

Date 30 Nov 2001                                     Date 30/11/01
     -----------------------                              ----------------------

EX-3.5

                                                                     EXHIBIT 3.5

                  THIRD AMENDMENT AND WAIVER TO LOAN AGREEMENT

          This THIRD AMMENDMENT AND WAIVER TO LOAN AGREEMENT (this "Amendment")
                                                                    ---------
is entered into as of September 10, 2001, between ASSOCIATED HYGIENIC PRODUCTS
LLC, a Delaware limited liability company (the "Borrower") and FOOTHILL CAPITAL
                                                --------
CORPORATION, in its capacity as administrative agent (the "Agent") for the
                                                           -----
Lenders (as defined below),

                              W I T N E S S E T H:

          WHEREAS, the Borrower, the Lenders (as defined therein) and Agent have
entered into that certain Amended and Restated Loan and Security Agreement dated
as of March 14, 2001, as amended by that certain First Amendment to Loan
Agreement and that certain Second Amendment to Loan Agreement prior to the date
hereof (as the same may be further modified, amended, restated or supplemented
from time to time, the "Loan Agreement"), pursuant to which the Lenders have
                        --------------
agreed to extend credit to the Borrower from time to time; and

          WHEREAS, pursuant to Section 7.8(a) of the Loan Agreement and Section
                               --------------                           -------
2 of the Subordination Agreement in connection with Subordinated Note A, the
- -
Borrower is prohibited from making any payments of principal on Subordinated
Note A or Subordinated Note B (the "Subordinated Note Payment Prohibition"); and
                                    -------------------------------------

          WHEREAS, pursuant to Section 7.14 of the Loan Agreement, the Borrower
                               ------------
is prohibited from directly or indirectly entering into or permitting to exist
any transaction with any Affiliate of Borrower except for transactions that are
in the ordinary course of Borrower's business, upon fair and reasonable terms,
and are fully disclosed to Agent, including, without limitation, any disclosure
set forth on Annex A to the Affiliate Subordination Agreement, and that are no
             -------
less favorable to Borrower than would be obtained in an arm's length transaction
with a non-Affiliate, and are subject to the Affiliate Subordination Agreement
(the "Affiliate Payment Prohibition"); and
      -----------------------------

          WHEREAS, the Borrower has requested that the Agent and the Lenders
waive the Subordinated Note Payment Prohibition and the Affiliate Payment
Prohibition, and amend the Loan Agreement and the Affiliate Subordination
Agreement to allow the Borrower to make (a) a $2,500,000 prepayment of principal
on Subordinated Note A, and (b) a non-ordinary course payment in full with
respect to the affiliate loan owed by Borrower to AHP Canada, Inc. in the amount
of $1,282,323.66, and the Agent and the Lenders have agreed to the requested
amendment and waiver on the terms and conditions set forth herein and in that
certain First Amendment to Amended and Restated Subordination and Non-Setoff
Agreement dated of even date herewith;

          NOW THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the



parties hereto hereby agree that all capitalized terms not otherwise defined
herein shall have the meanings ascribed to such terms in the Loan Agreement and
further agree as follows:

     1. Amendment to Section 7.14 of the Loan Agreement. Section 7.14 of the
        -----------------------------------------------
loan Agreement, "Transactions with Affiliates," is hereby modified and amended
                 ----------------------------
by deleting the existing Section 7.14 in its entirety and substituting the
following therefor:

          "7.14 Transactions with Affiliates. Directly or indirectly enter into
                ----------------------------
or permit to exist any transaction with any Affiliate of Borrower except (a)
transactions disclosed Annnex A to the Affiliate Subordination Agreement,
                       --------
(b) transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms, that are fully disclosed to Agent, that are no less
favorable to Borrower than would be obtained in an arm's length transaction with
a non-Affiliate, and are subject to the Affiliate Subordination Agreement, and
(c) the affiliate loan owed by Borrower to AHP Canada, Inc. in an amount not
exceeding $1,282,323.66, which loan may be repaid in full (i) provided no Event
of Default has occurred and is continuing, and (ii) if after giving effect to
such repayment, Borrower shall have Excess Availability equal to or greater than
$10,000,000"

     2. Waiver. The Lenders and the Agent hereby waive the Subordinated Note
        ------
Payment Prohibition to allow a one-time principal repayment on Subordinated Note
A prior to September 15, 2001, in the amount of $2,500,000; provided, however,
                                                            --------  -------
the above-referenced waiver shall not waive any other requirement or hinder,
restrict or otherwise modify the rights and remedies of the Agent or the Lenders
following the occurrence of any other Default or Event of Default under the Loan
Agreement, including, but not limited to, the Subordinated Note Payment
Prohibition with respect to any other future payments on Subordinated Note A or
Subordinated Note B,

     3. No Other Amendments or Waivers. Except as otherwise expressed herein,
        ------------------------------
the execution, delivery and effectiveness of this Amendment shall not operate as
a waiver of any right, power or remedy of the Agent or the Lenders under the
Loan Agreement, the Affiliate Subordination Agreement or any of the other Loan
Documents, nor constitute a waiver of any provision of the Loan Agreement, the
Affiliate Subordination Agreement or any of the other Loan Documents. Except for
the amendment and waiver set forth above, the text of the Loan Agreement, the
Affiliate Subordination Agreement and all other Loan Documents shall remain
unchanged and in full force and effect and the Borrower hereby ratifies and
confirms its obligations thereunder. This Amendment shall not constitute a
modification of the Loan Agreement or the Affiliate Subordination Agreement or a
course of dealing with the Agent or the Lenders at variance with the Loan
Agreement or the Affiliate Subordination Agreement such as to require further
notice by the Agent or the Lenders to require strict compliance with the terms
of the Loan Agreement, the Affiliate Subordination Agreement and the other Loan
Documents in the future, except as expressly set forth herein. The Borrower
acknowledges and expressly agrees that the Agent and the Lenders reserve the
right to and do in fact, require strict compliance with all terms and provisions
of the Loan Agreement, the Affiliate Subordination Agreement and the other Loan
Documents. The Borrower has no knowledge of any challenge to the Agent's or any
Lenders' claims arising under the Loan Documents, or to the effectiveness of the
Loan Documents.

                                       2



     4. Conditions Precedent to Effectiveness. This Amendment shall become
        -------------------------------------
effective as of the date hereof when and only when, the Agent shall have
received:

          (a) an amendment fee from the Borrower in the amount of $5,000
(it being understood that, by execution and delivery of this Amendment,
Borrower authorizes Agent to charge Borrower's Loan Account for such fee and
such amount shall thereafter accrue interest at the rate applicable to Advances
under the Loan Agreement in accordance with Section 2.6 of the Loan Agreement);
                                            -----------
and

          (b) counterparts of this Amendment duly executed and delivered by the
Borrower and the Lenders; and

          (c) the First Amendment to Amended and Restated Subordination and Non
Setoff Agreement dated of even date herewith, duly executed and delivered by
the Borrower, the Creditors party thereto, the Lenders and the Agent; and

          (d) such other information, documents, instruments or approvals as the
Agent or the Agent's counsel may reasonably require.

     5. Representations and Warranties of Borrower. Borrower represents and
        ------------------------------------------
warrants as follows:

          (a) Borrower is a limited liability company organized, validly
existing and in good standing under the laws of the jurisdiction indicated at
the beginning of this Amendment and all other jurisdictions in which the failure
to be so qualified reasonably could be expected to constitute a Material Adverse
Change;

          (b) The execution, delivery, and performance by Borrower of this
Amendment and the Loan Documents to which it is a party, as amended hereby, are
within Borrower's limited liability company powers, have been duly authorized by
all necessary limited liability company action and do not and will not (i)
violate any provision of federal, state, or local law or regulation applicable
to Borrower, the Governing Documents of Borrower, or any order, judgment, or
decree of any court or other Governmental Authority binding on Borrower, (ii)
conflict with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation of Borrower,
(iii) result in or require the creation or imposition of any Lien of any
nature whatsoever upon any properties or assets of Borrower, other than
Permitted Liens, or (iv) require any approval of Borrower's members or any
approval or consent of any Person under any material contractual obligation of
Borrower,

          (c) The execution, delivery, and performance by Borrower of this
Amendment and the Loan Documents to which it is a party, as amended hereby, do
not and will no, require any registration with, consent, or approval of, or
notice to, or other action with or by, any Governmental Authority or other
Person;

          (d) This Amendment and each other Loan Document to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by

                                       3



equitable principles or by bankruptcy, insolvency, reorganization, moratorium,
or similar laws relating to or limiting creditors' rights generally; and

          (e) No Default or Event of Default is existing.

     6. Counterparts. This Amendment may be executed in multiple counterparts,
        ------------
each of which shall be deemed to be an original and all of which, taken
together, shall constitute one and the same agreement. In proving this
Amendment in any judicial proceedings, it shall not be necessary to produce or
account for more than one such counterpart signed by the party against whom such
enforcement is sought. Any signatures delivered by a party facsimile
transmission shall be deemed our original signature hereto.

     7. Reference to and Effect on the Loan Documents. Upon the effectiveness of
        ---------------------------------------------
this Amendment, on and after the date hereof each reference in the Loan Agrement
to "this Agreement", "hereunder", "hereof" or words of like import referring to
the Loan Agreement, and each reference in the other Loan Documents to "the Loan
Agreement" "thereunder", "thereof" or words of like import referring to the Loan
Agreement, shall mean and be a reference to the Loan Agreement as amended
hereby.

     8. Costs, Expenses and Taxes. Borrower agrees to pay on demand all
        -------------------------
reasonable costs and expenses in connection with the preparation, execution, and
delivery of this Amendment and the other instruments and documents to be
delivered hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of counsel for the Agent with respect thereto and with
respect to advising the Agent as to its rights and responsibilities hereunder
and thereunder.

     9. Governing Law. This Amendment shall be deemed to be made pursuant to the
        -------------
laws of the State of Georgia with respect to agreements made and to be performed
wholly in the State of Georgia, and shall be construed, interpreted, performed
and enforced is accordance therewith.

     10. Loan Document. This Amendment shall be deemed to be a Loan Document for
         -------------
all purposes.

            [THE REMAINDER OF THE PAGE IS INTENTIONALLY BLANK]

                                       4



          IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the day and year first written above.

BORROWER:                               ASSOCIATED HYGIENIC PRODUCTS LLC


                                        By:
                                           -----------------------------------
                                        Name:
                                             ---------------------------------
                                        Title:
                                              --------------------------------


AGENT
and LENDER:                             FOOTHILL CAPITAL CORPORATI0N,
                                        as Agent and a Lender


                                        By:
                                           -----------------------------------
                                        Name:
                                             ---------------------------------
                                        Title:
                                              --------------------------------

                       THIRD AMMENDMENT TO LOAN AGREEMENT
                                 Signature Page

EX-3.6

                                                                     EXHIBIT 3.4


                       FOURTH AMENDMENT TO LOAN AGREEMENT

          This FOURTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is
                                                          ---------
entered into as of December 19, 2001. between ASSOCIATED HYGIENIC PRODUCTS LLC,
a Delaware limited liability company ("Borrower") and FOOTHILL CAPITAL,
                                       --------
CORPORATION, in its capacity as administrative agent ("Agent") for the
                                                       -----
Lenders (as defined below),

                              W I T N E S S E T H:

          WHEREAS, Borrower, the Lenders (as defined therein) and Agent have
entered into that certain Amended and Restated Loan and Security Agreement
dated as of March 14, 2001, as amended by that certain First Amendment to Loan
Agreement, as further amended by that certain Second Amendment to Loan
Agreement and as further amended by that certain Third Amendment and
Waiver to Loan Agreement prior to the date hereof (as the same may be further
modified, amended, restated or supplemented from time to time, the "Loan
                                                                    ----
Agreement"), pursuant to which the Lenders have agreed to extend credit to
- ---------
Borrower from time to time: and

          WHEREAS, pursuant to Section 7.20(a) of the Loan Agreement, Borrower
is required to meet certain financial tests, and Borrower has informed Agent and
the Lenders that Borrower (i) failed to satisfy the requirements of Section
7.20(a)(ii) for the fiscal quarter ending June 30, 2001 (the "Second Quarter
                                                              --------------
Covenant Default"), and (ii) failed to satisfy the requirements of Section
- ----------------
7.20(a)(i) for the six (6) month period ending September 30, 2001 and further
failed to satisfy the requirements of Section 7.20(a)(ii) for the fiscal quarter
ending September 30, 2001 (collectively, the "Third Quarter Covenant Defaults;
                                              -------------------------------
with the Second Quarter Covenant Default, the "Financial Covenants Defaults");
                                               ----------------------------
and

          WHEREAS, Borrower has requested that Agent and the Lenders waive the
Financial Covenants Defaults and amend the Loan Agreement to chance the
financial tests for the fiscal quarter ending December 31, 2001 and for each
fiscal quarter during the fiscal year ending December 31, 2002, and Agent and
the Lenders have agreed to the requested amendments and waiver on the terms
and conditions set forth herein; and

          WHEREAS, Borrower has requested that Agent and the Lenders further
amend the Loan Agreement by) restructuring the Term Loan (as such term is
defined in the Loan Agreement) into three separate term loans, and Agent and
the Lenders have agreed to the requested amendments on the terms and conditions
set forth herein;

          NOW THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree that all capitalized terms not
otherwise



defined herein shall have the meanings ascribed to such terms in the Loan
Agreement and further agree as follows:

     1.   Amendments to Loan Agreement.
          ----------------------------

          (a) Amendments to Section 1.1 of the Loan Agreement. Section 1.1.
              -----------------------------------------------
"Definitions," is hereby amended and modified as follows:
 -----------

          (i) The definition of "Term Loan" is hereby amended and modified by
deleting such definition in its entirety and substituting the following in lieu
thereof:

          ""Term Loan" means, collectively, Term Loan A, Term Loan B and Term
            ---------
          Loan C."

          (ii) The definition of "Term Loan Amount" is hereby amended and
modified by deleting such definition in its entirety and substituting the
following in lieu thereof:

          ""Term Loan Amount" means, collectively, the Term Loan A Amount, the
            ----------------
          Term Loan B Amount and the Term Loan C Amount."

          (iii) The definition of "Term Loan Commitment" is hereby amended and
modified by deleting such definition in its entirety and substituting the
following in lieu thereof:

          ""Term Loan Commitment" means, collectively, the Term Loan A
            --------------------
          Commitment, the Term Loan B Commitment and the Term Loan C
          Commitment."

          (iv) The following definitions are inserted therein in correct
alphabetical order:

          ""Business Plan" has the meaning set forth in Section 7.20(a)(iii)."
            -------------                               --------------------

          ""EBITDA" means, with respect to any fiscal period, Borrower's and
            ------
          its Subsidiaries consolidated net earnings (or loss), minus
          extraordinary gains, plus interest expense (excluding interest
          received on the Amended and Restated Wang Note), income taxes,
          depreciation and amortization for such period, plus, during Borrower's
          fiscal year 2002, non-cash restructuring charges paid by Borrower in
          such period, as determined in accordance with GAAP."

          ""Fourth Amendment Effective Date" has the meaning set forth in that
            -------------------------------
          certain Fourth Amendment and Waiver to Loan Agreement dated as of
          December 19, 2001 among Borrower and Agent."

                                       2



          ""Term Loan A" the meaning set forth in Section 2.2(a)(i)."
            -----------                           -----------------

          ""Term Loan B" has the meaning set forth in Section 2.2(a)(ii)."
            -----------                               ------------------

          ""Term Loan C" has the meaning set forth in Section 2.2 (a)(iii)."
            -----------                               --------------------

          ""Term Loan A Amount" has the meaning set forth in Section 2.2(a)(i)."
            ------------------                               -----------------

          ""Term Loan B Amount" has the meaning set forth in Section
            ------------------                               -------
          2.2(a)(ii)."
          ----------

          ""Term Loan C Amount" has the meaning set forth in Section
            ------------------                               -------
          2.2(a)(iii)."
          ----------

          ""Term Loan A Commitment" means, with respect to each Lender, its Term
            ----------------------
          Loan A Commitment, and, with respect to all Lenders, their Term Loan A
          Commitments, in each case as such Dollar amounts are set forth beside
          such Lender's name under the applicable heading on Schedule C-1 or on
                                                             ------------
          the signature page of the Assignment and Acceptance pursuant to
          which such Lender became a Lender hereunder in accordance with the
          provisions of Section 14.1."
                        ------------

          ""Term Loan B Commitment" means, with respect to each Lender, its Term
            ----------------------
          Loan B Commitment, and with respect to all Lenders, their Term Loan B
          Commitments, in each case as such Dollar amounts are set forth beside
          such Lender's name under the applicable heading on Schedule C-1 or on
                                                             ------------
          the signature page of the Assignment and Acceptance pursuant to which
          such Lender became a Lender hereunder in accordance with the
          provisions of Section 14.1."
                        ------------

          ""Term Loan C Commitment" means, with respect to each Lender, its Term
            ----------------------
          Loan C Commitment and, with respect to all Lenders, their Term Loan C
          Commitments, in each case as such Dollar amounts are set forth beside
          such Lender's name under the applicable heading on Schedule C-1 or on
                                                             ------------
          the signature page of the Assignment and Acceptance pursuant to which
          such Lender became a Lender hereunder in accordance with the
          provisions of Section 14.1."
                        ------------

          (b) Amendment to Section 2.2 of the Loan Agreement. Section 2.2 of
              ----------------------------------------------
the Loan Agreement, "Term Loan; Capital Expenditure Loans," is hereby amended
                     ------------------------------------
and modified by deleting Section 2.2(a) in its entirety and substituting the
following in lieu thereof:

          "(a) Term Loans. On March 14, 2001, the Lenders made a term loan to
     Borrower in the original principal amount of Eleven Million Dollars
     ($11,000,000). As of the Fourth Amendment Effective Date, the principal

                                       3



     balance of such term loan is $8,712,000, which shall be divided into three
     separate term loans, as set forth below:

               (i) Term Loan A. The principal balance of Term Loan A ("Term
                                                                       ----
     Loan A") is $2,780,601 (the "Term Loan A Amount"). Term Loan A shall be
     ------                       ------------------
     repaid in equal monthly installments of principal in the amount of $58,510
     plus accrued interest, such installments to be payable on the first day of
     ----
     each month commencing with the first day of the first month following the
     Fourth Amendment Effective Date and continuing on the first day of each
     succeeding month until and including the earliest of (1) the payment in
     full of the Term Loan A, or (2) the Maturity Date, or (3) termination of
     this Agreement;

               (ii) Term Loan B. The principal balance of Term Loan B ("Term
                                                                        ----
     Loan B") is $2,934,365 (the "Term Loan B Amount"). Term Loan B shall be
     ------                       ------------------
     repaid in equal monthly installments of principal in the amount of $61,746
     plus accrued interest, such installments to be payable on the first day of
     ----
     each month commencing with the first day of the first month following the
     Fourth Amendment Effective Date and continuing on the first day of each
     succeeding month until and including the earliest of (1) the payment in
     full of the Term Loan B, or (2) the Maturity Date, or (3) termination of
     this Agreement;

               (iii) Term Loan C. The principal balance of Term Loan C ("Term
                                                                         ----
     Loan C") is $2,997,034 (the "Term Loan C Amount"). Term Loan C shall
     ------                       ------------------
     be repaid in equal monthly installments of principal in the amount
     of $63,077 plus accrued interest, such installments to be payable on the
                ----
     first day of each month commencing with the first day of the first month
     following the Fourth Amendment Effective Date and continuing on the first
     day of each succeeding month until and including the earliest of (1) the
     payment in full of the Term Loan C, or (2) the Maturity Date, or (3)
     termination of this Agreement;

     The unpaid principal balance of each of Term Loan A Term Loan B, and Term
     Loan C shall be repaid with the proceeds of any Permitted Disposition to
     the extent such repayment is required by Section 7.4 hereof, with such
                                              -----------
     proceeds being applied to the installments due on the respective Term Loan
     in the inverse order of their maturity. The outstanding unpaid principal
     balance of the Term Loan, together with all accrued and unpaid interest and
     fees thereon, shall be due and payable on the earlier of the Maturity Date
     or the date of termination of this Agreement, whether by its terms, by
     prepayment, by acceleration, or otherwise. The unpaid principal balance of
     the Term Loan may be prepaid in whole or in part without penalty or premium
     (except as provided in Section 3.6) at any time during the term of this
                            -----------
     Agreement upon ninety (90) days' written notice by Borrower to Agent, all
     such prepaid amounts to be applied pro-rata to the installments due on the
     Term Loan A. Term Loan B and Term Loan C, in the inverse order of their

                                       4



     respective maturity. All amounts outstanding under the Term Loan shall
     constitute Obligations."

          (c) Amendment to Section 6.9 of the Loan Agreement. Section 6.9 of the
              ----------------------------------------------
Loan Agreement. "Location of Inventory and Equipment." is hereby amended and
                 -----------------------------------
modified to add the following proviso at the end of such Section:

          "and; provided further Borrower may re-locate Inventory and Equipment
                ----------------
     from a location identified on Schedule 5.5 to another location identified
                                   ------------
     on Schedule 5.5 so long as Borrower provides written notice to Agent not
        ------------
     less than 30 days prior to such relocation, and so long as, at the time of
     such written notification, Borrower provides any financing statements,
     fixture filings, Collateral Access Agreements or other documents required
     by Agent to perfect and continue Agent's Liens on such assets."

          (d) Amendment to Section 7.4 of the Loan Agreement. Section 7.4 of the
              ----------------------------------------------
Loan Agreement, "Disposal of Assets," is hereby amended and modified by deleting
                 ------------------
Section 7.4 in its entirety and substituting the following in lieu thereof:

          "7.4 Disposal of Assets. Convey, sell, lease, license, assign,
               ------------------
transfer, or otherwise dispose of any of Borrower's assets; provided, however,
                                                            --------  -------
that the Borrower may dispose of assets in a Permitted Disposition so long as:
(a) if the asset was acquired ,with the proceeds of a Capital Expenditure Loan,
the proceeds are used to repay the applicable Capital Expenditure Loan on the
date of receipt thereof by Borrower; (b) if the asset is Real Property
Collateral that was included by Agent in the calculation of the Term Loan C
Amount (designated "Real Estate Held for Sale" in Borrower's strategic business
plan delivered to Agent), the proceeds are used (i) first, to repay the
                                                    -----
installments due on Term Loan C in the inverse order of maturity, (ii} second,
                                                                       ------
to repay the installments due on Term Loan B in the inverse order of maturity,
(iii) third, to repay the installments due on Term Loan A in the inverse order
      -----
of maturity, and (iv) fourth, any remaining proceeds are directed to the Cash
                      ------
Management Account; (c) if the asset is Equipment that was included by Agent in
the calculation of the Term Loan B Amount (designated "Machinery and Equipment
Held for Sale" in Borrower's strategic business plan delivered to Agent), and to
the extent such proceeds from the sale of such Equipment are not used to
purchase replacement Equipment of equal or greater value within five (5)
Business Days after selling any such Equipment, the proceeds are used (i) first,
                                                                          -----
to repay the installments due on the Term Loan B in the inverse order of
maturity. (ii) second, to repay the installments due on Term Loan A in the
               ------
inverse order of maturity, third, to repay the installments due on Term Loan C
                           -----
in the inverse order of maturity, and (iv) fourth, any remaining proceeds are
                                           ------
directed to the Cash Management Account; and (d) in all other cases, the
proceeds are directed to the Cash Management Account, or immediately deposited
by Borrower in the Cash Management Account.

          (e) Amendment to Section 7.20 of the Loan Agreement. Section 7.20 of
              -----------------------------------------------
the Loan Agreement, "Financial Covenants," is hereby amended and modified by
                     -------------------

                                       5



deleting Section 7.20(a) and 7.20(b) in their entirety and substituting the
following in lieu thereof:

               (a} Fail to maintain:

               (i) Minimum EBITDA. EBITDA, measured on a fiscal quarter-end
     basis, of not less than the required amount set forth in the following
     table for the applicable period set forth opposite thereto:

     --------------------------------------------------------------------
     Applicable Amount                   Applicable Period
     --------------------------------------------------------------------
       ($6,923,000)      For the 3 month period ending December 31, 2001
     --------------------------------------------------------------------
         ($757,000)        For the 3 month period ending March 31, 2002
     --------------------------------------------------------------------
       $ 1,318,000         For the 6 month period ending June 30, 2002
     --------------------------------------------------------------------
       $ 3,302,000       For the 9 month period ending September 30, 2002
     --------------------------------------------------------------------
       $ 5,591,000       For the 12 month period ending December 31, 2002
     --------------------------------------------------------------------

               (ii} Tangible Net Worth. Tangible Net Worth of at least the
     required amount set forth in the following table as of the applicable date
     set forth opposite thereto:

     --------------------------------------------
     Applicable Amount      Applicable Period
     --------------------------------------------
       ($12,834,000)     as of December 31, 2001
     --------------------------------------------
       ($14,531,000)       as of March 31, 2002
     --------------------------------------------
       ($13,944,000)       as of June 30, 2002
     --------------------------------------------
       ($l3,198,000)     as of September 30, 2002
     --------------------------------------------
       ($12,058,000)     as of December 31, 2002
     --------------------------------------------

                    (iii) On December 1, 2002, and on each December 1
     thereafter, Borrower agrees to deliver to Agent Borrower's business plan
     for its upcoming fiscal year commencing January 1 of succeeding year (the
     "Business Plan"), which plan shall be reasonably acceptable to Agent in all
      -------------
     respects. Based upon the Business Plan for each fiscal year, Agent shall
     establish the quarterly minimum EBITDA and minimum Net Worth covenants for
     the fiscal year in question using the same methodology as utilized for the
     2001 and 2002 fiscal year financial covenants, and the new covenant levels
     shall be presented to Borrower for approval, which approval shall not be
     unreasonably withheld. In the event that Borrower does not approve the
     proposed covenant levels, Agent shall

                                       6



     establish the covenant levels, in its reasonable discretion, based upon the
     Business Plan for the applicable fiscal year.

               (b) Capital Expenditures. Make Capital Expenditures in any fiscal
year in excess of $6,975,000."

          (f) Amendment to Schedule C-1 to the Loan Agreement. Schedule C-1 of
              -----------------------------------------------
the Loan Agreement, "Commitments." is hereby amended and modified by deleting
                     -----------
Schedule C-1 in its entirety and substituting the schedule attached to this
Amendment as Annex A in lieu thereof.

     2. Waiver. The Lenders and Agent hereby waive the Financial Covenants
        ------
Defaults and their rights and remedies under the Credit Agreement arising as a
result of the Financial Covenants Defaults; provided, however, the
                                            --------  -------
above-referenced waiver shall not waive any other requirement or hinder,
restrict or otherwise modify the rights and remedies of Agent or the Lenders
following the occurrence of any other Default or Event of Default under the Loan
Agreement, including, but not limited to, any future defaults by Borrower of the
financial covenants contained in Section 7.20 of the Loan Agreement.

     3. No Other Amendments or Waivers. Except as otherwise expressed herein.
        ------------------------------
the execution, delivery and effectiveness of this Amendment shall not operate as
a waiver of any right, power or remedy of Agent or the Lenders under the Loan
Agreement or any of the other Loan Documents, nor constitute a waiver of any
provision of the Loan Agreement or any of the other Loan Documents. Except for
the amendment and waiver set forth above, the text of the Loan Agreement and all
other Loan Documents shall remain unchanged and in full force and effect and
Borrower hereby ratifies and confirms its obligations thereunder. This Amendment
shall not constitute a modification of the Loan Agreement or any of the other
Loan Documents or a course of dealing with Agent or the Lenders at variance with
the Loan Agreement or the other Loan Documents such as to require further notice
by Agent or the Lenders to require strict compliance with the terms of the Loan
Agreement and the other Loan Documents in the future, except as expressly set
forth herein. Borrower acknowledges and expressly agrees that Agent and the
Lenders reserve the right to, and do in fact, require strict compliance with all
terms and provisions of the Loan Agreement and the other Loan Documents.
Borrower has no knowledge of any challenge to Agent's or any Lenders' claims
arising under the Loan Documents, or to the effectiveness of the Loan Documents.

     4. Conditions Precedent to Effectiveness. This Amendment shall become
        -------------------------------------
effective as of the date hereof (the "Fourth Amendment Effective Date") when,
                                      -------------------------------
and only when, Agent shall have received:

          (a) an amendment fee from Borrower in the amount of $40,000, which
fee shall be fully earned and non-refundable when paid (it being understood
that, by execution and delivery of this Amendment, Borrower authorizes Agent to
charge Borrower's Loan Account for such fee and such amount shall thereafter
accrue interest at

                                       7



the rate applicable to Advances under the Loan Agreement in accordance with
Section 2.6 of the Loan Agreement);

          (b) counterparts of this Amendment duly executed and delivered by
Borrower and the Lenders; and

          (c) such other information, documents, instruments or approvals as
Agent or Agent's counsel may reasonably require.

     5. Representations and Warranties of Borrower. Borrower represents and
        ------------------------------------------
warrants as follows:

          (a) Borrower is a limited liability company organized, validly
existing and in good standing under the laws of the jurisdiction indicated at
the beginning of this Amendment and all other jurisdictions in which the failure
to be so qualified reasonably could be expected to constitute a Material Adverse
Change;

          (b) The execution, delivery, and performance by Borrower of this
Amendment and the Loan Documents to which it is a party, as amended hereby, are
within Borrower's limited liability company powers, have been duly authorized
by all necessary limited liability company action and do not and will not (i)
violate any provision of federal, state, or local law or regulation applicable
to Borrower, the Governing Documents of Borrower, or any order, judgment, or
decree of any court or other Governmental Authority binding on Borrower, (ii)
conflict with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation of Borrower,
(iii) result in or require the creation or imposition of any Lien of any nature
whatsoever upon any properties or assets of Borrower, other than Permitted
Liens, or (iv) require any approval of Borrower's members or any approval or
consent of any Person under any material contractual obligation of Borrower;

          (c) The execution, delivery, and performance by Borrower of this
Amendment and the Loan Documents to which it is a party, as amended hereby, do
not and will not require any registration with, consent, or approval of, or
notice to, or other action with or by, any Governmental Authority or other
Person;

          (d) This Amendment and each other Loan Document to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally; and

          (e) Except as expressly set forth herein, no other Default or Event of
Default is existing.

                                       8



     6. Counterparts. This Amendment may be executed in multiple counterparts,
        ------------
each of which shall be deemed to be an original and all of which, taken
together, shall constitute one and the same agreement. In proving this Amendment
in any judicial proceedings, it shall not be necessary to produce or account for
more than one such counterpart signed by the party against whom such enforcement
is sought. Any signatures delivered by a party by facsimile transmission shall
be deemed an original signature hereto.

     7. Reference to and Effect on the Loan Documents. Upon the effectiveness of
        ---------------------------------------------
this Amendment, on and after the date hereof each reference in the Loan
Agreement to "this Agreement", "hereunder", "hereof" or words of like import
referring to the Loan Agreement, and each reference in the other Loan Documents
to "the Loan Agreement" "thereunder", "thereof" or words of like import
referring to the Loan Agreement, shall mean and be a reference to the Loan
Agreement as amended hereby.

     8. Costs, Expenses and Taxes. Borrower agrees to pay on demand all
        -------------------------
reasonable costs and expenses in connection with the preparation, execution, and
delivery of this Amendment and the other instruments and documents to be
delivered hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of counsel for Agent with respect thereto and with
respect to advising Agent as to its rights and responsibilities hereunder and
thereunder.

     9. Governing Law. This Amendment shall be deemed to be made pursuant to the
        -------------
laws of the State of Georgia with respect to agreements made and to be performed
wholly in the State of Georgia, and shall be construed, interpreted, performed
and enforced in accordance therewith.

     10. Loan Document. This Amendment shall be deemed to be a Loan Document for
         -------------
all purposes.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       9



          IN WITNESS WHEREOF the parties hereto have executed and delivered this
Amendment as of the day and year first written above.

BORROWER:                       ASSOCIATED HYGIENIC PRODUCTS LLC


                                By:
                                   ---------------------------------------------
                                Name:
                                     -------------------------------------------
                                Title:
                                      ------------------------------------------


AGENT
and LENDER:                     FOOTHILL CAPITAL CORPORATION,
                                as Agent and a Lender

                                By:
                                   ---------------------------------------------
                                Name:
                                     -------------------------------------------
                                Title:
                                      ------------------------------------------

                                       S-1



                                    Annex A
                                    -------

                                  Schedule C-1
                                  ------------
                                  Commitments



- --------------------------------------------------------------------------------------------
                                  Term Loan A     Term Loan B     Term Loan C
                     Revolver      Commitment      Commitment      Commitment       Total
     Lender         Commitment   (subfacility)   (subfacility)   (subfacility)    Commitment
- --------------------------------------------------------------------------------------------
                                                                  
Foothill Capital   $35,000,000     $2,780,601      $2,934,365      $2,997,034    $35,000,000
Corporation
- --------------------------------------------------------------------------------------------
All Lenders        $35,000,000     $2,780,601      $2,934,365      $2,997,034    $35,000,000
- --------------------------------------------------------------------------------------------


                                       S-1

EX-3.7

                                                                     EXHIBIT 3.7

                                    CONTRACT

                      FOR THE TRANSFER OF LAND USE RIGHTS

              TRANSFEROR: SHANGHAI WAIGAOQIAO FREE TRADE ZONE 3UDC

              TRANSFEREE: DSG INTERNATIONAL LIMITED

                   This contract was signed on April 9, 2002.
                            Pudong, Shanghai, P.R.C.



                       Shanghai Waigaoqiao Free Trade Zone
                      Land Use Right Transference Contract

Transferor: Shanghai Waigaoqiao Free Trade Zone                        (Party A)
            3U-Development Co., Ltd.
Legal Representative: Liu Xinmin
Legal Address: 2001 Yang Gao Road (N) Pudong New Area, Shanghai

Transferee: DSG International Limited                                  (Party B)
Legal Representative:
Legal Address:

In accordance with the "Tentative Regulations of the People's Republic of China
on the Grant and Transfer of Urban State-Owned Land Use Right", "Transfer With
Consideration Measures on Shanghai Municipality Land Use Right" as well as
"Administration Measures on Land in Shanghai Pudong New Area", with equal and
friendly negotiation, Party A and Party B, formulate this contract on the
transfer of land (Plot F 14-5 in the Shanghai Waigaoqiao Free Trade Zone) use
right.

                     Number, space and location of the land

Article I Party A transfers to Party B using right of the land (plot  F14-5  )
                                                                     -     --
in the Shanghai Waigaoqiao Free Trade Zone. The area of the plot is  9929
                                                                    -    ----
square meters. As to the location and boundaries of the plot, see Appendix 1
(Drawing No.:  148-56,149-56  )
              -             --

                    Transfer period, fee and term of payment

Article 2 Party A transfers to Party B using right of the land specified in this
contract, the transfer period will be 50 years The transfer period will be
commencing from the date of issuing State-owned land use right to Party B by the
land management department.

Article 3 The transfer fee shall be paid in US dollar. With mutual negotiation,
Party B obtains the land (Plot F14-5) using right at the price US$95/m/2/. The
land shall be for the industrial use. The total transfer fee is US$943,255. The
down payment paid by Party B shall be regarded as part of the transfer fees.

Article 4 Party B shall, within 45 days from the date on which this contract
comes into effect, remit 25% of the total amount of the transfer fee less the
down payment of US$121,000, namely, US$114,813.75, into Party A's bank account.
                                       ----------

Party A's bank account:
Shanghai Waigaoqiao Free Trade Zone 3U Development Co., Ltd.
No:1001279909004631629
Bank: 022799---Industrial and Commercial Bank of China Shanghai Waigaoqiao Free
               Trade Zone Branch

Within 60 days of the first term payment, Party B shall pay 25% of the total
land



transfer fees amounting to US$235,813.75

Within 60 days of the second term payment, Party B shall pay 25% of the total
land transfer fees amounting to US$235,813.75

Within 60 days of the third term payment, Party B shall pay 25% of the total
land transfer fees amounting to US$235,813.75

If any of the above term payments is overdue by more than 45 days, Party A is
entitled to terminate the Contract unilaterally and Party B bears a breach
responsibility on this Contract.

Article 5 Prior the effectiveness of the contract, Party A shall have made full
payment of the land transfer fee, land added fee, taxes and other related
expenses. Should Party A fail to pay in full the abovementioned fees and
expenses, Party B may terminate the contract unilaterally and Party A shall
return in full the total amount paid by party B. If Party B pay the
above-mentioned items for Party A, Party B is entitled to deduct the amount paid
from the land transfer fee and charge Party A an overdue interest of 0.03% per
day. Party A shall pay the remainder which has not been deducted.

                             Measurement of the land

Article 6  Within 61 days since the effectiveness of the Contract, Party A and
                  --
Party B can refer to the government measuring department to do the measuring and
set the land boundary. If there is some deficiency between the actual
construction area surveyed by the measuring department and the land size in this
Contract, Party A and Party B shall count the deficiency in the rents which is
set in this Contract within 7 days after finishing the measuring. Both sides
shall set the written agreement as the Contract Appendix.

                 Delivery of plot, transfer of land using right

Article 7  Party B is the investor of the company intending to set up in
Shanghai Waigaoqiao Free Trade Zone. Before the name of such company is checked
and registered by the govenunent authority, the Lease Contract (and this
Supplementary Articles) signed by Party B's legal representative or its
authorized representative is binding on Party B until the name of such company
is checked and registered by the government authority. The registered company
continue to execute all the rights and liabilities of Party B under such land
use right transfer contract. (and this Supplementary Articles).

Article 8 Party B may, within 90 days after settlement of the total transfer
                              --
fee, entrust Party A to go through procedures relevant with land use right
transfer for "State-Owned Land Use Right Certificate".

Article 9 For the reason not due to Party B's fault, Party B cannot get the
"State-Owned Land Use Right Certificate" and Party B is entitled to terminate
the Contract unilaterally. Party A shall return all the already paid transfer
fees to Party B as well as the interest within 30 days.
                                               --



Article 10 The delivery of the land in real sense should be subject to the
"State-Owned Land Use Right Certificate".

Article 11 Party A shall, within 61 days after the Contract signing, have all
the buildings and facilities on the land dismantled and moved. Water, power,
natural gas and communication supply and sewage joint should be arranged with
Shanghai Waigaoqiao Free Trade Zone temporary regulations on infrastructure
facilities. The delivery is completed upon both parties signing on the delivery
sheet. If Party A and Parry B fail to complete the delivery procedure, the
delivery date will be the commencing date of Land Management Department
Approval. If Party A fails to finish the above mentioned issues, Party A shall
bear the responsibility of a breach of contract.

Article 12 In case of Party B going through application/approval procedure
relevant to the investment on the land, Party A shall provide assistance. Party
B shall bear all the fees hereafter.

                         Extension of the land use term

Article 13 Upon the expiration of the transfer period, should Party B wish to go
on with the transfer, and the land use is still in line with the requirements
for extension, Party B shall go through the relevant procedure set force in
related regulations of the State. Party A shall provide the relevant assistance
in it.

Article 14 Upon the expiration of the transfer period, Party B should not ask
the payment or compensation for the building or facilities on the land, which
will be transferred intact to the State.

Article 15 Party B shall, in accordance with the provisions formulated by the
government, pay real estate bureau land use fee annually.

                          Take-back of land using right

Article 16 Party A or the State shall not withdraw wholly or partly the land
using right during the transfer period. On some specific occasion such as for
the benefit of the public and social welfare, the State is entitled to withdraw
the land use right according to the related laws and regulations. In this case,
Party B shall be compensated properly and fully.

Article 17 Party A shall give Party B 3 months' prior notice in writing, if the
State asks for wholly or partly withdraw the land use right. The reasons for the
withdrawal shall be explained in writing.

                               Breaching liability

Article 18 Party B shall give Party A 30 days' prior notice in writing, if Party
B decides to terminate the Contract unilaterally. With Party A's consent, the
Contract can be terminated thereafter. Party A will not return the down payment
and other payments



paid by Party B. In the case that the forfeited payment cannot make up the
losses, Party A is entitled to claim Party B for the discrepancies.

Article 19 Should Party B fail to pay the transfer fee within the time
stipulated in the contract, Party B shall pay Party A an overdue interest of
0.03% for each day from the date of the payment is due.

Article 20 For the reason due to Party A's fault and Party B cannot get the
transferred land, Party A shall inform Party B in advance and return the
payments paid by Party B. Party B is entitled to reserve the claim right.

                            Statement by both Parties

Article 21 Party A is entitled to get the complete approval and sign the
Contract to transfer the land use right to Party B.

Article 22 Within 60 days after the effectiveness of the contract, should Party
B decide not to participate in the transfer of the land under Plot F14-6 (area=
15083 sq., 50 years usage right), Party A is entitled to replace the land under
Plot F14-5 in this contract by the land under Plot F14-6a. The total area of
F14-6a and the related price as well as transfer conditions are the same with
Plot 14-5 in this Contract. Both sides will fix another supplementary contract
for it.

Article 23 All the information provided by Party A (or the agency) to Party B
(or the agency) is complete and correct. Nothing important is omitted herein.

Article 24 The land transferred by Party A to Party B is not involved in any
registration related to third Party's mortgage or guarantee, nor any proceedings
or arbitration.

Article 25 Party B's possession, usage and income on the land should comply with
the relevant state laws and regulations as well as the items of this Contract.

Article 26 The Contract will come to effectiveness upon the signature of both
sides. Party A and Party B shall carry out the obligations and rights set in the
Contract. Any unsettled issues in this Contract can be put into supplementary
articles, which has the equal validity with this Contract.

                                 Force Majeure

Article 27 Force majeure here indicates fire, bombing, accident, typhoon,
earthquake, pestilence and some occasion out of control or unexpected. Any Party
shall spare no effort to minimize the influence if the force majeure occurred
and notify other Party within 10 days after the situation back to normal.

Article 28 If the Contract could not be carried out due to force majeure, the
breaching Party is free from any responsibility.

                            Disputes and arbitration



Article 29 While fulfilling the contract, any dispute raised shall be settled
with negotiation by the two parties. Should negotiation be unsuccessful, the
dispute shall be submitted to People's Court for settlement.

Article 30 The contract's setting, effectiveness, remark, carrying-out is
subject to protection and management of the laws of P.R.C.

                              Language of contract

Article 31 This contract shall be written in Chinese and English, the two
versions each in 6 copies and share the same validity. Each Party holds one copy
for each version. Notarization office holds one copy for each version. Land
management department holds one copy for each version. Others are for the
government file.

                                   Appendixes

Article 32 The appendix of the contract share the same validity with the
Contract.

Article 33 This contract will come into force with the signature/stamp of the
legal representatives or authorized persons from the two parties as well as
notarization of Shanghai Notarial Office. Notarization fee shall be equally born
by the two parties.

Transferor (Party A): Shanghai Waigaoqiao Free Trade Zone 3U-Development Co.
                      Ltd.
Authorized representative:
Bank with which account is opened and Account No.: [Illegible]

Transferee (Party B):

Authorized representative: [Illegible]
Bank with which account is opened and Account No.:

              This contract is signed on April, 9 in Shanghai P.R.C



                                  ATTACHMENT A

                      Shanghai Municipality Waigaoqiao Free
                   Trade Zone Planning & Design Requirements

1.   Plot area:

11.  Planned purpose of usage: industrial, warehousing.

111. Volumetric (plot) ratio: not higher than 2.0.

1V.  Coverage ratio: not higher than 40%.

V.   Requirement on landscaping control: landscaping ratio shall not be less
     than 28%, The green cover on the base shall not be less than 60CM. If not,
     the green cover could not be counted as the green area ratio.

VI.  Control requirements on boundary:

     (1)  underground structure:

     a.   retreat from the red line of the road for not less than 5 metres.

     b.   retreat from other borders of the Plot for not less than 4 metres;

     (2)  Surface structure:

     a.   retreat from the red line of the road:-

               (I)  if the height of the building is < 18 metres, not less than
                    5 metres;
               (II) if the height of the building is 18M < H <= 32M, not less
                    than 8 metres.
               (III) if the height of the building is 32M < H <= 70M, not less
                    than 10M
               (IV) if the height of the building is >70M, not less than 15M.

     b.   retreat from other borders of the Plot (excluding the enclosure wall,
          gate, guard-room)

          (i)  retreat from the longer side , 0.35H, not less than 6 metres;

          (ii) retreat from the shorter side, 0.20H, not less than 5 metres

     c.   as for some specific area, the retreat shall apply with the specific
          details.

VII. Exit and entry points:

     (1)  The internal road of F7,FI1,F12,FI4 shall be specified and file in
          Waigaoqiao Free Trade Zone Administrative Committee.

     (2)  The exit for motor vehicles may only be located appointed metres away
          from and on the extension line of contact point of the turning curve
          of the red line of the road.
          Road width <=20M, the exit shall be more than 1.5 times of the road
          width
          Road width >=20M, the exit shall be 30M away.

     (3)  Regulations on the width B of the side facing the street and the width
          b of the exit:
          B*=40M, b **= 4M;
          B*=60M, b **= 7M;
     B*=l00M, b **= 7M.; an additional vehicle exit may be added which shall not
     be wider than



     4M.
     (4)  On the internal passage there could be over 1 vehicle exits for plot
          public use. The exits shall be 10M away from the public use passage.
          The width of the passage is <| 7M, road shoulder is <| 1M
     (5)  The turning point radius inside the public use passage is <| 7M. the
          max vertical slope, small-sized car is >| 15%, big-sized truck is >|
          10%
     (6)  In the case that there is the parking lot underground, the exits shall
          apply with the following regulation:
          Total amount of the cars <=80, a double-line exit can be set; if two
          exits are necessary , the space n1 between shall be <| 15M.

VIII. Parking lots
(l)  Motor vehicle lots shall be set for the non-industrial construction in the
     plot, the standard is as follows:
     Construction area A*=2000 m/2/, 1 parking lot / 250 m/2/ construction area
     2000 m/2/*A*=5000 m/2/, 1 parking lot / 300 m/2/ construction area
     5000 m/2/*A, 1 parking lot / 350 m/2/ construction area
     not less than the former set.
(2)  Ground Parking regulations
     A.   The ground parking area in the plot shall be proportionate. In the
          case that total amount of the parking <=80, the ground parking shall
          be not less than 10%; total amount of the parking >80, the 5% of the
          exceeding shall be parked on the ground.
     B.   50% of the ground parking lots shall be for the big-sized passenger
          bus. Each passenger bus shall be counted as two cars.
(3)  Non-motor vehicle parking lots set:
     Office and industrial construction: 1 1100 m/2/ construction area
     Warehousing construction: 0.5/100 m/2/ construction area

IX.  Loading and unloading berth
     Loading and unloading berth shall be counted with the actual usage
     character:
A.   Warehousing construction: construction area A<=2000 m/2/, not less than 1
     lot;
     2000 m/2/*A<=3000 m/2/, not less than 2 lots;
     3000 m/2/*A, 1 more lot with each increase of 3000 m/2/
B.   Industrial construction: 0.5 berth / 1000 m/2/ construction area
The loading/unloading berth shall have at least the following dimensions:
overhead space: 4.5 metres, length: 12 metres, width: 4 metres. The length
of berth for container truck shall be 18 metres plus loading space or platform
of an area similar to the loading/unloading berth.

X.   Requirements for construction unit shall comply with some national
     regulations as well as the follows:
     (1)  The building area of non-manufacturing sector inside the Plot shall
          not exceed 15% of the total construction area;
     (2)  In the case that the construction height over 24M, the rescue platform
          for fire-fighting shall be considered, which is not less than 1/3~1/4
          of the construction circumference and the floor shall be hard and over
          10M in wide.
     (3)  Auxiliary utilities, such as the power distribution room, pressure
          adjusting room for gas and steam, instrument room, room for
          centralized heat (cool) facility and pumps shall not be erected as a
          separate structure independently;
     (4)  The steps and walk way of buildings facing the street shall not exceed
          1/3 of the retreating distance;



     (5)  The roof board of under-ground structure that is along side with the
          street shall not be higher than the out-door horizon height mark;

     (6)  If the base is to be enclosed, the side of the walls facing the street
          shall be fenced and its height shall not be higher than 1.5 metre.

XI.  Any other specific requirements beyond this document shall be dealt with
     separately.

XII  Note:
(1)  The design for some large-scaled construction for citizen use and the
     projects on main roads shall go to Administrative Committee approval for
     the rough design. The common project can directly go to the rough design
     according to the regulations and requirements without the approval of the
     Committee. The rough design shall get the confirmation from the department
     of fire-fighting, sanitary, environment human resource, water, power,
     natural gas, communication, sewage etc and then get the approval from the
     Committee and then go to the construction map design.
(2)  The layout is of 1:500. The land size for specific use and the technology
     items shall be listed clearly.
(3)  The following materials are needed when handing in the rough design:
     A.   Shanghai Waigaoqiao Free Trade Zone construction design application
          form
     B.   Feasibility Study and the approval for it (copy)
     C.   Land contract (copy) and the layout
     D.   State-owned land use right certificate and the layout(copy).
     E.   Check and approval from the department of fire-fighting, environment,
          sanitary, human resource, transportation etc.
     F.   Settlement of the water, power, natural gas, heating, communication
          and sewage.

Reference:
1.A. For the building height over 5.6M and there is no special requirements for
the manufacturing technology. Volumetric (plot) ratio shall be counted with 2
storeies.
B.   If the height between the inside floor and the outside over 1.2M, the
     counting of Volumetric (plot) ratio is necessary.
2. The construction height indicates the vertical height of the highest point of
the building. (lightning conductor, pole, chimney excluded)
3. The inserting method shall be applied herewith.

                                           Shanghai Municipality Waigaoqiao Free
                                             Trade Zone Administration Committee

14 November 1997.



                                  ATTACHMENT B

                       SHANGHAI WAIGAOQIAO FREE TRADE ZONE
                       STATE-OWNED LAND USE REQUIREMENTS

According to the Provisional Regulations of the People's Republic of China
concerning the Grant and Transfer of the State-owned Land Use Right in Urban
Areas (the "Regulations"), the Measures of Shanghai Municipality for the
Transfer of Land Use Rights for Consideration (the "Measures"), the Development
Plan for Shanghai Waigaoqiao Free Trade Zone and the Contract for Granting
STATE-OWNED Land Use Right of Land in Lots in Shanghai Waigaoqiao Free Trade
Zone, the exercise of the land use rights in respect of the land with the
reference No.    within the Shanghai Waigaoqiao Free Trade Zone (the "Land")
             ---
shall conform to the following requirements:

1.   Basic Requirements
     ------------------
     (a)  Party B may use the Land legally within the limit of the term set
          forth in the State-owned Land Use Certificate issued by the
          government. The ownership of the Land lot, the right to use which has
          been transferred, shall remain with the People's Republic of China.
          The State and the government shall by all means have such jurisdiction
          and administration powers as vested by law and such other rights
          execrable by the State as provided by the laws of the People's
          Republic of China as well as other powers and interests required for
          social public benefit. Underground resources, buried objects and
          municipal public utilities shall not be within the transfer scope in
          respect of the land use rights.
     (b)  Except otherwise stated in the Land Use Right Transfer Contract of
          Shanghai Waigaoqiao Free Trade Zone (the "Transfer Contract"), the
          terms "transferee", "transferee party" or "land user" in the
          Regulations, Measures, Transfer Contract and Shanghai Waigaoqiao Free
          Trade Zone State-owned Land Use Requirements (the "Requirements")
          shall refer to the enterprise, other economic organization or
          individual whose name has been signed against the column of the
          "transferee"("Party B") of the Transfer Contract and shall also
          include any assignee or successor after the transfer or succession of
          the Land Use Right or the transfer of Land Use Right as a result of
          exercise of a mortgage.
     (c)  The government reserves the right to adjust the municipal planning in
          respect of the Land. If the original land usage planning is modified,
          any existing buildings on the Land may remain without being affected,
          provided that, when any reconstruction is made within the usage term
          of the land or when renewal of the Land Use Right is applied for at
          the expiration of the term, the planning effective at that time must
          be conformed to. Party A shall not be liable for any compensation for
          any affection incurred by the transferee as a result of the
          modification to the planning.
     (d)  All economic contracts, agreements, drawings and certificates
          concerning any re-transfer, mortgage of succession of the Land Use
          Right, any change to the ownership of buildings and [appurtenant
          facilities] or any business of lease of relevant property as well as
          other documents that must be registered according



          to other parties' opinion shall be registered with the Administration
          Commission of Shanghai Waigaogiao Free Trade Zone in accordance with
          the Regulations and the Measures.

2.   Planning and Designing Requirements
     -----------------------------------
     (a)  Planned usage: land used for industrial and warehousing purposes
     (b)  Land area:                       Square meters (subject to the actual
                    -----------------------
          area as measured and delimited)
     (c)  Construction Coverage: not exceeding   45    %
                                               --  ----
     (d)  Floor area ratio (volumetric ratio): not exceeding
                                                            ------
     (e)  Green area ratio: the area of the land used for planting not less than
            28    % of the site area.(excluding roof-top planting area or
          --  ----
          vertically planting area)
     (f)  Parking lot, entry and exit location of the building, road red line
          for setback of construction and distance of the land boundaries as
          well as other planning and designing requirements shall be subject to
          the planning and designing requirements prepared under the supervision
          of the Administration Commission of Shanghai Waigaoqiao Free Trade
          Zone.

3.   Requirements on Administration of Municipal Construction
     --------------------------------------------------------
     (a)  Requirements on the administration of urban construction concerning
          green area, municipal appearance, environmental protection, hygienic
          condition, fire protection, traffic management and designing and
          construction, etc. should conform to the relevant regulations of the
          State and Shanghai Municipality.
     (b)  The embedding and laying of various pipelines, ducts and accesses
          across the green area and other areas which are necessary for public
          utility purposes, other than the Seven Utilities' Facilities approved
          by the government, shall be subject to Party B's consent.
     (c)  Party B shall ensure that the government administration personnel,
          policemen, firemen and ambulance staff and their emergency equipment
          and vehicles can enter the site conveniently for rescue or official
          purposes.
     (d)  Party B shall be liable for compensation for losses incurred by the
          State or adjacent entities from damage or destruction to surroundings
          or facilities as a result of Parry B's activities on the Land.

4.   Requirements on Administration of Construction
     (a)  Party B shall complete the construction workload with the ground
          construction area not less than     % of the total proposed
                                          ---
          construction area before                   .
                                   ------------------
     (b)  Should Party B fails to complete the construction as required above,
          Party B shall apply to the Administration Commission of Shanghai
          Waigaoqiao Free Trade Zone for extension of the construction period at
          least 6 months prior to the expiration of the construction period set
          forth above, but the extension period shall not exceed 1 year.
          Punishment for extension of construction shall be dealt with according
          to the relevant regulations of the State.
     (c)  Party B may not excavate, remove or dig any land other than the Land
          in the usage scope without proper permission. If temporary occupancy
          of land or



          road out of the usage scope is needed, the approval by Party A and
          other departments in charge shall be obtained and the necessary fees
          shall be paid.

5.   Delimitation
     ------------
     (a)  After the execution of the Transfer Contract, Party B, together with
          Party A and the land administration authority, shall verify the
          location of the coordinates corners as indicated on the map of land
          usage scope and verify and confirm the area. Both Parties shall sign
          for confirmation of the red line map of the land marked with the
          coordinates of the corners.
     (b)  Party B shall entrust land administration authority of the government
          to stake at the corners of the land according to the coordinates of
          the corners marked on the reap of the land usage scope. Party B shall
          take efficient measures to ensure the stakes not to be removed or
          damaged. If the stakes are removed or damaged within the land use tem,
          Party B shall submit a written report to the Administration Commission
          of Shanghai Waigaoqiao Free Zone immediately to apply for
          re-measurement and re-staking.
          Until delimitation of the Land and obtaining the Project Construction
          Planning Permission, Party B shall not proceed with any construction
          on the land.
          It shall be charged with unlawful occupancy and use of State-owned
          land for violation of the above provision.
     (c)  Party B shall be liable for the expenses incurred in the
          re-measurement and re-staking due to loss, damage or removal of the
          stakes.

6.   Municipal Infrastructure Facilities Requirements
     (a)  While the building project is being constructed on the land, Party B
          or the project construction unit entrusted by party B shall be
          responsible for repairing or relaying open ditches; water canals,
          cables and other utility pipes and construction located in adjacent
          land which have been damaged due to the construction on the land and
          shall be responsible for relevant expenses.
     (b)  Within the land use term, Party B shall properly protect public
          utilities across the land and avoid any damage thereto; otherwise,
          Party B shall be responsible for all of the expenses incurred for the
          repair of the same.
     (c)  The common accesses and public facilities shared by the Land and
          adjacent lands shall be erected and managed by the transferees of all
          the lands on a joint basis and the expenses concerned shall also
          shared by them.

7.   Requirements on Building Maintenance, Repair, Alteration and Reconstruction
     ---------------------------------------------------------------------------
     (a)  Within the land use term, if any building or a part there of requires
          demolition or is damaged due to unexpected events, Party B shall
          replace the same with a building corresponding to the original
          construction area and value and in conformity with the planned usage
          requirements. The reconstruction plan shall be applied to the
          Administration Commission of Shanghai Waigogiao Free Trade Zone as
          soon as possible before demolition and after damage and construction
          shall be commenced and completed in time.
     (b)  Within the Land use term, Party B shall ensure that all buildings and
          other facilities on the land which have already been built and are
          constructed at any time are in good and usable condition and assume
          all necessary expenses. Cleaning or outside enclosure and assume all
          necessary expenses. Cleaning or outside enclosure walls and the
          appearance of the buildings shall be subject to the relevant
          regulations of the Waigaoqiao Free Trade Zone.



[GRAPHIC]

- ----------------------------------
[Illegible] [Illegible] [Illegible]
- ----------------------------------
  BC11       13161,068    9827,595
- ----------------------------------
  MC11       13141,988    9826,272
- ----------------------------------
  EC11       13127,557    9838,824
- ----------------------------------
  BC12       13046,412   10001,614
- ----------------------------------
  MC12       13045,063   10020,653
- ----------------------------------
  EC12       13057,541   10035,095
- ----------------------------------
  BC13       13421,194   10218,247
- ----------------------------------
  MC13       13445,833   10220,839
- ----------------------------------
  EC13       13466,015   10206,469
- ----------------------------------
  BC14       13564,316   10059,749
- ----------------------------------
  MC14       13567,710   10039,421
- ----------------------------------
  EC14       13554,683   10023,451
- ----------------------------------

- ----------------------------------

- ----------------------------------

- ----------------------------------

- ----------------------------------
[Illegible]   110704.1M/2/
- ----------------------------------

[Illegible]                    F14
- ----------------------------------
[Illegible]                 1:1000
- ----------------------------------
[Illegible]             2000.11.08
- ----------------------------------
[Illegible]
- ----------------------------------



[GRAPHIC]

- ----------------------------------
[Illegible] [Illegible] [Illegible]
- ----------------------------------
  BC11       13161,068    9827,595
- ----------------------------------
  MC11       13141,988    9826,272
- ----------------------------------
  EC11       13127,557    9838,824
- ----------------------------------
  BC12       13046,412   10001,614
- ----------------------------------
  HC12       13045,412   10020,653
- ----------------------------------
  EC12       13057,541   10035,095
- ----------------------------------
  BC13       13421,194   10218,247
- ----------------------------------
  MC13       13445,833   10220,839
- ----------------------------------
  EC13       13466,015   10206,469
- ----------------------------------
  BC14       13564,316   10059,749
- ----------------------------------
  MC14       13567,710   10039,421
- ----------------------------------
  EC14       13554,683   10023,451
- ----------------------------------

- ----------------------------------

- ----------------------------------

- ----------------------------------

- ----------------------------------
[Illegible]   110704.1M/2/
- ----------------------------------

[Illegible]                    F14
- ----------------------------------
[Illegible]                 1:1000
- ----------------------------------
[Illegible]             2000.11.08
- ----------------------------------
[Illegible]
- ----------------------------------



[Chinese]

EX-3.8

                                                                     EXHIBIT 3.8

                        FIFTH AMENDMENT TO LOAN AGREEMENT

          This FIFTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered
                                                        ---------
into as of April 17, 2002, between ASSOCIATED HYGIENIC PRODUCTS LLC, a Delaware
limited liability company ("Borrower"), and FOOTHILL CAPITAL CORPORATION, in its
                            --------
capacity as administrative agent ("Agent") for the Lenders (as defined below),
                                   -----

                              W I T N E S S E T H:

          WHEREAS, Borrower, the Lenders (as defined therein) and Agent have
entered into that certain Amended and Restated Loan and Security Agreement dated
as of March 14, 2001, as amended by that certain First Amendment to Loan
Agreement, as further amended by that certain Second Amendment to Loan
Agreement, as further amended by that certain Third Amendment and Waiver to Loan
Agreement, and as further amended by that certain Fourth Amendment to Loan
Agreement prior to the date hereof (as the same may be further modified,
amended, restated or supplemented from time to time, the "Loan Agreement"),
                                                          --------------
pursuant to which the Lenders have agreed to extend credit to Borrower from time
to time; and

          WHEREAS, the United States District Court for the Middle District of
Georgia, Albany Division, has entered a judgment (the "Patent Infringement
                                                       -------------------
Judgment") on the jury's verdict in favor of the plaintiffs in the amount of
- --------
$10,400,000.00 in the matter of John M. Tharpe; Robert M. Herrin; and R&L
Engineering, Inc., Plaintiffs, vs. DSG International Limited, and Associated
Hygienic Products, LLC, Defendant; and

          WHEREAS, Borrower hereby represents and warrants that the parties have
entered into a settlement of all claims under the Patent Infringement Judgment
and the related litigation pursuant to that certain Settlement Agreement dated
as of April 9, 2002 (the "Settlement Agreement"); and
                          --------------------

          WHEREAS, Borrower has requested that Agent and the Lenders amend the
Loan Agreement to permit Borrower to use up to $1,450,000 in Advances (as
defined in the Loan Agreement) to fund, in part, the amounts due under the
Settlement Agreement; and

          WHEREAS, Agent and the Lenders have agreed to the requested amendments
on the terms and conditions set forth herein;



          NOW THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree that all capitalized terms not
otherwise defined herein shall have the meanings ascribed to such terms in the
Loan Agreement and further agree as follows:

     l.   Amendments to Loan Agreement.
          ----------------------------

          (a) Amendments to Section 1.1 of the Loan Agreement. Section 1.1,
              -----------------------------------------------
"Definitions," is hereby amended and modified by inserting the following
 -----------
definitions in appropriate alphabetical order therein:

          ""Settlement Agreement" means that certain Settlement Agreement dated
            --------------------
          as of April 9, 2002 by and among the parties signatory thereto to
          settle all claims against the Borrower and DSG related to that certain
          judgment entered by the United States District Court for the Middle
          District of Georgia, Albany Division, on the jury's verdict in favor
          of the plaintiffs in the amount of $10,400,000 in the matter of John
          M. Tharpe; Robert M. Herrin; and R&L Engineering, Inc., Plaintiffs,
          vs. DSG International Limited, and Associated Hygienic Products, LLC,
          Defendants, or any other litigation or claims related thereto."

          ""Subordinated Note A-3" means the indebtedness of Borrower to
            ---------------------
          Disposable Soft Goods (UK) Plc, evidenced by that certain promissory
          note executed by Borrower and payable to the order of Disposable Soft
          Goods (UK) Plc dated as of April 17, 2002, in the original principal
          amount of $2,750,000, in form and substance satisfactory to Agent."

          (b) Amendment to Section 3.3 of the Loan Agreement. Section 3.3 of the
              ----------------------------------------------
Loan Agreement, "Conditions Precedent to all Extensions of Credit," is hereby
                 ------------------------------------------------
amended and modified by deleting the "and" at the end of subsection 3.3(c), by
deleting the period at the end of subsection 3.3(d) and substituting "; and"
therefor, and adding the following subsection 3.3(e):

          "(e) with regard to any Capital Expenditure Loan, Borrower and DSG
     shall have satisfied all of their respective obligations under the
     Settlement Agreement, and Excess Availability shall be $3,500,000 or more
     on the date of such Capital Expenditure Loan."

          (c) Amendment to Section 7.1 of the Loan Agreement. Section 7.1 of the
              ----------------------------------------------
Loan Agreement, "Indebtedness," is hereby amended and modified by deleting
                 ------------
subsection (d) thereof in its entirety and substituting the following in lieu
thereof:

          "(d) Indebtedness evidenced by Subordinated Note A-2 (as such term is
defined in the Subordination, Waiver and Consent Agreement dated as of September
11,

                                       2



2001 among Borrower, Agent and Disposable Soft Goods (UK) Plc), Subordinated
Note B and Subordinated Note A-3,"

          (d) Amendment to Section 7.8 of the Loan Agreement. Section 7.8 of the
              ----------------------------------------------
Loan Agreement, "Payments, Prepayments and Amendments," is hereby amended and
                 ------------------------------------
modified by deleting subsection (a) thereof in its entirety and substituting the
following in lieu thereof:

          "(a) Make any payments of principal of, or interest or fees on,
Subordinated Note A-2, Subordinated Note B or Subordinated Note A-3; provided,
                                                                     --------
however, that Borrower may make regularly scheduled interest payments on
- -------
Subordinated Note A-2 if (i) no Event of Default has occurred and is continuing,
and (ii) Borrower has demonstrated to the satisfaction of Agent that, after
giving effect to such payment, Excess Availability is $10,000,000 or more;
provided, further, that Borrower may refinance and pay in full the Subordinated
- --------  -------
Note A-2 with the proceeds of new subordinated debt provided by an Affiliate of
Borrower on terms and conditions, and subject to a Subordination Agreement and
other documents, in form and substance satisfactory to Agent, and provided,
                                                                  --------
further, Borrower may make regularly scheduled payments of principal and
- -------
interest on Subordinated Note A-3 if (i) no Event of Default has occurred and is
continuing, and (ii) Borrower has demonstrated to the satisfaction of Agent
that, after giving effect to such payment, Excess Availability (after
subtracting the amount of any payables of the Borrower which are more than 60
days past due) is $10,000,000 or more."

          (e) Amendment to Section 7.11 of the Loan Agreement. Section 7.11 of
              -----------------------------------------------
the Loan Agreement, "Distributions," is hereby amended and modified by deleting
                     -------------
Section 7.11 in its entirety and substituting the following in lieu thereof:

          "7.11 Distributions. Make any distribution or declare or pay any
                -------------
dividends (in cash or other property, other than Stock) on, or purchase,
acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or
hereafter outstanding, or pay any management fees; provided, however, so long as
                                                   --------  -------
no Default or Event of Default exists on the date of such distribution or
immediately after giving effect thereto, and Borrower demonstrates to the
reasonable satisfaction of Agent that Excess Availability will be at least
$1,000,000 after giving effect to such distribution, Borrower may from time to
time during or following the end of any fiscal quarter during which Borrower was
a Pass-Through Entity, distribute to its respective equity holders in cash an
amount not in excess of the Tax Distribution Amount for the portion of the
fiscal year during the end of such fiscal quarter, minus the aggregate amount of
any such distributions therefor made in respect of such fiscal year; provided,
however, that in no event shall the amount so distributed in respect of any
fiscal year exceed the actual amount of federal and state income taxes for such
year solely attributable to the ownership of Borrower's equity interest. The
amount of any distribution of the Tax Distribution Amount under this Section
shall be verified by the chief financial officer of Borrower in the certificate

                                       3



required under Section 6.3 and in the written statement required of Borrower's
               -----------
accountants under Section 6.3."
                  -----------

          (f) Amendment to Section 7.17 of the Loan Agreement. Section 7.17 of
              -----------------------------------------------
the Loan Agreement, "Use of Proceeds," is hereby amended and modified by
                     ---------------
deleting Section 7.17 in its entirety and substituting the following in lieu
thereof:

          "7.17 Use of Proceeds. Use the proceeds of (a) the Advances and the
                ---------------
Term Loan for any purpose other than (i) on the Closing Date, (x) to facilitate
the Drypers Acquisition, (y) to restate and restructure amounts owing under the
Prior Loan Agreement, and (z) to pay transactional fees, costs, and expenses
incurred in connection with this Agreement, the other Loan Documents, and the
transactions contemplated hereby and thereby, and (ii) thereafter, consistent
with the terms and conditions hereof, for its lawful and permitted corporate
purposes; provided, Borrower may use the proceeds of Advances in an aggregate
amount not exceeding $1,450,000 to pay amounts due under the Settlement
Agreement, and (b) the Capital Expenditure Loan for any purpose other than to
purchase Equipment."

     2. No Other Amendments or Waivers. The execution, delivery and
        ------------------------------
effectiveness of this Amendment shall not operate as a waiver of any right,
power or remedy of Agent or the Lenders under the Loan Agreement or any of the
other Loan Documents, nor constitute a waiver of any provision of the Loan
Agreement or any of the other Loan Documents. Except for the amendments set
forth above, the text of the Loan Agreement and all other Loan Documents shall
remain unchanged and in full force and effect and Borrower hereby ratifies and
confirms its obligations thereunder. This Amendment shall not constitute a
modification of the Loan Agreement or any of the other Loan Documents or a
course of dealing with Agent or the Lenders at variance with the Loan Agreement
or the other Loan Documents such as to require further notice by Agent or the
Lenders to require strict compliance with the terms of the Loan Agreement and
the other Loan Documents in the future, except as expressly set forth herein.
Borrower acknowledges and expressly agrees that Agent and the Lenders reserve
the right to, and do in fact, require strict compliance with all terms and
provisions of the Loan Agreement and the other Loan Documents. Borrower has no
knowledge of any challenge to Agent's or any Lenders' claims arising under the
Loan Documents, or to the effectiveness of the Loan Documents.

     3. Conditions Precedent to Effectiveness. This Amendment shall become
        -------------------------------------
effective as of the date hereof when, and only when, Agent shall have received:

          (a) an amendment fee from Borrower in the amount of $25,000, which fee
shall be fully earned and non-refundable when paid (it being understood that, by
execution and delivery of this Amendment, Borrower authorizes Agent to charge
Borrower's Loan Account for such fee and such amount shall thereafter accrue
interest at the rate applicable to Advances under the Loan Agreement in
accordance with Section 2.6 of the Loan Agreement);

                                       4



          (b) counterparts of this Amendment duly executed and delivered by
Borrower and the Lenders;

          (c) true and correct copies of a court order or settlement agreement
approving the settlement of the Patent Infringement Judgment, in form and
substance satisfactory to Agent;

          (d) evidence of Borrower's receipt of not less than $2,750,000 in
subdebt from Disposable Soft Goods (UK) Plc and copies of all documents
evidencing such indebtedness, on terms and conditions satisfactory to Agent;

          (e) a subordination agreement executed by and among Borrower, Agent
and Disposable Soft Goods (UK) Plc, on terms and conditions satisfactory to
Agent;

          (f) a wire of the funds described in (d) above, together with
instructions from Borrower to wire transfer such funds and Advances hereunder
directly to the plaintiffs in full satisfaction of the Settlement Agreement; and

          (g) such other information, documents, instruments or approvals as
Agent or Agent's counsel may reasonably require.

     4. Representations and Warranties of Borrower. Borrower represents and
        ------------------------------------------
warrants as follows:

          (a) Borrower is a limited liability company organized, validly
existing and in good standing under the laws of the jurisdiction indicated at
the beginning of this Amendment and all other jurisdictions in which the failure
to be so qualified reasonably could be expected to constitute a Material Adverse
Change;

          (b) The execution, delivery, and performance by Borrower of this
Amendment and the Loan Documents to which it is a party, as amended hereby, are
within Borrower's limited liability company powers, have been duly authorized by
all necessary limited liability company action and do not and will not (i)
violate any provision of federal, state, or local law or regulation applicable
to Borrower, the Governing Documents of Borrower, or any order, judgment, or
decree of any court or other Governmental Authority binding on Borrower, (ii)
conflict with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation of Borrower,
(iii) result in or require the creation or imposition of any Lien of any nature
whatsoever upon any properties or assets of Borrower, other than Permitted
Liens, or (iv) require any approval of Borrower's members or any approval or
consent of any Person under any material contractual obligation of Borrower;

          (c) The execution, delivery, and performance by Borrower of this
Amendment and the Loan Documents to which it is a party, as amended hereby, do
not

                                       5



and will not require any registration with, consent, or approval of, or notice
to, or other action with or by, any Governmental Authority or other Person;

          (d) This Amendment and each other Loan Document to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally; and

          (e) After giving effect to this Amendment, no Default or Event of
Default is existing.

     5. Counterparts. This Amendment may be executed in multiple counterparts,
        ------------
each of which shall be deemed to be an original and all of which, taken
together, shall constitute one and the same agreement. In proving this Amendment
in any judicial proceedings, it shall not be necessary to produce or account for
more than one such counterpart signed by the party against whom such enforcement
is sought. Any signatures delivered by a party by facsimile transmission shall
be deemed an original signature hereto.

     6. Reference to and Effect on the Loan Documents. Upon the effectiveness of
        ---------------------------------------------
this Amendment, on and after the date hereof each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof' or words of like import
referring to the Loan Agreement, and each reference in the other Loan Documents
to "the Loan Agreement" "thereunder," "thereof' or words of like import
referring to the Loan Agreement, shall mean and be a reference to the Loan
Agreement as amended hereby.

     7. Costs Expenses and Taxes. Borrower agrees to pay on demand all costs and
        ------------------------
expenses in connection with the preparation, execution, and delivery of this
Amendment and the other instruments and documents to be delivered hereunder,
including, without limitation, the reasonable fees and out-of-pocket expenses of
counsel for Agent with respect thereto and with respect to advising Agent as to
its rights and responsibilities hereunder and thereunder.

     8. Governing Law. This Amendment shall be deemed to be made pursuant to the
        -------------
laws of the State of Georgia with respect to agreements made and to be performed
wholly in the State of Georgia, and shall be construed, interpreted, performed
and enforced in accordance therewith.

     9. Loan Document. This Amendment shall be deemed to be a Loan Document for
        -------------
all purposes.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       6

EX-5.1

                                                                     EXHIBIT 5.1

                              SETTLEMENT AGREEMENT
                              --------------------

          This Agreement is made this 9th day of April 2002 by and between John
M. Tharpe, Robert M. Herrin and R&L Engineering, Inc, a Georgia corporation
(collectively, "Plaintiffs"), and DSG International Limited, a British Virgin
Islands corporation, and Associated Hygienic Products LLC, a Delaware limited
liability company (collectively, "Defendants").

          WHEREAS, Plaintiffs brought in the U.S. District Court for the Middle
District of Georgia, Albany Division ("the Court") a civil action against
Defendants and others entitled Tharpe v. DSG International Ltd., CA No.
1:95-cv-19-2 (WLS) (M.D. Ga.)("the Litigation"), asserting misappropriation of
trade secrets, breach of confidential relationship and infringement of U.S.
Patent No. 5,308,345 ("the `345 Patent");

          WHEREAS, during the pendency of the Litigation, Messrs. Tharpe and
Herrin executed a Deed of Assignment ("Deed of Assignment"), assigning the `345
patent to GDM S.p.A. of Cremona, Italy ("GDM");

          WHEREAS, Messrs. Tharpe and Herrin reserved for themselves "all rights
of recovery or settlement for infringement of whatever kind or nature occurring
both before and after the date of [the] Deed of Assignment against the companies
AHP, DSG . . . currently under litigation in Georgia";

          WHEREAS, Plaintiffs have accepted a settlement amount which is
substantially less than the reasonable royalties and enhanced damages awarded by
the jury and the Court, which settlement amount Plaintiffs believe is
representative of the diminution in value of Plaintiffs' `345 Patent occasioned
by Defendants' alleged infringement;

CONFIDENTIAL                          -1-



          WHEREAS, Plaintiffs maintain that the language of the Deed of
Assignment, particularly when taken in light of the Court's ruling dated March
29, 2002, provides Plaintiffs with the right to grant to Defendants a
non-exclusive license or an immunity from suit under the `345 Patent throughout
the life of that patent for machines purchased by Defendants both before and
after the Deed of Assignment;

          WHEREAS, Defendants desire, as a necessary component of this agreement
to settle the Litigation, immunity from suit under the `345 patent for making,
having made, leasing, using, importing, offering to sell, or selling, any
product of Defendants during the remaining life of the `345 patent and any
corresponding foreign counterpart patents and for making, having made, leasing,
using, importing, offering to sell, or selling, any machinery for the
manufacture of any such product of Defendants for the remaining life of the `345
patent and any corresponding foreign counterpart patents; and

          WHEREAS, Plaintiffs and Defendants desire to amicably settle the
Litigation; NOW, THEREFORE, in consideration of the mutual covenants and
promises made herein, for other good and valuable consideration, and intending
to be legally bound hereby, the parties agree as follows:

     1. Defendants will pay four million two hundred thousand U.S. dollars
($4,200,000) to Plaintiffs on or before April 18, 2002. This agreement shall not
be effective until such time as the aforesaid funds have finally cleared.

     2. All payments under paragraph 1 will be paid to Plaintiffs by wire
transfer to the following account:

CONFIDENTIAL                          -2-



         Account Name:        Allen, Dyer, Doppelt, Milbrath & Gilchrist, PA

         Account Number:      190131926

         ABA Routing Number:  067012882

         Bank Name:           Admiralty Bank

         Bank Address:        25 Orange Avenue, Orlando, FL   32801


     3.  Within five (5) business days after receipt of and clearance of the
payment pursuant to paragraph 1, Plaintiffs will cause their counsel to sign,
obtain signature of Defendants' counsel, and file in the Court a stipulated
dismissal with prejudice as provided in Annex A hereto.

     4.  Plaintiffs, individually and collectively, hereby release and forever
discharge Defendants, individually and collectively, their predecessors,
successors, assigns, subsidiaries, divisions, affiliates, past and present
directors, officers, representatives, employees, agents, attorneys, suppliers,
distributors, users, and customers, from any and all causes of action, demands,
claims, damages, and liabilities of any nature whatsoever, whether at law or in
equity, that were asserted by Plaintiffs in the Litigation, including breach of
confidentiality, misappropriation of trade secrets, and direct or indirect
infringement the `345 Patent, and that could have been asserted in the
Litigation, arising prior to the date of this Agreement.

     5.  Defendants hereby release and forever discharge Plaintiffs,
individually and collectively, their predecessors, successors, assigns,
subsidiaries, divisions, affiliates, past and present directors, officers,
representatives, employees, agents, attorneys, suppliers, distributors, users,
and customers, from any and all causes of action, demands, claims, damages, and
liabilities of any nature whatsoever, whether at law or in equity, that were
asserted by

 CONFIDENTIAL                         -3-



Defendants in the Litigation and that could have been asserted in the
Litigation, arising prior to the date of this Agreement.

     6.  Plaintiffs, individually and collectively, grant Defendants,
individually and collectively, their predecessors, successors, assigns,
subsidiaries, divisions, affiliates, past and present directors, officers,
representatives, employees, agents, attorneys, suppliers, distributors, users,
and customers immunity from suit under the `345 patent for making, having made,
leasing, using, importing, offering to sell, or selling, any product of
Defendants during the remaining life of the `345 patent and any corresponding
foreign counterpart patents and for making, having made, leasing, using,
importing, offering to sell, or selling, any machinery for the manufacture of
any such product of Defendants for the remaining life of the `345 patent and any
corresponding foreign counterpart patents. Provided, however, that the immunity
from suit set forth in this Paragraph 6 specifically excludes any of Plaintiffs'
patents or inventions not directed to machines or methods for stretching or
applying waistbands to disposable articles or disposable articles made by such
machines or methods. Specifically, the training pant invention claimed in U.S.
Patent Nos. 5,545,275; 5,788,797; and any claims not directed to machines or
methods for stretching or applying waistbands to disposable articles or
disposable articles made by such machines or methods in any patent issuing from
Application S.N. 884,804 filed 5/19/92 are not included within this immunity
from suit. Plaintiffs acknowledge that there are no other patents or patent
applications, related to the `345 patent or otherwise, claiming machines or
methods for stretching or applying waistbands to disposable articles or
disposable articles made by such machines or methods. Should any such patents be
granted, the immunity from suit in this Paragraph 6 shall include such patents.

CONFIDENTIAL                          -4-



     7.  Plaintiffs, individually and collectively, agree, at their own expense,
to defend, indemnify, and hold harmless Defendants, individually and
collectively, their predecessors, successors, assigns, subsidiaries, divisions,
affiliates, past and present directors, officers, representatives, employees,
agents, attorneys, suppliers, distributors, users, and customers for all damages
and costs (including all attorney fees and disbursements) resulting from any
claim by any assignees or anyone claiming rights in the `345 patent (including
GDM) for infringement of the `345 patent and any corresponding foreign
counterpart patents. Provided, however, that the duty to indemnify and hold
harmless set out in this Paragraph is limited to damages and costs resulting
from any claim by any assignees or anyone claiming rights in the `345 Patent
(including GDM) for infringement of the `345 Patent and any corresponding
foreign counterpart with respect to those waistband applicators purchased or
acquired by the Defendants before the termination of the litigation.

     8.  Plaintiffs and Defendants agree that, in the event that an order for
relief under 11 U.S.C. ss. 101, et seq. (the "Bankruptcy Code") is entered with
respect to Defendants, Defendants shall have the right to assume and assign this
Settlement Agreement and the immunity from suit granted hereunder pursuant to
Bankruptcy Code Section 365(a), notwithstanding any restrictions imposed upon
such assumption by Bankruptcy Code Section 365(c) or applicable nonbankruptcy
law, including, but not limited to, the provisions of Title 35 of the United
States Code.

     9.  The terms of this Agreement are confidential and no party will
disclose, publicize or otherwise communicate any of its terms without the prior
written permission of all other parties except as required by law, provided,
however, that all parties may disclose the existence of this Agreement.

CONFIDENTIAL                          -5-



     10. All notices provided for in this Agreement will be in writing and
deemed duly given on the date on which it is hand delivered or sent by facsimile
and by one of the following International Overnight Carriers: Federal Express or
DHL, or if mailed, ten (10) days after it is sent by registered or certified
mail, return receipt requested, and postage prepaid, addressed as follows:

                  if to Plaintiffs:        R&L Engineering, Inc.
                                           -------------------------------------
                                           P.O. Box 3970
                                           -------------------------------------
                                           Albany, GA   31706
                                           -------------------------------------

                           copies to:      Herbert L. Allen
                                           -------------------------------------
                                           P.O. Box 3791
                                           -------------------------------------
                                           Orlando, FL   32802
                                           -------------------------------------
                                           Fax:  407-842-2343
                                           -------------------------------------

                  if to Defendants:        Peter Chang
                                           -------------------------------------
                                           Associated Hygienic Products, LLC
                                           -------------------------------------
                                           2805 Peachtree Industrial Blvd. #211
                                           -------------------------------------
                                           Duluth, GA 30097
                                           -------------------------------------

                  copies to:               Donald R. Dunner
                                           -------------------------------------

                                           Finnegan, Henderson, Farabow, Garrett
                                           Dunner, LLP
                                           -------------------------------------

                                           1300 I Street, N.W., Suite 700
                                           -------------------------------------
                                           Washington, D.C.  20005-3315
                                           -------------------------------------

CONFIDENTIAL                          -6-



     11. Plaintiffs have accepted a settlement amount which is substantially
less than the reasonable royalties and enhanced damages awarded by the jury and
the Court, which settlement amount Plaintiffs believe is representative of the
diminution in value of Plaintiffs' `345 Patent occasioned by Defendants' alleged
infringement.

     12. This Agreement, and the rights and obligations of the parties hereto,
shall be governed by the laws of the State of Georgia without regard to its
conflict of law rules.

     13. No change or modification of this Agreement will be valid or binding on
the parties hereto, nor will any waiver of any term or condition be deemed a
waiver of any such term or condition in the future, unless such change or
modification or waiver is in writing signed by all parties.

     14. This Agreement constitutes the entire understanding and agreement among
the parties regarding the specific subject matter hereof and supersedes any
prior agreements or understandings, whether written or oral, among the parties
on the same subject.

     15. All terms of this Agreement will bind and inure to the benefit of the
parties and their legal representatives, successors and permitted assigns.

     16. This Agreement may be executed in any number of counterparts, each of
which will be deemed an original and all of which together will be deemed one
and the same instrument.

         IN WITNESS WHEREOF, the parties have executed this Agreement in
duplicate by their duly authorized representatives.

CONFIDENTIAL                          -7-



- --------------------------------------------------------------------------------
                                                R&L Engineering, Inc

Date:  __________________                       By _________________________
                                                   John M. Tharpe, President
- --------------------------------------------------------------------------------



Date ____________________                          _________________________
                                                   John M. Tharpe
- --------------------------------------------------------------------------------



Date ____________________                        ___________________________
                                                   Robert M. Herrin
- --------------------------------------------------------------------------------

                                                DSG International Limited

Date ____________________                       By _________________________
                                                   Edmund Schwartz
- --------------------------------------------------------------------------------

                                                Associated Hygienic Products LLC


Date ____________________                       By _________________________
                                                   Peter Chang
- --------------------------------------------------------------------------------

CONFIDENTIAL                          -8-

EX-11

EXHIBIT 11

COMPUTATION OF NET INCOME PER ORDINARY SHARE

	Year ended December 31,
	2001			2000		1999
	(in thousands except per share amounts)
Number of ordinary shares
Ordinary shares outstanding, beginning of year		6,675			6,675		6,675
Ordinary shares issued		315			—		—
Ordinary shares outstanding, end of year		6,990			6,675		6,675
Weighted average shares outstanding during the year		6,721			6,675		6,675
Net (loss) income	$	(27,563	)	$	2,963	$	4,435
(Loss) earnings per share	$	(4.10	)	$	0.44	$	0.66

EX-13

Exhibit 13

ABOUT THE COMPANY

DSG International Limited is a global company specialized in manufacturing and distribution of disposable baby diapers, adult incontinence and training pants products. The Company now has ten manufacturing plants established in Hong Kong, the United States, Australia, England, the People’s Republic of China (“PRC”), Thailand, Indonesia and Malaysia. The Company’s products are marketed and distributed throughout Asia, Australia, North America and Europe. Its principal brand names are “FITTI^®”, “PET PET^®”, “COSIES^®”, “COSIFITS^®”, “BABY LOVE^®”, “BABYJOY^®”, “LULLABY^®”, “CARES^®”, “CUDDLES^®”, “SUPER FAN-NIES^®”, “DISPO 123^™”, “HANDY^™”, “CERTAINTY^®”, “MERIT^®” and “DRYPERS^®”. These brands are synonymous with high quality and superior value, characteristics that the Company is dedicated to maintaining.

FINANCIAL HIGHLIGHTS

	Year Ended December 31,
	2001			2000		1999		1998		1997
	(In US$ million except per share amounts)
Net sales	$	299.8		$	214.7	$	205.8	$	207.9	$	230.9
Net (loss) income	$	(27.6	)	$	3.0	$	4.4	$	1.6	$	1.0
Shareholders’ equity	$	39.0		$	63.4	$	70.3	$	68.0	$	64.8
(Losses) earnings per share	$	(4.10	)	$	0.44	$	0.66	$	0.24	$	0.15

1

CONTENTS

THE DSG MANAGEMENT TEAM	3
Executive and Non-Executive Directors of DSG
TO OUR SHAREHOLDERS	4
Report on the highlights of 2001 and the outlook for 2002
by Brandon Wang, Chairman
OPERATIONS	6
Report of DSG’s operations world-wide in 2001
OPERATING AND FINANCIAL REVIEW AND PROSPECTS	9
SELECTED CONSOLIDATED FINANCIAL DATA	23
MANAGEMENT REPORT	24
by Edmund J Schwartz, Chief Financial Officer
INDEPENDENT AUDITORS’ REPORT	25
by Deloitte Touche Tohmatsu, Hong Kong
CONSOLIDATED STATEMENTS OF OPERATIONS	26
CONSOLIDATED BALANCE SHEETS	27
CONSOLIDATED STATEMENTS OF CASH FLOWS	29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY	31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	43
SHAREHOLDER INFORMATION	51
DSG COMPANIES	52
DSG Corporate addresses world-wide

2

THE DSG MANAGEMENT TEAM

DSG EXECUTIVE DIRECTORS	DSG OFFICERS
Brandon S L Wang	Edmund J Schwartz
Chairman and Chief Executive Officer	Chief Financial Officer
Philip K C Leung	George Jackson
Member of Executive Cabinet	Chief Executive of USA
(Deceased on March 25, 2002)
	Patrick Wong
Johnny S L Tsui	Chief Operating Officer—South East Asia
Member of Executive Cabinet, Chief Operating
Officer of China & Hong Kong and	Colin Lamond
Company Secretary	Chief Operating Officer—Australia
Patrick K Y Tsang
Member of Executive Cabinet and
Chief Operating Officer of Europe
Terence Y F Leung
Member of Executive Cabinet
Peter Chang
Member of Executive Cabinet and Chairman of
North American operations
DSG NON-EXECUTIVE DIRECTORS
Anil Thadani
Chairman of Schroder Capital Partners (Asia)
Limited, Hong Kong
Owen Price
Formerly Managing Director of Dairy Farm
International Holdings, Hong Kong
(retired in 1993)
Allister McLeish
Formerly Finance Director of Yule Catto
& Co. Plc., U.K.
(retired in 2000)

3

TO OUR SHAREHOLDERS

The year 2001 marked another year of progress towards the long-term goals of DSG International Limited. Unfortunately in 2001, the Company produced less than acceptable financial performance. Despite the unfavorable financial performance, 2001 represented a year in which the Company integrated a major acquisition and accomplished overall sales growth in most of its markets. We believe that 2001 established a foundation on which the Company will begin to solidify its prominence in the marketplace and improve its financial performance. In 2002, the Company is positioned to capitalize on an integrated North American business and should begin to realize the anticipated cost saving synergies of its 2001 acquisition of Drypers. This activity, coupled with the Company’s strong Asian sales growth and an anticipated recovery in its Australian operations should result in improved performance in 2002.

Financial Review

Sales increased in 2001 over 2000 by 39.7% to $299.8 million. In 2001 the Company recorded a net loss of $27.6 million, or a $4.10 loss per share. The loss resulted primarily from about $14.0 million in restructuring charges along with non-recurring expenses related to inefficiencies resulting from excess plant capacity acquired in the Drypers acquisition, write down of assets held for sale, write off of discontinued inventory, redundancy payments and office closure in the U.S. In addition, the Company recorded $4.6 million in costs associated with the settlement of two lawsuits.

During 2001 the Company repaid a $15.0 million Term Loan related to the Drypers acquisition. Share purchase warrants at a price of $0.01 per share were attached to this debt. Upon repayment of the debt, the Company was required to issue 314,510 Ordinary Shares to the lender of the Term Note. The fair value of the share warrants of $1.4 million was treated as interest expense in 2001.

Operations

North America

The most important development for our North American operations was the acquisition during the first quarter 2001 of Drypers North America, which was combined with Associated Hygienic Products (“AHP”), our North American business unit. This strategic acquisition will accomplish several key goals for AHP. First of all, once the Drypers operations are fully integrated into AHP, our North American revenue run rate should more than double from the $92.2 million in net sales last year. This will translate to significant growth for DSG International Limited as well. Secondly, the two Drypers plants acquired in the transaction will provide additional capacity and improved productivity for North American operations. And finally, the Drypers acquisition will provide the synergies to consolidate and grow our current position as the second largest supplier of private label disposable diapers and training pants in our North American markets.

Australia

We further expanded our strong presence in Australia through market share gains during 2001 and remain the second largest manufacturer of baby diapers in this market. Net sales increased 1.3% to $45.3 million (by 13.6% in local currency terms), as we increased our penetration of the grocery sector and grew export sales, particularly to New Zealand. We also gained market share in the adult incontinence market.

4

Asia

Our greatest growth story occurred in the Asian region, where net sales increased to $70.9 million in 2001, a gain of 16.5% over 2000. We had a strong showing across the region, including Malaysia, the PRC, Thailand, Indonesia, Hong Kong and Singapore. While we had the benefit of strong local economies, the results were also due to aggressive, competitive and tailored marketing strategies in the various locales of the region. For instance, we have introduced economy brands in certain markets to capture new consumers and have varied our brands and packaging in other markets to react to competition and local market conditions. We believe our early entry in these emerging disposable diaper markets will position us well for continued penetration and growth.

Europe

In Europe, we continue to face strong competition in the United Kingdom. The U.K. operation now concentrates on both branded and private label disposable diapers for the U.K. market.

Outlook

The year 2001 brought with it many challenges. The Drypers acquisition proved to be more demanding than anticipated requiring a larger dedication of the Company’s resources. In addition, the Company was forced to respond to competitive pressures in the marketplace that squeezed profit margins. Given all of these challenges, the Company made significant operational progress. The measurement of the success of our progress should translate to improved future financial performance. We will strive to accomplish that goal and adopt the most effective business model in each of the economic regions in which we operate. We are committed to improving our competitive standing in the marketplace by offering our customers the best possible service, product quality and value for the products we supply. Our marketplace will continue to present challenges and demands in the coming year. However we remain optimistic about the future for DSG International Limited.

We appreciate the support of our shareholders and look forward to providing a favorable outcome of our efforts in the future.

Brandon Wang

Chairman

5

OPERATIONS

DSG International Limited and its subsidiaries, firstly established in Hong Kong in 1973, is one of the world leading companies specialized in manufacturing disposable baby diapers, adult incontinence and training pants products in this industry. The Company now operates ten manufacturing facilities in North America, Australia, Asia and Europe with extensive distribution activities around the world.

The principal raw materials for the Company’s disposable products are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene backsheets, cloth-like breathable backsheets, polypropylene non-woven liners, adhesive closure tapes, mechanical closure tapes, hot melt adhesive, elastic, aloe vera and tissue.

There are different marketing and distribution strategies for each geographic segment of the Company, however, the Company’s fundamental strategies are:

• Producing high quality and value-added products for consumers.

• Providing healthy profit margins to distributors and retailers.

• Manufacturing in a highly flexible and efficient way.

• Responding intelligently to change in the marketplace.

NORTH AMERICA

During the year, the Company continued its effort to further strengthen the North American operation. All the programs, systems and other measures put in place to improve the productivity and efficiency have shown significant positive results. However, the improvement was negated by the impact of unutilized manufacturing capacity caused by the Drypers acquisition in the first quarter of 2001. The Company has taken steps to reduce this over capacity and should see positive improvement in 2002.

The net sales for the year 2001 were $177.3 million compared with $92.2 million in 2000. The increase in 2001 sales was attributable to the Company’s first quarter acquisition of Drypers North America. Operating income decreased by $19.6 million in year 2001 versus 2000. Excess manufacturing capacity, additional selling, general and administrative costs related to the Drypers acquisition and provision of bad and doubtful debts for Ames Department Stores caused this decrease.

The Company continued to expand its branded and private label diaper business. On the branded side, the Company had introduced Mega packs for FITTI^® brand, Jumbo packs for FITTI^® brand training pants as well as the roll out on FITTI^® brand size 6 Super Toddler. On the DRYPERS^® brand, the Company launched new Super Mega packs. On the private label side, the Company continued to strengthen its existing private label partnerships with major retailers like Walgreens, Pathmark, A&P, Uniprix Drug, Topco etc. With the acquisition of Drypers North America, the Company gained additional private label business with key retailers including Wal-Mart, Kroger, Giant Eagle, Shoprite, Aldi and many others. The Company continued to add new products in both areas of disposable baby products and disposable adult incontinence. Included was the launch of new Koala Kare Mat, disposable changing pads. This new product has already been accepted and put into retail distribution with Walgreens drug and Kroger. The Company will continue to target other major retailers to establish new profitable private label partnerships in all of its product categories.

In March 2001, the Company acquired the Drypers’s North American operations and the DRYPERS^®

6

brand name. The combination of the Company’s North American operations and Drypers will provide a new level of service to our branded and private label customers in the U.S. markets and gain entry to the major supermarket chains and mass merchandisers such as Walmart and Kroger. Once the Drypers operations are fully integrated into the Company’s North American operations, the revenue growth should more than double the net sales of $92.2 million in 2000.

In the adult incontinence area, the Company continued to pursue the strategy to have the capability to provide key retailers, institutions and consumers with product technology that is superior to what other manufacturers can currently provide. The “value” tier fitted briefs introduced by the Company in 1999 for the private label retailers has been well embraced by the consumers. As the result of this success, the Company currently is putting on major efforts to bring the programs to more retailers.

In line with the Company’s global fundamental marketing strategies, the Company’s North American operations provide its customers high quality products and superior service with satisfactory profit margin.

The Company’s principal brand names in North America are DRYPERS^®, FITTI^®, CUDDLES^® for disposable baby diapers and CERTAINTY^® for adult incontinence.

AUSTRALIA

The Company’s net sales in 2001 were $45.3 million, representing an increase of 1.3% compared with sales of $44.8 million in 2000. In local currency terms, the increase in net sales from 2000 to 2001 was 13.6%. Net sales increased due to growth in the grocery class of trade, expansion of export sales and continued market share gains in adult incontinence products. Operating income fell to $2.3 million in 2001, from $3.9 million in 2000, due mainly to poor manufacturing efficiencies. The currency exchange rates against the U.S. dollar in 2001 dropped by 11% compared with 2000 which also impacted negatively on the operating results.

The Company further strengthened its position as the second largest manufacturer of disposable baby diapers in Australia. The Company’s major brands in Australia, BABY LOVE^® and LULLABY^®, continue to penetrate the grocery and variety sector, while COSIFITS^® and COSIES^® grew market share in a declining independent pharmacy sector. In addition, the Company is also the leading supplier of private label diapers to major grocery and variety retailers. The Company’s reliable service, high quality products and competitive prices have resulted in it maintaining its position in the private label sector despite the closure of a major private label retailer.

The Company also grew sales of the VLESI^® range of adult incontinence products into the Australian market.

ASIA

The Company’s net sales in Asia grew by 16.5% to $70.9 million in 2001 compared to $60.8 million in 2000. The major sales growth contributors were from the Malaysia, PRC, Thailand and Indonesia markets. The Company is striving to maintain market growth in pace with the economic recovery by its localization of production and its direct selling strategy. Operating income of $5.1 million in 2001, increased by 11.1% over last year.

The Company’s major brands for disposable baby diapers are FITTI^®, PET PET^®, COSIFITS^®, FITTI^®

7

Basic, BABY LOVE^® and BABYJOY^®. The Company produces and distributes adult incontinence products in Asia under the brand names DISPO 123^™ and HANDY^™.

The Company provides consumers with a different range of products with price differentiation to maintain its competitiveness against other local brands. The Company also has flexibility in tailoring packaging, brand and product differentiation and advertising and promotional activities to cope with different demands in various markets in the region. Although competition and pricing pressure has become more intense in the region, the Company believes that there is great potential for sales growth due to projected population growth figures and anticipated favorable currency rates. As a pioneer in the region, the Company has an advantage in entering and expanding in these markets by encouraging disposable diaper usage and establishing its brands at an early stage through strategic advertising and promotional activities.

EUROPE

The Company’s net sales in Europe were $6.3 million in 2001 compared to $16.8 million in 2000. The Company sold the Swiss adult incontinence operation during the year 2000 and the Company’s U.K. operation in 2001 continued with branded and private label disposable baby diapers. The Company also closed down its trading company in Belgium. Operating loss for the year 2001 was $1.4 million compared with an operating loss of $2.4 million in 2000.

The Company’s brands in Europe for baby diapers are FITTI^®, COSIFITS^® and CARES^®. The Company believes that the presence of its branded and private label disposable baby diapers in the United Kingdom can be maintained although it will be difficult to penetrate the market share of Procter & Gamble and Kimberly-Clark.

8

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements and related Notes which appear elsewhere in this Annual Report.

General

The Company’s revenues are primarily derived from the manufacture and sale of disposable baby diapers, adult incontinence and training pants products in North America, Australia, Asia and Europe, both under its own brands and private label brands of major retailers.

The Company is not taxed in the British Virgin Islands where it is incorporated. The Company’s subsidiaries are subject to taxation in the jurisdictions in which they operate.

The Consolidated Financial Statements of the Company are prepared in U.S. dollars, and the majority of its revenues are received and expenses are disbursed in U.S. dollars. Because certain of the Company’s subsidiaries account for their transactions in currencies other than U.S. dollars, the Consolidated Balance Sheets contain foreign currency translation adjustments and the Consolidated Statements of Operations contain realized exchange gains and losses due to exchange rate fluctuations.

Industry Trends

The Company believes that the most significant industry trends are :

• fluff wood pulp costs and other raw material costs decreased moderately in 2001, however, it is expected that fluff wood pulp costs will increase moderately in 2002;

• increasing demand for cloth-like breathable backsheet and mechanical closure tape products, which the Company is meeting through modifications to its machinery;

• the domination of industry leaders in most of the markets putting pressure on retailers’ margins, which the Company is finding difficult to respond to by providing retailers with higher profit margins in the current highly competitive market conditions.

The Company is unable to predict whether the industry trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative.

Forward-looking Statements

The Company continues to expand its markets in the South East Asian and PRC region and the Company expects that its market share in the regions will increase. The cost of raw materials, primarily fluff wood pulp costs will increase moderately in 2002.

9

From time to time, the Company may make certain statements that contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as “anticipate”, “estimate”, “project”, “expect”, “believe” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of this Operating and Financial Review and Prospects and as part of other sections of this Annual Report on Form 20-F and the Company’s other filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Risk Factors

Among the factors that have a direct effect on the results of operations and financial condition of DSG International Limited (the “Company”) are the following:

1.    Raw Material Cost

The overall raw material costs have decreased moderately during year 2001 and the Company’s operating results may be adversely affected by any increases in raw material costs in the future, specifically the cost of the main raw material, fluff wood pulp, which increased moderately in 2000 and may increase moderately in 2002.

2.    Branded Product Innovation

Patents and other intellectual property rights are an important competitive factor in the disposable diaper market, mostly because of the industry emphasis in product innovations. Patents held by the main competitors could severely limit the Company’s ability to keep up with branded product innovations, by prohibiting the Company from marketing product with comparable features.

3.    Pricing and Volumes

The market position of the Company’s main competitors, The Procter & Gamble Company (“P&G”) and Kimberly-Clark Corporation (“KC”), relative to the Company varies from one geographic area to another; but due to their substantial financial, technical and marketing resources, both of these major manufacturers have the ability to exert significant influence in price and volumes, and gain substantial market share in any of their marketing areas. They have heavily promoted diapers in the multi-pack configuration. These packages offer a lower unit price to the retailer and consumer. It is possible that as a consequence of this strategy, in those geographic markets in which the main competitors have adopted it, the Company may realize lower selling prices and/or lower sales volumes.

10

4.    Increased Cost

On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company’s products in the Asian Pacific and Australian region after December 31, 2000. A similar agreement with P&G was entered into in 1998 relating to the North American region that provides for payments of royalty fees based on a percentage of certain products sold after December 31, 1997 within the North American region.

The Company believes that the royalty being charged by P&G under its respective license agreements is approximately the same royalty that will be paid by its major competitors for similar patent rights. However, these royalties will continue to have an adverse impact on the Company’s future financial condition and results of operations as compared to pre-settlement.

5.    Increased Financial Leverage

As a result of the acquisition of the North American assets of Drypers Corporation, the Company has short and long term debt of $47.9 million, bearing various interest rates as of December 31, 2001.

As a consequence of the incurrence of the Company’s new debt, its principal and interest obligations have increased substantially. The increase in the Company’s financial leverage as described above, could adversely affect the Company’s ability to obtain additional financing for working capital, acquisitions or other purposes and could make the Company more vulnerable to economic crisis in the different geographical markets and to competitive pressures from its main competitors.

As a substantial portion of the Company’s available cash from operations will have to be applied to meet debt service requirements, the Company’s liquidity could be affected as well as its ability to fund capital expenditures. Notwithstanding, the Company believes that its cash flow from operations and other sources of liquidity will be adequate to meet its requirements for working capital, capital expenditures, interest payment and scheduled principal payment for the foreseeable future. However, if the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There is no assurance that this additional financing could be obtained in favorable terms for the Company.

6.    Litigation Risk

As the Company operates in an industry in which patents are numerous and are enforced vigorously, the Company and its subsidiaries are from time to time involved in legal matters.

11

In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by the Plaintiffs John M. Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the United States District Court for the Middle District of Georgia. The complaint alleged that the Company, its U.S. subsidiary and certain European suppliers of disposable diaper manufacturing equipment (the “Defendants”) have infringed U.S. Patent No. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers; that the Company and its U.S. subsidiary breached a confidentiality agreement with the Plaintiffs by using certain information relating to the waistband applicator disclosed to them in confidence by the Plaintiffs; and theft by the Defendants of the Plaintiffs’ trade secrets concerning the waistband applicator. On March 20, 2002 the United States District Court for the Middle District of Georgia entered a $4.0 million judgment in favor of the Plaintiffs. On March 29, 2002 an amended final order and judgment was entered by the United States District Court for the Middle District of Georgia awarding the Plaintiffs $10.4 million in actual and increased damages for patent infringement and prejudgment interest on the patent claim. Subsequent to the entering of this final order and judgment, the Company began to negotiate a settlement with the Plaintiffs. On April 9, 2002 the Company entered into a Settlement Agreement with the Plaintiffs. The terms of this Settlement Agreement required the Company to make a lump sum payment of $4.2 million to the Plaintiffs no later than April 18, 2002 to settle all asserted claims in the original lawsuit. The $4.2 million lump sum payment was made to the Plaintiffs on April 17, 2002. On April 18, 2002, the Company along with the Plaintiffs filed a “Stipulated Final Order of Dismissal” dismissing with prejudice both the judgment dated March 20, 2002 and the amended final order and judgment dated March 29, 2002. Effective with the filing of the “Stipulated Final Order of Dismissal”, the R&L lawsuit has been settled and the judgments of March 20th and March 29th have been vacated. The Company has recorded the $4.2 million settlement as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations for the year ended December 31, 2001.

12

Results of Operations

1.    Overall

The following table sets forth the percentage of net sales represented by the specified components of income and expense for the years ended December 31, 2001, 2000 and 1999:

	Year Ended December 31,
	2001		2000		1999
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	69.3		67.8		67.1
Gross profit	30.7		32.2		32.9
Selling, general and administrative expenses	(33.0	)	(29.3	)	(29.8	)
(Loss) gain on disposals of property, plant and equipment	(0.1	)	0.1		0.5
Restructuring costs	(2.1	)	—		—
Operating (loss) income	(4.5	)	3.0		3.6
Interest expense	(1.6	)	(0.7	)	(1.1	)
Interest income	0.2		0.4		0.4
Exchange loss	(0.9	)	(0.6	)	(0.5	)
Settlement of legal cases	(1.5	)	—		—
Loss on divestiture	(0.2	)	—		—
Gain on disposal of subsidiaries	—		0.1		—
Other (expense) income	(0.2	)	—		0.3
(Loss) income before income taxes	(8.7	)	2.2		2.7
Provision for income taxes	(0.4	)	(0.7	)	(0.5	)
Minority interest	(0.1	)	(0.1	)	(0.1	)
Net (loss) income	(9.2	)%	1.4	%	2.1	%

2.    Comparison of 2001, 2000 and 1999

Net sales of the Company in 2001 increased by 39.7% to $299.8 million compared with $214.7 million in 2000. The growth was significantly contributed to by the acquisition of Drypers and the sales growth in the Asian Pacific and Australian regions, offset in part by the effects of the divestiture of an investment in the European region.

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The Company’s gross profit margin was 30.7% in 2001, which declined by 1.5% compared to 2000. The lower cost of raw materials was offset by a $6.7 million one-time expense related to manufacturing inefficiencies experienced with assimilating the Drypers manufacturing operations and the write off of Drypers inventory of $1.0 million to its net realizable value. Selling, general and administrative expenses as a percentage of net sales increased to 33.0% in 2001 compared to 29.3% in 2000, primarily due to a higher selling and administrative expenses associated with the newly acquired Drypers operation and provision of bad and doubtful debts of $0.8 million for Ames Department Stores which filed for Chapter 11 involuntary bankruptcy in 2001. Restructuring cost of $6.4 million was incurred in 2001 due to the assimilation of Drypers into the Company’s U.S. operation. The Company also provided $4.6 million for settlement of the legal cases in North America (see Note 5 to the Company’s Consolidated Financial Statements). The Company’s interest expense increased to $4.7 million in 2001 compared to $1.6 million in 2000 as a result of the increased financial leverage resulting from additional borrowings related to the purchase of Drypers. The Company issued warrants to purchase 314,510 Ordinary Shares at a fair value of $1.4 million and recorded these warrants as interest expense in 2001. The Company also experienced an increase in foreign exchange losses of $1.4 million to $2.8 million in 2001, primarily due to unfavorable currency fluctuation of Australian currencies against U.S. dollar. On the other hand, the Company continued to divest its investment in Europe and recorded a loss of $672,000 in the write off of this investment, and the recording of redundancy and liquidation costs.

The Company’s net sales in 2000 increased by 4.3% to $214.7 million compared with $205.8 million in 1999. The Company’s sales in Asia Pacific grew more than 30% and by 5% in Australia despite the 10% devaluation of Australian dollars against U.S. dollars during the year. The Company’s sales in North America in 2000 were marginally lower than in 1999. The Company sold its Swiss adult incontinence operation during the year which was the main contributor to the reduction in the Company’s sales in Europe.

Gross profit margin for the year 2000 was 32.2% compared with 32.9% in 1999. The raw material costs in 2000 were higher than the costs in 1999 due to higher fluff wood pulp cost. Also a high proportion of the volume growth in Asia came from lower margin value brands. The Company was able to alleviate the negative impact on raw material costs and lower margin by higher sales volume and increased productivity of the Company’s operations in Asia and Australia. Selling, general and administrative expenses increased by $1.6 million to $62.9 million due to higher spending on advertising and promotion activities in Asia and Australia. The Company also recorded a $0.3 million charge relating to a patent agreement with the Procter & Gamble Company (see Note 17 to the Company’s Consolidated Financial Statements). The Company’s interest expense decreased to $1.6 million in 2000 compared to $2.2 million in 1999, primarily due to full repayment of Swiss Franc denominated mortgage loans in 2000. The Company also had an exchange loss of $1.4 million in 2000 versus $1.0 million in 1999. The increase was due to the unfavorable currency fluctuation of Swiss Franc against U.S. dollar.

Geographic Segment Information

As the results of the Company’s operations differ significantly from one market to another, the following discussion considers the Company’s results in each of the geographic regions in which it operates. The tables below set forth the Company’s net sales and operating income in each geographic region in 2001, 2000 and 1999, and the percentage change over the preceding period:

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1.    North America

	Year Ended December 31,							Increase/(Decrease)
	2001			2000		1999		2001		2000		1999
	(Dollars in thousands)
Net sales	$	177,323		$	92,229	$	93,479	92.3	%	(1.3	)%	4.0	%
Operating income (loss)		(14,275	)		5,301		5,001	—		6.0		333.0

Comparison of 2001, 2000 and 1999.

The Company’s net sales were $177.3 million in 2001 compared with $92.2 million in 2000. The increase in sales was attributable to the acquisition of Drypers North America in the first quarter of 2001. Gross profit margin was at 27.7% in 2001 compared with 28.6% in 2000. Lower cost of raw material was offset by manufacturing labor costs and over capacity caused by the purchase of the Drypers North American business. The addition of this over capacity from the Marion, Ohio and Vancouver, Washington operations contributed significantly to a lower gross margin than the prior year. Selling, general and administrative expenses as a percentage of net sales in 2001 increased to 32.2% from 22.5% a year ago. This increase was attributable to certain costs associated with integrating the Drypers business into AHP, additional costs associated with the promotion of future sales of the “DRYPERS^®” brand and a provision established for bad and doubtful debts for Ames Department Stores which filed for Chapter 11 involuntary bankruptcy in 2001. Operating income for the year 2001 decreased by $19.6 million from the previous year to an operating loss of $14.3 million.

The Company’s net sales were $92.2 million in 2000 compared with $93.5 million in 1999. The slight decrease in sales was mostly attributed to the Company’s decision to revise its credit policy resulting in the loss of some customers. Gross profit margin was at 28.6% in 2000 compared with 29.5% in 1999. Although the Company achieved greater productivity gains during the year, the higher cost of raw materials and labor contributed to a lower gross margin than the prior year. Selling, general and administrative expenses in 2000 declined to 22.5% from 24.1% in 1999. This improvement was primarily attributed to a continued effort to trim promotional expenditures and other cost control measures. Operating income for the year 2000 improved by 6.0% from the previous year to $5.3 million.

2.    Australia

	Year Ended December 31,						Increase/(Decrease)
	2001		2000		1999		2001		2000		1999
	(Dollars in thousands)
Net sales	$	45,322	$	44,753	$	42,676	1.3	%	4.9	%	5.4	%
Operating income		2,298		3,919		4,823	(41.4	)	(18.7	)	(2.5	)

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Comparison of 2001, 2000 and 1999.

The Company’s 2001 net sales in Australia grew by 1.3% to $45.3 million over 2000. The actual growth was over 13.6% when the net sales are compared in the domestic currency. The Australian dollar devalued by over 10% against the U.S. dollar during 2001. Gross profit margin declined by 4.3% due mostly to poor manufacturing efficiencies. Selling, general and administrative expenses were 0.5% lower as a percentage of net sales. As a result, operating income as a percentage of net sales in 2001 decreased by 3.7% to 5.1%.

The outlook for 2002 is for continued strong growth in sales and a recovery of profitability as manufacturing improvements are made. Gains in manufacturing efficiency were realized in the fourth quarter of 2001 and these improvements are continuing into the first quarter of 2002.

The Company’s net sales in Australia were $44.8 million and grew by 4.9% over 1999. The actual growth was over 16.0% when the net sales were compared in the domestic currency. The Australian dollar had devalued by over 10.0% against U.S. dollars during 2000. Gross profit margin dropped by 2.5% from 39.2% in 1999 to 37.7% primarily due to higher fluff wood pulp cost in 2000. Selling, general and administrative expenses increased by 1.0% to 28.9% in 2000 due to higher advertising and promotional expenditure. As a result, operating income, as a percentage of net sales, in 2000 decreased by 2.5% to 8.8% on net sales.

3.    Asia

	Year Ended December 31,						Increase/(Decrease)
	2001		2000		1999		2001		2000		1999
	(Dollars in thousands)
Net sales	$	70,850	$	60,835	$	45,715	16.5	%	33.1	%	3.4	%
Operating income		5,119		4,609		3,839	11.1		20.1		35.1

Comparison of 2001, 2000 and 1999.

The Company’s net sales in Asia increased by 16.5% to $70.9 million in 2001 compared to $60.8 million in 2000. The major sales growth contributors were from the Malaysian, PRC, Thailand and Indonesian markets. The Company’s gross profit margin in 2001 was 37.7%, which increased by 0.5% over the prior year. Selling, general and administrative expenses as a percentage of net sales in 2001 were 30.5% compared to 29.6% in 2000. The moderate increase was due to higher spending on promotion programs in the PRC and Malaysian markets. Operating income was $5.1 million in 2001, which increased by 11.1% over the prior year.

The Company’s net sales in Asia increased by 33.1% to $60.8 million in 2000 from $45.7 million in 1999. The Company recorded sales growth in all the markets and high double-digit growth in the markets in Malaysia, the PRC and Indonesia. The Company’s gross profit increased by 20.9% to $22.6 million in 2000 from $18.7 million in 1999, although the gross profit margin declined by 3.6% to 37.2% in 2000 from 1999 primarily due to higher fluff wood pulp cost and lower margin on several economy brands. Selling, general and administrative expenses as a percentage of net sales dropped by 2.6% to 29.6% in 2000 from 32.2% in 1999 primarily due to the economies of higher sales volume. Operating income was $4.6 million in 2000, increased by 20.1% over the operating income in 1999.

4.    Europe

	Year Ended December 31,									Increase/(Decrease)
	2001			2000			1999			2001		2000		1999
	(Dollars in thousands)
Net sales	$	6,282		$	16,844		$	23,972		(62.7	)%	(29.7	)%	(28.1	)%
Operating loss		(1,361	)		(2,371	)		(1,667	)	(42.6	)	42.2		(42.6	)

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Comparison of 2001, 2000 and 1999.

The Company’s net sales in Europe were $6.3 million in 2001 compared with $16.8 million in 2000. The decrease in sales in 2001 was the result of the disposal of the Company’s Swiss adult incontinence operation in 2000. The operating loss in 2001 declined by $1.0 million to $1.4 million compared to 2000.

The Company’s net sales in Europe were $16.8 million in 2000 compared with $24.0 million in 1999. The decrease in sales was the result of the sale of the Company’s Swiss baby diaper operation in 1999 and the sale of the Company’s Swiss adult incontinence operation in 2000. The operating results in 2000 were impacted by higher fluff wood pulp cost and disappointing operating results of the adult incontinence operation prior to it being sold. The operating loss in 2000 increased by $0.7 million compared to a loss of $1.7 million in 1999 due to a lower gross profit margin, offset by lower selling, general and administrative expenses in 2000.

Liquidity and Capital Resources

The Company has cash and cash equivalents of $9.4 million at the year ended 2001, a decrease of $0.9 million from $10.3 million in 2000. The cash and cash equivalents were held by individual operations of the Company in their local currencies and were from time to time invested in interest bearing deposit accounts. The Company did not use any financial instruments for hedging.

Net cash provided by operating activities was $18.6 million. As a result of the restructuring of the Company’s North American operations, a non-cash write off of assets of $2.5 million was recorded in 2001. During the year 2001, the Company issued 314,510 Ordinary Shares at a fair value of $1.4 million and recorded the amount as additional interest expense in 2001. The net decrease in working capital requirements of $28.6 million consisted of an increase in net cash inflow from accounts receivable, other receivable and inventories of $2.3 million, $3.0 million and $4.2 million respectively, primarily due to the assets purchased in the Drypers acquisition. The Company also obtained more favorable credit terms by the extension of payment periods with suppliers and thereby improved cash flow by $12.5 million. In addition, the Company also recorded accruals for restructuring, divestiture and settlement of legal cases of $1.1 million, $0.6 million and $4.6 million in 2001, respectively.

Net cash used for investing activities was $45.4 million, of which $35.9 million was associated with the acquisition of the North American assets of Drypers Corporation. The Company invested $9.8 million in capital expenditures for additions and modifications to property, machinery and equipment in the Company’s various operations. The increase in other assets of $1.4 million was primarily due to deposits paid on land, machinery and equipment. The Company made advances of $3.0 million to a shareholder and the shareholder made repayment of $3.9 million to the Company during 2001. Additional information on the advances to shareholder is provided in Note 16 to Consolidated Financial Statements.

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The Company utilized $28.7 million in short-term bank credit lines out of total available credit facilities of $37.0 million as of December 31, 2001. The utilization of short-term bank credit increased by $15.6 million in 2001 compared with the utilization of $4.9 million in 2000. The increase in total short-term borrowings and long-term debt in 2001 was $47.5 million. The Company repaid $21.6 million of its debts during 2001. The weighted average interest rate on borrowings at the year ended 2001 was 4.43%. Additional information on short-term borrowings and long-term debt is set out in Notes 14 and 15 to Consolidated Financial Statements.

In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by the Plaintiffs John M. Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the United States District Court for the Middle District of Georgia. The complaint alleged that the Company, its U.S. subsidiary and certain European suppliers of disposable diaper manufacturing equipment (the “Defendants”) have infringed U.S. Patent No. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers; that the Company and its U.S. subsidiary breached a confidentiality agreement with the Plaintiffs by using certain information relating to the waistband applicator disclosed to them in confidence by the Plaintiffs; and theft by the Defendants of the Plaintiffs’ trade secrets concerning the waistband applicator. On March 20, 2002 the United States District Court for the Middle District of Georgia entered a $4.0 million judgment in favor of the Plaintiffs. On March 29, 2002 an amended final order and judgment was entered by the United States District Court for the Middle District of Georgia awarding the Plaintiffs $10.4 million in actual and increased damages for patent infringement and prejudgment interest on the patent claim. Subsequent to the entering of this final order and judgment, the Company began to negotiate a settlement with the Plaintiffs. On April 9, 2002 the Company entered into a Settlement Agreement with the Plaintiffs. The terms of this Settlement Agreement required the Company to make a lump sum payment of $4.2 million to the Plaintiffs no later than April 18, 2002 to settle all asserted claims in the original lawsuit. The $4.2 million lump sum payment was made to the Plaintiffs on April 17, 2002. On April 18, 2002, the Company along with the Plaintiffs filed a “Stipulated Final Order of Dismissal” dismissing with prejudice both the judgment dated March 20, 2002 and the amended final order and judgment dated March 29, 2002. Effective with the filing of the “Stipulated Final Order of Dismissal”, the R&L lawsuit has been settled and the judgments of March 20th and March 29th have been vacated. The Company has recorded the $4.2 million settlement as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations for the year ended December 31, 2001.

A claim was made by Ms. Rhonda Tracy, the owner of U.S. Patent No. 5,797,824 for disposable diapers with a padded waistband and leg holes, asserting that the Company has been manufacturing and/or selling diapers which infringe her patent. No lawsuit has been filed against the Company to date. The Company, however, had filed a lawsuit against Ms. Tracy in the U.S. District Court for the Northern District of Georgia for a declaration that her patent is invalid and/or not infringed. The Company settled this claim with Rhonda Tracy on March 15, 2002 for $375,000. The Company has recorded the $375,000 as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations for the year ended December 31, 2001.

The Company issued 314,510 shares at par value of $0.01 per share in 2001.

The Company did not repurchase any shares or pay a dividend during 2001.

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New accounting standard adopted—The Financial Accounting Standards Board (the “FASB”) has issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Derivative Working Capital and Instruments and Hedging Activities”. This statement, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives are accounted within the statements of operations and comprehensive income (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. The Company’s adoption of SFAS No. 133 on January 1, 2001 did not have a material effect on its consolidated financial statements.

New accounting standards not yet adopted—In June 2001, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets”. This statement provides that goodwill and other intangible assets with indefinite lives not be amortized, but will be tested for impairment on an annual basis. The Company will adopt SFAS No. 142 on January 1, 2002, as required. Management is assessing, but has not yet determined, the impact that SFAS No. 142 will have on its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addressed the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will be required to adopt this standard on January 1, 2003. Management has determined that the adoption of SFAS No. 143 will not have a material impact on the Company’s financial position or results of operations.

The FASB also recently issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and portions of APB Opinion No. 30, “Reporting the Results of Operations”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. Management has determined that the adoption of SFAS No. 144 will not have a material impact on the Company’s financial position or results of operations.

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Contractual Obligations and Commitments

As of the year ended December 31, 2001, the Company’s contractual obligations and commitments were summarized as follows:

			Payment due by year
	Total		2002		2003		2004		2005		2006 and thereafter
	(Dollars in thousands)
Short-term borrowings	$	28,675	$	28,675	$	—	$	—	$	—	$	—
Long-term debt		19,256		6,038		3,899		3,550		3,393		2,376
Operating leases		6,542		3,163		2,090		634		240		415
Purchase of license use right		2,000		1,500		500		—		—		—
Capital expenditures		2,731		1,200		613		613		305		—
Total	$	59,204	$	40,576	$	7,102	$	4,797	$	3,938	$	2,791

Over the last few years, the Company’s cash requirements have been primarily provided by internally generated funds and bank borrowings. In the opinion of the Company, the cash on hand of $9.4 million plus expected cash flow from operating activities is sufficient to fund its liquidity, contractual obligations and commitments needs for the next twelve months. However, the Company may require additional borrowings in order to finance expansion, capital expenditure, other investments or other business requirements. Additional information on short-term borrowings, long-term debt and commitments and contingencies is set out in Notes 14, 15 and 17 to Consolidated Financial Statements.

Critical Accounting Policies

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and judgments, including those related to bad and doubtful debts, inventories, income taxes, impairment of assets, intangible assets and litigation. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

Bad and doubtful debts—The Company maintains allowances for its bad and doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers changed, changes to these allowances may be required, which would impact the Company’s future operating results.

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Inventories—Inventories, consisting of finished goods, raw materials and packaging materials, are stated at the lower of cost or market with cost determined using the first-in, first-out method. The Company makes certain obsolescence and other assumptions to adjust inventory based on historical experience and current information. The Company writes down inventory for estimated obsolete or unmarketable inventory equal to the difference between the costs of inventory and estimated market value, based upon assumptions about future demand and market conditions. These assumptions, although consistently applied, can have a significant impact on current and future operating results and financial position.

Income taxes—The Company records a valuation allowance to reduce its deferred tax assets to the amount that the Company believes is more likely than not to be realized. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Impairment of assets—The Company reviews all assets on a regular basis to ensure that there is no impairment in the carrying value. If the Company determines that there has been a permanent decline in, or the Company has become unable to recover the carrying value of the asset, an impairment charge will be recorded, which will have an adverse effect upon the Company’s future operating results.

Intangible assets—The Company makes assumptions regarding estimated future cash flows and other factors to determine the fair value of intangible assets. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment charge if the estimated fair value of intangible assets are less than their recorded amount. Through December 31, 2001, the Company has not recorded an impairment charge for intangible assets. Beginning January 1, 2002, the Company will be required to adopt Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, and will be required to analyze goodwill and other intangible assets for impairment issues during the year 2002, and on a periodic basis thereafter.

Litigation—The Company records contingent liabilities relating to litigation or other loss contingencies when it believes that the likelihood of loss is probable and the amount of the loss can reasonably be estimated. Changes in judgments of outcome and estimated losses are recorded, as necessary, in the period such changes are determined or become known. Any changes in estimates would impact its future operating results. Significant contingent liabilities, which the Company believes are at least possible, are disclosed in the Notes to the Consolidated Financial Statements.

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Restructuring Program

As a result of the Drypers acquisition, the Company consolidated its operations in the U.S. and recorded restructuring costs of $6,356 during 2001. The components of these costs were as follows:

	US$’000
Write down of assets held for sale	$2,514
Write off of discontinued inventory	1,547
Redundancy payment costs	1,137
Office closure and other costs	1,158
Total	$6,356

Redundancy payment, office closure and other costs were recorded and related principally to the closure of the manufacturing facility located in Duluth, Georgia; a liability totaling $2,295 was recorded by the Company during 2001 relating to these costs. The carrying values of the manufacturing plant in Duluth along with certain equipment located therein, which are held for sale, were adjusted to their estimated fair value. In addition, in conjunction with these activities, management discontinued certain product offerings resulting in the write off of inventories on hand related to these discontinued lines.

The redundancy payments related principally to the termination of approximately 326 employees at the Duluth facility; these employees were terminated in the first quarter of 2002. Office closure and other costs are expected to be incurred in the first quarter of 2002. Approximately $1,137 and $1,158 of redundancy costs, and office closure and other costs recorded in 2001 and not yet incurred were recorded as accrued restructuring costs in the accompanying Consolidated Balance Sheet at December 31, 2001. Through December 31, 2001, no assets held for sale have been sold; accordingly, these assets are recorded in the accompanying Consolidated Balance sheet as assets held-for-sale.

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SELECTED CONSOLIDATED FINANCIAL DATA

	Year Ended December 31,
	2001			2000			1999			1998			1997
	(in thousands except per share amounts)
Statement of Operations Data
Net sales	$	299,777		$	214,661		$	205,842		$	207,925		$	230,930
Cost of sales		(207,780	)		(145,532	)		(138,120	)		(147,997	)		(153,929	)
Gross profit		91,997			69,129			67,722			59,928			77,001
Selling, general and administrative expenses		(98,911	)		(62,898	)		(61,322	)		(55,318	)		(71,912	)
(Loss) gain on disposals of property, plant and equipment		(193	)		244			1,034			42			(122	)
Restructuring costs		(6,356	)		—			—			(897	)		(1,389	)
Operating (loss) income		(13,463	)		6,475			7,434			3,755			3,578
Interest expense		(4,653	)		(1,594	)		(2,208	)		(2,511	)		(2,833	)
Interest income		711			868			792			790			1,451
Exchange loss		(2,796	)		(1,356	)		(997	)		(311	)		(610	)
Settlement of legal cases		(4,575	)		—			—			—			—
Loss on divestiture		(672	)		—			—			—			—
Gain on disposal of subsidiaries		—			214			—			—			—
Other (expense) income		(547	)		54			522			155			(169	)
(Loss) income before income taxes		(25,995	)		4,661			5,543			1,878			1,417
Provision for income taxes		(1,144	)		(1,557	)		(987	)		(253	)		(443	)
Minority interest		(424	)		(141	)		(121	)		(3	)		—
Net (loss) income	$	(27,563	)	$	2,963		$	4,435		$	1,622		$	974
Basic earnings per share:
Net (loss) income	$	(4.10	)	$	0.44		$	0.66		$	0.24		$	0.15
Weighted average number of shares outstanding		6,721			6,675			6,675			6,675			6,675

The Company has not declared any dividend during the above periods.

	December 31,
	2001		2000		1999		1998		1997
Balance Sheet Data
Working capital	$	3,144	$	32,423	$	36,000	$	30,091	$	30,823
Total assets		138,648		111,409		120,945		133,909		130,273
Long-term debt		13,218		5,577		11,894		20,957		21,281
Shareholders’ equity		38,981		63,447		70,302		68,013		64,778

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MANAGEMENT REPORT

To the Shareholders of DSG International Limited

The financial statements of the Company published in this report were prepared by the Company’s management, which is responsible for their integrity and objectivity. The statements have been prepared in accordance with United States generally accepted accounting principles, applying certain estimates and judgments as required. The financial information elsewhere in this report is consistent with the financial statements.

The Company maintains a system of internal controls adequate to provide reasonable assurance that its transactions are appropriately recorded and reported, its assets are protected and its established policies are followed. This system is maintained by the establishment and communication of policies and a qualified financial staff.

Our independent auditors, Deloitte Touche Tohmatsu, provide an objective independent audit of the Company’s financial statements and issuance of a report thereon. Their audit is conducted in accordance with United States generally accepted auditing standards.

The Audit Committee of the Board of Directors, comprised solely of outside directors, meets with the independent auditors and representatives from management to evaluate the adequacy and effectiveness of the audit functions, control systems and quality of our financial accounting and reporting.

Edmund J Schwartz

Chief Financial Officer

June 4, 2002

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INDEPENDENT AUDITORS’ REPORT

To the Shareholders and the Board of Directors of

DSG International Limited

We have audited the accompanying consolidated balance sheets of DSG International Limited and its subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 the 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, such financial statements present fairly, in all material respects, the financial position of DSG International Limited and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

Deloitte Touche Tohmatsu

Hong Kong

June 4, 2002

25

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

	Year Ended December 31,
	2001			2000			1999
Net sales	$	299,777		$	214,661		$	205,842
Cost of sales		(207,780	)		(145,532	)		(138,120	)
Gross profit		91,997			69,129			67,722
Selling, general and administrative expenses		(98,911	)		(62,898	)		(61,322	)
(Loss) gain on disposals of property, plant and equipment (Note 3)		(193	)		244			1,034
Restructuring costs (Note 4)		(6,356	)		—			—
Operating (loss) income		(13,463	)		6,475			7,434
Interest expense		(4,653	)		(1,594	)		(2,208	)
Interest income		711			868			792
Exchange loss		(2,796	)		(1,356	)		(997	)
Settlement of legal cases (Note 5)		(4,575	)		—			—
Loss on divestiture (Note 6)		(672	)		—			—
Gain on disposal of subsidiaries (Note 7)		—			214			—
Other (expense) income, net		(547	)		54			522
(Loss) income before income taxes		(25,995	)		4,661			5,543
Provision for income taxes (Note 8)		(1,144	)		(1,557	)		(987	)
Minority interest		(424	)		(141	)		(121	)
Net (loss) income	$	(27,563	)	$	2,963		$	4,435
Basic (loss) earnings per share	$	(4.10	)	$	0.44		$	0.66
Weighted average number of shares outstanding		6,721			6,675			6,675

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Year Ended December 31,
	2001			2000			1999
Net (loss) income	$	(27,563	)	$	2,963		$	4,435
Other comprehensive income (expense) Foreign currency translation adjustments		854			(1,017	)		665
Comprehensive (loss) income	$	(26,709	)	$	1,946		$	5,100

See accompanying notes to consolidated financial statements.

26

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,
	2001		2000
ASSETS
Current assets:
Cash and cash equivalents	$	9,364	$	10,327
Accounts receivable, less allowance for doubtful accounts of $2,621 in 2001 and $897 in 2000		38,970		33,468
Other receivables		3,342		2,472
Inventories (Note 9)		33,840		26,556
Prepaid expenses and other current assets		1,710		571
Income taxes receivable		855		219
Total current assets		88,081		73,613
Property, plant and equipment—at cost: (Note 10)
Land		2,519		3,551
Buildings		9,366		13,049
Machinery and equipment		73,826		74,977
Furniture and fixtures		2,645		2,357
Motor vehicles		1,433		1,670
Leasehold improvements		1,139		2,017
Construction in progress		—		1,545
Total		90,928		99,166
Less:    accumulated depreciation and amortization		55,814		62,685
Net property and equipment		35,114		36,481
Loan receivable, less allowance for doubtful accounts of $300 in 2001 and nil in 2000 (Note 11)		254		554
Deferred income taxes		499		299
Other assets (Note 12)		9,961		203
Intangible assets (Note 13)		4,739		259
Total long-term assets		50,567		37,796
Total assets	$	138,648	$	111,409

See accompanying notes to consolidated financial statements.

27

CONSOLIDATED BALANCE SHEETS—(Continued)

(in thousands except shares and per share amounts)

	December 31,
	2001			2000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings (Note 14)	$	28,675		$	13,235
Current portion of long-term debt (Note 15)		6,038			3,421
Accounts payable		27,207			14,992
Accrued advertising and promotion		5,212			2,404
Accrued payroll and employee benefits		4,006			1,863
Other accrued expenses		5,271			4,855
Accruals for settlement of legal cases		4,575			—
Accrued restructuring costs		2,295			—
Accruals for divestiture		591			—
Income taxes payable (Note 8)		1,011			418
Deferred income taxes (Note 8)		56			2
Total current liabilities		84,937			41,190
Long-term debt (Note 15)		13,218			5,577
Minority interest		1,512			1,195
Commitments and contingencies (Note 17)
Shareholders’ equity:
Ordinary shares, $0.01 par value—authorized 20,000,000 shares; issued and outstanding 6,989,116 shares in 2001 and 6,674,606 shares in 2000		70			67
Additional paid-in capital		19,673			18,301
Retained earnings		38,101			65,664
Accumulated other comprehensive loss		(8,119	)		(8,973	)
Less:    Receivable from shareholder (Note 16)		(10,744	)		(11,612	)
Total shareholders’ equity		38,981			63,447
Total liabilities and shareholders’ equity	$	138,648		$	111,409

See accompanying notes to consolidated financial statements.

28

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2001			2000			1999
Cash flows from operating activities
Net (loss) income	$	(27,563	)	$	2,963		$	4,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,368			9,464			9,662
Provision for doubtful debts		2,024			173			65
Assets impairment		2,514			—			—
Loss (gain) on disposals of property, plant and equipment		193			(244	)		(1,034	)
Gain on disposal of subsidiaries		—			(214	)		—
Deferred income taxes		(134	)		(354	)		(798	)
Minority interest		424			141			121
Warrant interest		1,372			—			—
Other		850			109			903
Net change in working capital components		28,583			(10,363	)		(1,529	)
Net cash provided by operating activities		18,631			1,675			11,825
Cash flows from investing activities
Expenditures for property, plant and equipment		(9,847	)		(5,947	)		(6,097	)
Proceeds from disposals of property, plant and equipment		871			1,276			4,237
Proceeds from sale of subsidiaries, net of cash forfeited		—			4,842			—
Receipt of restricted bank deposit		—			—			6,000
Advances to a shareholder		(3,046	)		(10,744	)		(1,879	)
Repayments by a shareholder		3,914			1,943			2,540
Cost of acquisition, net of cash acquired		(35,878	)		—			—
Increase in other assets		(1,396	)		(39	)		(6	)
Net cash (used in) provided by investing activities		(45,382	)		(8,669	)		4,795
Cash flows from financing activities
Increase (decrease) in short-term borrowings		15,641			4,858			(295	)
Increase in long-term debt		31,876			6,554			148
Repayment of long-term debt		(21,575	)		(7,956	)		(10,582	)
Issue of ordinary shares		3			—			—
Repayment to minority shareholder		(107	)		(255	)		(15	)
Net cash provided by (used in) financing activities		25,838			3,201			(10,744	)
Effect of exchange rate changes on cash and cash equivalents		(50	)		(232	)		(74	)
(Decrease) increase in cash and cash equivalents		(963	)		(4,025	)		5,802
Cash and cash equivalents, beginning of year		10,327			14,352			8,550
Cash and cash equivalents, end of year	$	9,364		$	10,327		$	14,352

See accompanying notes to consolidated financial statements.

29

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(in thousands)

	Year Ended December 31,
	2001			2000			1999
Schedule of changes in working capital components net of effects from sale of subsidiaries and acquisition of business
Accounts receivable	$	2,313		$	(7,427	)	$	2,288
Other receivables		2,959			98			(470	)
Inventories		4,243			(4,974	)		(966	)
Prepaid expenses and other current assets		(1,160	)		58			106
Accounts payable		12,480			3,207			(2,492	)
Accrued expenses		7,794			571			(1,256	)
Income taxes payable		(46	)		(1,896	)		1,261
Net change in working capital components	$	28,583		$	(10,363	)	$	(1,529	)
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest	$	2,054		$	1,579		$	2,208
Income taxes		1,258			3,600			403

See accompanying notes to consolidated financial statements.

30

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

	Ordinary shares			Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Receivable from shareholder (Note 16)			Total shareholders’ equity
	Shares	Amount
Balance at January1, 1999	6,674	$	67	$	18,301	$	58,266		$	(8,621	)	$	—		$	68,013
Net income	—		—		—		4,435			—			—			4,435
Foreign currency translation adjustment	—		—		—		—			665			—			665
Transfer of balance of net receivable from shareholder													(2,811	)		(2,811	)
Balance at December 31, 1999	6,674		67		18,301		62,701			(7,956	)		(2,811	)		70,302
Net income	—		—		—		2,963			—			—			2,963
Foreign currency translation adjustment	—		—		—		—			(1,017	)		—			(1,017	)
Transfer of balance of net receivable from shareholder	—		—		—		—			—			(8,801	)		(8,801	)
Balance at December 31, 2000	6,674		67		18,301		65,664			(8,973	)		(11,612	)		63,447
Issuing of shares	315		3		1,372		—			—			—			1,375
Net loss	—		—		—		(27,563	)		—			—			(27,563	)
Foreign currency translation adjustment	—		—		—		—			854			—			854
Net repayment of receivable from shareholder	—		—		—		—			—			868			868
Balance at December 31, 2001	6,989	$	70	$	19,673	$	38,101		$	(8,119	)	$	(10,744	)	$	38,981

See accompanying notes to consolidated financial statements.

31

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

1.    ORGANIZATION AND BASIS OF PRESENTATION

DSG International Limited (the “Company”) is incorporated in the British Virgin Islands. It operates through subsidiary companies located in North America, Australia, Asia and Europe which manufacture and distribute disposable baby diapers, adult incontinence and training pants products.

In March 2001, the Company acquired the North American assets of Drypers Corporation. The acquisition was accounted for as purchase and their operating results are included in the Consolidated Statements of Operations from the date of acquisition (see Note 24).

The financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) which differ from those used in the statutory accounts of its subsidiaries. There are no material differences between the U.S. GAAP amounts and the amounts used in the statutory accounts of the subsidiaries.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation—The consolidated financial statements include the assets, liabilities, revenues and expenses of all subsidiaries. Intercompany balances and transactions are eliminated in consolidation.

Cash and cash equivalents—Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts, commercial paper and time certificates of deposit with a maturity of three months or less when purchased.

Inventories—Inventories are stated at the lower of cost determined by the first-in, first-out method, or value determined by the market. Finished goods inventories consist of raw materials, direct labor, and overhead associated with the manufacturing process.

Depreciation and amortization of property, plant and equipment—Depreciation is provided on the straight line method at rates based upon the estimated useful lives of the property, generally three to ten years except for buildings which are 40 years. Costs of leasehold improvements are amortized over the life of the related asset or the term of the lease, whichever is shorter.

Revenue recognition—The Company recognizes revenue at the time shipments of product are made to customers at which time, title and the risk of loss transfers to the customer. Provision for discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded.

Income taxes—Income taxes are provided based on an asset and liability approach for financial accounting and reporting of income taxes. Deferred income tax liabilities or benefits are recorded to reflect the tax consequences in future years of differences between tax basis of assets and liabilities and the financial reporting amounts and operating loss carryforwards. A valuation allowance is recorded if it is more likely than not that some portion of, or all of, a deferred tax asset will not be realized.

32

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Valuation of long-lived assets—The Company evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

Foreign currency translation—The Company uses the United States dollar as its reporting currency. Assets and liabilities of foreign subsidiaries are translated at year end exchange rates, while revenues and expenses are translated at average currency exchange rates during the year. Adjustments resulting from translating foreign currency financial statements are reported as a separate component of shareholders’ equity. Gains or losses from foreign currency transactions are included in net income.

Postretirement and postemployment benefits—The Company does not provide postretirement benefits, and postemployment benefits, if any, are not significant.

Earnings per share—Earnings per share are based on the weighted average number of Ordinary Shares outstanding. Diluted earnings per share are not presented in 2001 as the effect of the warrants outstanding during the year were antidilutive. There were no common stock equivalents outstanding during 2000 and 1999.

Concentration of credit risk—The Company sells to distributors and retailers located in each of the countries in which it operates. The Company grants credit to all qualified customers on an unsecured basis but does not believe it is exposed to any undue concentration of credit risk to any significant degree.

Comprehensive income—Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.

Intangible assets—Costs incurred in the acquisition of trademark licenses, patents and other intangible assets are capitalized and amortized to expense on a straight-line basis over the shorter of license period or 7 to 10 years. Goodwill is amortized on a straight-line basis over periods estimated to be benefited, generally over 5 years.

New accounting standard adopted—The Financial Accounting Standards Board (the “FASB”) has issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Derivative Working Capital and Instruments and Hedging Activities”. This statement, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives are accounted within the statements of operations and comprehensive income (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. The Company’s adoption of SFAS No. 133 on January 1, 2001 did not have a material effect on its consolidated financial statements.

33

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

New accounting standards not yet adopted—In June 2001, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets”. This statement provides that goodwill and other intangible assets with indefinite lives not be amortized, but will be tested for impairment on an annual basis. The Company will adopt SFAS No. 142 on January 1, 2002, as required. Management is assessing, but has not yet determined, the impact that SFAS No. 142 will have on its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addressed the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will be required to adopt this standard on January 1, 2003. Management has determined that the adoption of SFAS No. 143 will not have a material impact on the Company’s financial position or results of operations.

The FASB also recently issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and portions of APB Opinion No. 30, “Reporting the Results of Operations”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. Management has determined that the adoption of SFAS No. 144 will not have a material impact on the Company’s financial position or results of operations.

Use of estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates. Actual results could differ from those estimates.

Reclassifications—Certain reclassifications have been made to prior-period amounts to conform with the 2001 presentation. These reclassifications had no effect on the results of operations or financial position for any year presented.

3.    DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT

In 2001, the Company scrapped machinery in one of its plants in the U.K., resulting in a loss of $196.

In 2000, the Company sold machinery in one of its plants in the U.S. for a total consideration of $1,200 resulting in a gain of $153.

In 1999, the Company sold its property in Singapore and machinery and equipment in one of its plants in Switzerland for a total consideration of $3,318, resulting in a gain of $871.

34

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.    RESTRUCTURING COSTS

As a result of the Drypers acquisition, the Company consolidated its operations in the U.S. and recorded restructuring cost of $6,356 during 2001. The components of these costs were as follows :

Write down of assets held for sale	$2,514
Write off of discontinued inventory	1,547
Redundancy payment costs	1,137
Office closure and other costs	1,158
Total	$6,356

Redundancy payment, office closure and other costs were recorded and related principally to the closure of the manufacturing facility located in Duluth, Georgia; a liability totaling $2,295 was recorded by the Company during 2001 relating to these costs. The carrying values of the manufacturing plant in Duluth along with certain equipment located therein, which are held for sale, were adjusted to their estimated fair value. In addition, in conjunction with these activities, management discontinued certain product offerings resulting in the write off of inventories on hand related to these discontinued lines.

The redundancy payments related principally to the termination of approximately 326 employees at the Duluth facility; these employees were terminated in the first quarter of 2002. Office closure and other costs are expected to be incurred in the first quarter of 2002. Approximately $1,137 and $1,158 of redundancy costs, and office closure and other costs recorded in 2001 and not yet incurred were recorded as accrued restructuring costs in the accompanying Consolidated Balance Sheet at December 31, 2001. Through December 31, 2001, no assets held for sale have been sold; accordingly, these assets are recorded in the accompanying Consolidated Balance sheet as assets held-for-sale.

5.    SETTLEMENT OF LEGAL CASES

In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by the Plaintiffs John M. Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the United States District Court for the Middle District of Georgia. The complaint alleged that the Company, its U.S. subsidiary and certain European suppliers of disposable diaper manufacturing equipment (the “Defendants”) have infringed U.S. Patent No. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers; that the Company and its U.S. subsidiary breached a confidentiality agreement with the Plaintiffs by using certain information relating to the waistband applicator disclosed to them in confidence by the Plaintiffs; and theft by the Defendants of the Plaintiffs’ trade secrets concerning the waistband applicator. On March 20, 2002 the United States District Court for the Middle District of Georgia entered a $4,000 judgment in favor of the Plaintiffs. On March 29, 2002 an amended final order and judgment was entered by the United States District Court for the Middle District of Georgia awarding the Plaintiffs $10,400 in actual and increased damages for patent infringement and prejudgment interest on the patent claim. Subsequent to the entering of this final order and judgment, the Company began to negotiate a settlement with the Plaintiffs. On April 9, 2002 the Company entered into a Settlement Agreement with the Plaintiffs. The terms of this Settlement Agreement required the Company to make a lump sum payment of $4,200 to the Plaintiffs no later than April 18, 2002 to settle all asserted claims in the original lawsuit. The $4,200 lump sum payment was made to the Plaintiffs on April 17, 2002. On April 18, 2002, the Company along with the Plaintiffs filed a “Stipulated Final Order of Dismissal” dismissing with prejudice both the judgment dated March 20, 2002 and the amended final order and judgment dated March 29, 2002. Effective with the filing of the “Stipulated Final Order of Dismissal”, the R&L lawsuit has been settled and the judgments of March 20th and March 29th have been vacated. The Company has recorded the $4,200 settlement as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations for the year ended December 31, 2001.

35

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A claim was made by Ms. Rhonda Tracy, the owner of U.S. Patent No. 5,797,824 for disposable diapers with a padded waistband and leg holes, asserting that the Company has been manufacturing and/or selling diapers which infringe her patent. No lawsuit has been filed against the Company to date. The Company, however, had filed a lawsuit against Ms. Tracy in the U.S. District Court for the Northern District of Georgia for a declaration that her patent is invalid and/or not infringed. The Company settled this claim with Rhonda Tracy on March 15, 2002 for $375. The Company has recorded the $375 as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations for the year ended December 31, 2001.

6.    LOSS ON DIVESTITURE

Due to the decision made in 2001 to liquidate a business in Europe, the Company recorded a loss of $672 relating to the write off of assets, recording of closure and liquidation costs. The operations of this business were not significant.

7.    GAIN ON DISPOSAL OF SUBSIDIARIES

In October 2000, the Company sold its investment in the adult incontinence manufacturing operation in Switzerland and a distribution office in Germany for a cash consideration of $4,963, resulting in a gain of $214.

8.    PROVISION FOR INCOME TAXES

Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The Company is not taxed in the British Virgin Islands where it is incorporated.

The components of income before income taxes are as follows:

	2001			2000		1999
U.S.	$	(21,078	)	$	4,446	$	2,235
Foreign		(4,917	)		215		3,308
	$	(25,995	)	$	4,661	$	5,543

36

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The provision for income taxes consists of the following:

	2001			2000			1999
Current
U.S. Federal	$	29		$	554		$	440
U.S. State		—			—			—
Foreign		1,985			1,452			2,404
Benefit of loss carryforwards		—			(95	)		—
Benefit of loss carryback		(736	)		—			(1,059	)
Deferred taxes		(134	)		(354	)		(798	)
	$	1,144		$	1,557		$	987

A reconciliation between the provision for income taxes computed by applying the United States Federal statutory tax rate to income before taxes and the actual provision for income taxes is as follows:

	2001		2000		1999
Provision for income taxes at statutory rate on (loss) income for the year	(35.0	)%	35.0	%	35.0	%
Effect of different tax rates applicable to foreign earnings	(25.8	)	(20.5	)	14.8
Foreign losses which are not deductible	13.6		18.0		—
Foreign profits which are not taxable	32.8		(35.0	)	—
Change in valuation allowance	20.7		29.6		(32.5	)
Withholding tax on interest and royalty income	(1.9	)	5.7		3.9
Tax exemption under tax holiday	—		(0.2	)	(2.3	)
Other	—		0.8		(1.1	)
Effective rate	4.4	%	33.4	%	17.8	%

The Company’s subsidiary incorporated in the PRC is entitled to a two-year exemption from state and local income taxes commencing from the first profitable year of operations, which was 1998, followed by a 50% reduction in tax rates for the next three years. The year ended December 31, 2000 was the first year for the subsidiary to be under a 50% reduction in the prevailing tax rate. Had this tax holiday not been available, income tax expense would have been higher by $11 in 1999. Earnings per share would have been the same in 2001 and 2000 and was lower by $0.02 in 1999.

37

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Certain subsidiaries have operating loss carryforwards for income tax purposes which may be applied to reduce future taxable income. The loss carrybackwards and carryforwards are available on a country by country basis and are not available for use except in the country in which the loss occurred. At December 31, 2001 the tax loss carrybackwards and carryforwards by country and their future expiration dates are as follows:

	Total		2000 and prior years		2001		2002		2003		2004		2005		2010-   2021		Indefinite
United Kingdom	$	92,654	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	92,654
U.S.A—Federal		13,916		4,483		—		—		—		—		—		9,433		—
U.S.A—State		18,882		—		—		—		—		—		—		18,882		—
	$	125,452	$	4,483	$	—	$	—	$	—	$	—	$	—	$	28,315	$	92,654

Included in United Kingdom operating loss carryforwards for income tax purposes is approximately $74,242 relating to tax losses at the date of acquisition of a company acquired in 1993. Utilization of these losses will result in a reduction in future tax expense and is dependent on both the earning of sufficient otherwise taxable income in the relevant countries and the satisfaction of technical requirements of applicable law. In the case of the United Kingdom, this includes the requirement that there not be a “major change” in business activities.

In March 2002, the United States amended its regulations allowing the losses of 2001 to be carried back five years instead of its normal two year carryback period. As a result, the Company will carry back $4,483 of its losses resulting in an additional benefit of $1,524. This benefit will be recorded during the three months period ended March 31, 2002, the period in which the change was enacted.

Deferred income tax balances at December 31 are related to :

	2001						2000
	Assets			Liabilities			Assets			Liabilities
Inventories	$	3		$	—		$	1		$	—
Accounts receivable and prepaid expenses		153			(9	)		19			(44	)
Property, plant and equipment		—			(263	)		—			(493	)
Other		771			(212	)		939			(125	)
Tax loss carryforwards		37,761			—			32,387			—
Valuation allowances		(37,761	)		—			(32,387	)		—
Total	$	927		$	(484	)	$	959		$	(662	)

38

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9.    INVENTORIES

Inventories by major categories are summarized as follows:

	2001		2000
Raw materials	$	14,000	$	13,636
Finished goods		19,840		12,920
	$	33,840	$	26,556

10.    PROPERTY, PLANT AND EQUIPMENT

Included in property, plant and equipment are assets acquired under capital leases with the following net book values:

	2001			2000
At cost:
Machinery and equipment	$	12,659		$	5,982
Motor vehicles		145			122
		12,804			6,104
Less: Accumulated amortization		(3,531	)		(2,426	)
Net book value	$	9,273		$	3,678

11.    LOAN RECEIVABLE

The loan which is made to a minority shareholder of a subsidiary, is non-interest bearing and will not be received within twelve months from the balance sheet date and, accordingly, the amount is classified as a non-current asset in the accompanying balance sheets.

12.    OTHER ASSETS

Other assets consist of the following:

	2001		2000
Assets held-for-sale	$	7,776	$	203
Prepayment of long-term loan fee		777		—
Deposit for a license use right (See Note 17)		500		—
Deposit for a land in PRC (See Note 17)		121		—
Deposit for new machinery		787		—
	$	9,961	$	203

39

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13.    INTANGIBLE ASSETS

Intangible assets consists of the following:

	2001			2000
Drypers trademark	$	2,068		$	—
Patents		1,990			—
Private label customer relationship		1,150			—
Goodwill		558			542
		5,766			542
Less: Accumulated amortizations		(1,027	)		(283	)
Net book value	$	4,739		$	259

Amortization expense charged to income from operations for the years ended December 31, 2001 and 2000 was $744 and $206 respectively.

14.    SHORT-TERM BORROWINGS

These include borrowings in the form of trade acceptances, loans and overdrafts with various banks:

	2001			2000
Credit facilities granted	$	37,008		$	14,850
Utilized	$	28,675		$	13,235
Weighted average interest rate on borrowings at end of year		4.43	%		8.91	%

The Company maintains short-term bank credit lines in each of the countries in which it operates. Interest rates are generally based on the banks’ prime lending rates and cost of funds and the credit lines are normally subject to annual review. The amount outstanding above includes $11,900 relating to the revolving credit facility provided by the Senior Lender discussed in Note 15. The credit facilities utilized and granted, excluding the revolving credit facility provided by the Senior Lender, was $16,775 and $22,008 respectively, at December 31, 2001. At December 31, 2001, amounts available for additional borrowings, excluding those available under the revolving credit facility provided by the Senior Lender discussed in Note 15, totaled $5,233. At December 31, 2001, borrowings of $15,760 are collateralized by the pledge of accounts receivable and inventory of a subsidiary with a book value of $35,396. In addition, borrowings of $7,323 are collateralized by the pledge of land and buildings with a net book value of $5,096.

40

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. LONG-TERM DEBT

Long-term debt consists of:

	2001		2000
Term loans bearing interest at London Inter-Bank Offered Rate (“LIBOR”) plus 4.25% per annum (6.68% per annum at December 31, 2001) principal payable in monthly installments of $183.3 plus accrued interest	$	8,712	$	3,628
Loan from finance companies at rates ranging from 5.50% to 7.00% per annum at December 31, 2001, secured by the building and equipment of the Company’s Wisconsin facilities		1,917		2,455
Mortgage loan bearing interest at LIBOR plus 1.25% per annum (3.4375% per annum at December 31, 2001), interest payable quarterly with entire principal due in November 2006		2,087		—
Capital leases bearing interest rates ranging from 4.50% to 12.00% per annum at December 31, 2001		6,540		2,915
Total		19,256		8,998
Current portion of long-term debt		6,038		3,421
Long-term debt, less current portion	$	13,218	$	5,577

Maturities of long-term debt as at December 31, 2001 are as follows :

	Loans		Capital Leases		Total
Year ending December 31,
2002	$	2,707	$	3,331	$	6,038
2003		2,700		1,199		3,899
2004		2,700		850		3,550
2005		2,529		864		3,393
2006		2,080		296		2,376
Total	$	12,716	$	6,540	$	19,256

The capital lease commitments amounts above exclude interest implicit in the leases. The total amount of implicit interest payable under the capital leases was $485 from the years ending December 31, 2002 to 2006. The interest payments will be $249, $119, $77, $37 and $3 in 2002, 2003, 2004, 2005 and 2006, respectively.

41

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In March 2001, one of the Company’s U.S. subsidiaries (the “Subsidiary”) entered into an amended financing agreement with the existing financial institution (the “Senior Lender”) under which the Subsidiary received a Term Loan of $11,000 (the “Term Loan”), a capital expenditure line of up to $5,000, and a revolving credit facility (based on the lesser of a percentage of eligible accounts receivable and inventory or $15,000). Such financing was entered into in connection with the Subsidiary’s purchase of certain assets of the North American operations of Drypers Corporation as discussed in Note 24. The full amount of the $11,000 Term Loan was borrowed, with interest payable at the LIBOR plus 4.25% or prime plus 2.75% per year at the election of the borrower, and the outstanding balance of an existing term note was repaid. The financing agreement was amended in December 2001, at which date the remaining principal balance on the Term Loan was $8,712, which was then divided into three separate term loans in the amount of $2,781, $2,934 and $2,997. These loans are repayable in monthly installments of principal in the amount of $183 plus interest and is collateralized by the Subsidiary’s assets. In addition, the Subsidiary had outstanding borrowings of approximately $11,900 of the $15,000 revolving credit facility as of December 31, 2001. These amounts were recorded as a component of short-term borrowings in the accompanying Consolidated Balance Sheets (see Note 14). Among other things, the agreement contains certain restrictive covenants, including the maintenance of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and tangible net worth, and places limitations on acquisitions, dispositions, capital expenditures, and additional indebtedness. At December 31, 2001, the Company was not in compliance with the EBITDA covenant due to the legal settlement as discussed in Note 5 to the Company’s Consolidated Financial Statements. The existing covenant violations were waived by the Senior Lender on April 17, 2002.

In connection with the waiver of these covenant violations, the Senior Lender and the Company amended the revolving credit facility to allow for additional advances of up to $1,450 for the legal settlement, increased the capital expenditure line to $6,975 and revised certain covenants including capital expenditures, payments and prepayments, and additional indebtedness. The Company had not borrowed any facility out of the capital expenditure line. As a result, the Company had approximately $2,300 and $6,975 available for additional borrowings under the Term Loan and capital expenditure line, respectively, at December 31, 2001.

In addition in March 2001, the Company borrowed $15,000 under a term loan (the “$15 million Term Loan”) from an overseas financial institution. One of the Company’s non-executive directors holds a seat on the Board of Directors of this company. The loan bears annual interest at a rate of 14.5% increasing to 17.5% if any amounts payable under the loan are not repaid when due. Interest is payable monthly while principal is due in March 2002. The Company had the option to repay all or a portion of the loan after the six-month anniversary of the initial borrowing. The loan was secured by the Company’s ownership interest in its Australian subsidiaries. In addition, the loan agreement contains certain restrictive covenants, including minimum tangible net worth and EBITDA of the Australian subsidiaries. The borrowings were guaranteed by the Company’s Chairman and Chief Executive Officer. The Company repaid the $15 million Term Loan in September 2001.

42

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In conjunction with the $15 million Term Loan, the Company committed to issue share purchase warrants to the lender. The warrants allowed the lender to purchase Ordinary Shares of the Company at a price of $0.01 per share. The number of warrants issued equaled 0.75% of the Company’s diluted Ordinary Shares outstanding for each month the principal balance of the loan was outstanding. Due to the repayment of the $15 million Term Loan after the six-month anniversary of the initial borrowing, the Company issued 4.5% of the Company’s diluted Ordinary Shares, equivalent to 314,510 shares. The fair value of the warrants of $1,372 was treated as interest expense in 2001. The fair value of the warrants was estimated using the Black-Scholes Model. The assumptions used in the model included : fair value of ordinary shares of $4.81 per share, volatility rate of 80%, a discount rate of 3.41% and an estimated life of one year.

16.    RECEIVABLE FROM SHAREHOLDER

In 2001, 2000 and 1999 the Company advanced $3,046, $10,744 and $1,879, respectively, to Brandon Wang, the founder, substantial shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Brandon Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes (the “Notes”) bearing interest at a rate equal to 1.5% over LIBOR or such other rate that the Board of Directors and the borrower shall agree in writing. In January 2000, the Company’s U.S. subsidiary borrowed amounts under a term loan facility which was used to repay the balance of a loan payable by Brandon Wang to a bank, amounting to $5,250. This amount has been aggregated with the receivable from Brandon Wang under the Notes, which amounted to $2,811 at December 31, 1999, and is repayable on demand and carries the same interest terms as those of the Notes. Brandon Wang is required to provide as collateral shares of the Company held by him. The security agreement with Mr. Wang requires that the total amounts due from him should not exceed 80% of the fair market value of the pledged shares. Subsequent to December 31, 2001, the loan balance exceeded 80% of the fair value of the shares pledged as collateral as a result of a decline in the quoted market price of such shares. The Board of Directors of the Company has approved a plan whereby Mr. Wang has committed to make payments such that the outstanding balance decreases by $1,000 each year beginning in 2002. The Board of Directors of the Company also has decided not to take any further action on this matter at this time, including any available to it as a result of the decrease in the fair value of the shares pledged as collateral during 2002. At December 31, 2001 and 2000, the Company has classified the balances owed by Brandon Wang as a reduction from shareholders’ equity. During 2001, 2000 and 1999, Brandon Wang and a trust controlled by him repaid $3,914, $1,943 and $2,540, respectively, to the Company. In addition, in April 2002, Mr. Wang repaid $750. Interest of $445, $470 and $243 was charged on these advances in 2001, 2000 and 1999, respectively.

17.    COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries lease land, facilities and equipment under operating leases, many of which contain renewal options and escalation clauses. Rental expense under operating leases was $3,582 in 2001, $1,650 in 2000 and $1,787 in 1999.

43

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17.    COMMITMENTS AND CONTINGENCIES—continued

At December 31, 2001, the Company and its subsidiaries were obligated under operating leases requiring minimum rentals as follows :

Year ending December 31,
2002	$    3,163
2003	2,090
2004	634
2005	240
2006	196
2007 and thereafter	219
Total	$    6,542

In August 2001, the Company signed a license agreement to purchase a license use right for $2,500 for the manufacture and sale of disposable baby, adult incontinence and feminine hygiene products in certain territories. As of December 31, 2001, the Company paid a $500 deposit for the use of license right and recorded this amount as other assets in the Consolidated Balance Sheet at December 31, 2001. In addition, the Company must pay a royalty fee ranging from 3%—5% of certain product sales. Through December 31, 2001, no products related to the license agreement were sold.

In November 2001, the Company signed a letter of intent to purchase a land use right in Waigaoqiao, Shanghai, PRC for its own facility expansion. The Company paid $121 as an initial deposit in December 2001 and recorded this amount as other assets in the Consolidated Balance Sheet at December 31, 2001. The Company has a total capital commitment of $2,731 for the purchase of land in PRC, and the acquisition of machinery and equipment as of the year ended December 31, 2001.

The Company and its subsidiaries are, from time to time, involved in routine legal matters incidental to their business. On May 21, 2001, the Company entered into an agreement with The Procter & Gamble Company (“P&G”) to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company’s products in the Asian Pacific and Australian region after December 31, 2000. The agreement encompasses fixed payments totaling $300 relating to the period prior to January 1, 2001 and payment of royalties based on a percentage of sales of certain products in the Asian Pacific region beginning January 1, 2001. The amount of $300 relating to periods prior to January 1, 2001 was recorded in the statement of operations for the year ended December 31, 2000 as a component of selling, general and administrative expenses. As discussed in Note 5 to Consolidated Financial Statements, the Company settled the R&L lawsuit and the Rhonda Tracy claim for $4,200 and $375 in April and March 2002, respectively.

44

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18.    NON CASH TRANSACTIONS

Additions to property, plant and equipment during the year ended December 31, 2001, 2000 and 1999 amounting to $7,263, $303 and $187, respectively, were financed by new capital leases.

19.    EMPLOYEE BENEFIT PLANS

The Company’s United States subsidiary has established a 401(k) plan under which the Company matches employee contributions up to 5% of employees’ base compensation. The Company’s other international subsidiaries have defined contribution plans, covering substantially all employees, which are determined by the boards of directors of the subsidiaries. These plans provide for annual contributions by the Company from 2% to 22.5% of eligible compensation of employees based on length of service.

Total expense related to the above plans was $1,662 in 2001, $1,075 in 2000 and $1,081 in 1999.

20.    SUPPLEMENTARY INFORMATION

Valuation and qualifying accounts:

	Balance at beginning of year		Disposal of a subsidiary			Charged to cost and expenses		Deductions			Balance at end of year
Year ended December 31, 2001
Allowances for doubtful accounts	$	897	$	—		$	2,802	$	(778	)	$	2,921
Provision for inventory obsolescence		490		—			1,414		(194	)		1,710
	$	1,387	$	—		$	4,216	$	(972	)	$	4,631
Year ended December 31, 2000
Allowances for doubtful accounts	$	724	$	(41	)	$	256	$	(42	)	$	897
Provision for inventory obsolescence		376		(76	)		457		(267	)		490
	$	1,100	$	(117	)	$	713	$	(309	)	$	1,387
Year ended December 31, 1999
Allowances for doubtful accounts	$	659	$	—		$	931	$	(866	)	$	724
Provision for inventory obsolescence		840		—			569		(1,033	)		376
	$	1,499	$	—		$	1,500	$	(1,899	)	$	1,100

Deductions relate to write-offs of accounts receivable as bad debts and disposals of inventories.

45

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21.    FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying amounts of cash and cash equivalents, accounts and other receivables, loan receivable, receivable from shareholder, accounts payable, short-term borrowings, and long-term debt are reasonable estimates of their fair value. The interest rate on the Company’s long-term debt approximates that which would have been available at December 31, 2001 for debt of the same remaining maturities.

22.    SEGMENT INFORMATION

The Company is engaged in one industry segment, the manufacturing and marketing of disposable hygienic products. However, the Company has four principal geographic segments for operating management purposes. The principal measures of operating performance are operating income (loss) and income (loss) before income taxes.

Within these industry segments, the Company derived its revenues from the following product lines for the years ended December 31, 2001, 2000 and 1999:

	2001		2000		1999
Products
Disposable baby diapers	$	244,216	$	160,417	$	147,615
Adult incontinence products		35,317		44,230		42,784
Training pants, youth pants and sanitary napkins		20,244		10,014		15,443
Total net sales	$	299,777	$	214,661	$	205,842

Intersegment sales were not significant.

Certain financial information by geographic area and by products are as follows:

	2001		2000		1999
Net sales
North America (principally the U.S.)	$	177,323	$	92,229	$	93,479
Australia		45,322		44,753		42,676
Asia		70,850		60,835		45,715
Europe		6,282		16,844		23,972
	$	299,777	$	214,661	$	205,842

46

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	2001			2000			1999
Operating (loss) income
North America (principally the U.S.)	$	(14,275	)	$	5,301		$	5,001
Australia		2,298			3,919			4,823
Asia		5,119			4,609			3,839
Europe		(1,361	)		(2,371	)		(1,667	)
Corporate		(5,244	)		(4,983	)		(4,562	)
	$	(13,463	)	$	6,475		$	7,434
(Loss) income before income taxes
North America (principally the U.S.)	$	(24,592	)	$	2,722		$	1,695
Australia		57			1,954			2,743
Asia		3,233			2,592			3,352
Europe		(2,043	)		(2,497	)		(2,747	)
Corporate		(2,650	)		(110	)		500
	$	(25,995	)	$	4,661		$	5,543

The gain on disposal of subsidiaries, interest expense and exchange loss were recorded as a component of corporate expenses in the tables above. The loss before income taxes in 2001 included the restructuring costs of $6,356, provision of bad and doubtful debts for Ames Department Stores of $800, and settlement of legal cases of $4,575 of the North American operation and loss on divestiture of the European operation of $672, respectively.

	2001		2000		1999
Interest expenses
North America (principally the U.S.)	$	1,455	$	882	$	1,510
Australia		254		123		126
Asia		340		285		160
Europe		11		145		190
Corporate		2,593		159		222
	$	4,653	$	1,594	$	2,208

The fair value of the warrants interest of $1,372 was recorded as a component of corporate expense in the table above.

47

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	2001			2000			1999
Interest income
North America (principally the U.S.)	$	136		$	204		$	397
Australia		34			53			41
Asia		35			34			41
Europe		3			63			44
Corporate		503			514			269
	$	711		$	868		$	792
Assets, at end of year
North America (principally the U.S.)	$	79,742		$	46,599		$	44,479
Australia		17,165			19,359			19,725
Asia		35,281			39,194			35,903
Europe		1,648			2,876			13,123
Corporate assets		4,812			3,381			7,715
	$	138,648		$	111,409		$	120,945
Expenditures for property, plant and equipment
North America (principally the U.S.)	$	8,024		$	2,645		$	2,443
Australia		989			1,497			728
Asia		775			1,528			2,407
Europe		59			197			517
Corporate assets		—			80			2
		9,847			5,947			6,097
Less: non cash capital expenditure (Note 18)		(7,263	)		(303	)		(187	)
	$	2,584		$	5,644		$	5,910
Depreciation and amortization
North America (principally the U.S.)	$	5,731		$	3,875		$	3,218
Australia		1,298			1,642			1,899
Asia		2,933			2,901			2,418
Europe		320			978			2,061
Corporate assets		86			68			66
	$	10,368		$	9,464		$	9,662

48

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	2001		2000		1999
Property, plant and equipment, end of year
North America (principally the U.S.)	$	21,600	$	19,431	$	21,671
Australia		5,747		6,586		7,840
Asia		7,254		9,776		11,945
Europe		—		166		6,061
Corporate assets		513		522		464
	$	35,114	$	36,481	$	47,981

No single customer accounted for 10% or more of the total revenues.

23.    QUARTERLY DATA (UNAUDITED)

	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
2001
Net sales	$	59,804		$	82,310		$	79,683		$	77,980
Gross profit		18,246			24,687			23,815			25,249
Net income (loss)(1)		(108	)		(5,092	)		(11,767	)		(10,596	)
Loss per share		(0.02	)		(0.76	)		(1.76	)		(1.54	)
2000
Net sales	$	55,868		$	51,270		$	54,191		$	53,332
Gross profit		18,635			16,451			17,723			16,320
Net income (loss)		1,603			700			831			(171	)(2)
Earnings (loss) per share		0.24			0.10			0.12			(0.02	)
1999
Net sales	$	53,591		$	48,732		$	50,282		$	53,237
Gross profit		17,273			15,784			16,904			17,761
Net income		1,556			316			747			1,816
Earnings per share		0.23			0.05			0.11			0.27

(1) Includes restructuring cost of $256, $4,610 and $1,490 from second to fourth quarter, provision of bad and doubtful debts relating to Ames Department Stores of $800 in second quarter, and loss on divestiture and settlement of legal cases of $672 and $4,575, respectively, in the fourth quarter.

(2) Includes $300 charge relating to an agreement with P&G (see Note 17).

49

DSG INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

24.    BUSINESS ACQUISITION

In March 2001, one of the Company’s U.S. subsidiaries acquired the North American assets of Drypers Corporation pursuant to the order of the U.S. Bankruptcy Court based in Houston, Texas for approximately $39,625, including acquisition costs, less working capital adjustments of $3,747. The assets are located in Marion, Ohio; Vancouver, Washington and Houston, Texas and relate to the manufacture and sale of disposable baby diapers and training pants. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, “Business Combinations”, and the purchase price was allocated based on the relative fair values of the assets acquired.

The fair value of assets acquired and consideration paid were as follows:

Fair value of tangible assets acquired	$	30,670
Fair value of Drypers trademarks, patents and customer relationship		5,208
	$	35,878

The operating results of the Drypers assets acquired have been included in the accompanying 2001 Consolidated Statements of Operations from March 14, 2001, the acquisition date. The unaudited pro forma results of the Company for the years ended December 31, 2001 and 2000, assuming the acquisition occurred at the beginning of each period are as follows:

	2001		2000
Net sales	$	324,133	$	410,437
Net loss	$	27,151	$	4,565
Losses per share	$	4.04	$	0.68

The acquisition was financed by existing cash balances of the Company, proceeds from term loans and a revolving credit line (see Notes 14 and 15).

25.    EQUITY PARTICIPATION PLAN

During March 2002, the Company established an equity participation plan (“the Plan”) for certain employees, directors and independent contractors of the Company to award the Company’s Ordinary Shares at the sole discretion of the Company’s Board of Directors or its delegate committee or plan administrator. Subject to adjustment under the Plan, 1,500,000 Ordinary Shares are available for awards under the Plan and no more than 375,000 Ordinary Shares may be granted or awarded to a participant during a calendar year.

50

SHAREHOLDER INFORMATION

Annual Meeting

The next annual meeting of shareholders will be held in Hong Kong on October 23, 2002 at 10:00 a.m. local time. Notice of the meeting and proxy statement will be mailed to shareholders before the meeting.

Market Information

The Company’s shares are traded on the NASDAQ National Market System under the Symbol DSGIF.

Stock Transfer Agent

Mellon Investor Services LLC

P.O. Box 3315

South Hackensack

New Jersey 07606

U.S.A.

Tel.:          (1) 800-356 2017

website:    www.melloninvestor.com

Independent Auditors

Deloitte Touche Tohmatsu

26th Floor, Wing On Centre

111, Connaught Road, Central

Hong Kong

Principal Executive Office

DSG International Limited

17th Floor, Watson Centre

16-22 Kung Yip Street

Kwai Chung

Hong Kong

Tel:    (852) 2484-4820

Form 20-F

The Company’s 2001 report to the Securities and Exchange Commission on Form 20-F provides additional details about the Company’s business as well as other financial information not included in this annual report. A copy of this report is available to shareholders upon written request to the Company’s Principal Executive Office.

51

DSG COMPANIES

Asia	Australia
Disposable Soft Goods Limited	DSG Pty Limited
17/F Watson Centre	(trading as Australian Pacific Paper Products)
16-22 Kung Yip Street	3 Lake Drive
Kwai Chung, N T	Dingley
Hong Kong	Victoria 3172
Telephone:    (852) 2427 6951	Australia
Facsimile:    (852) 2480 4491	Telephone:    (61) 3-9552 1222
	Facsimile:    (61) 3-9558 1056
Disposable Soft Goods (S) Pte Limited
No. 1, Joo Koon Crescent	North America
4th Floor, Yeow Heng Industrial Building
Singapore 629087	Associated Hygienic Products LLC
Telephone:    (65) 6861 9155	4455 River Green Parkway
Facsimile:    (65) 6861 9313	Duluth, GA 30096
	U.S.A.
Disposable Soft Goods (Zhongshan) Limited	Telephone:    (1) 770-497 9800
Jin Chang Road	Facsimile:    (1) 770-623 8887
Jin Sha Industrial Zone
Shalang, Zhongshan, Guangdong	Associated Hygienic Products Inc.
People’s Republic of China	205 E. Highland Drive
Postal Code : 528411	Oconto Falls, WI 54154
Telephone:    (86) 760-855 9866	U.S.A.
Facsimile:    (86) 760-855 8794	Telephone:    (1) 920-846 8444
	Facsimile:    (1) 920-846 3026
DSG International (Thailand) Limited
835 Moo 4 Prakasa	Europe
Muang
Samutprakarn 10280	Disposable Soft Goods (UK) Plc
Thailand	Boythorpe Works
Telephone:    (66) 2-709 4153	Derbyshire
Facsimile:    (66) 2-709 3884	Chesterfield, S40 2PH
	U.K.
PT DSG Surya Mas Indonesia	Telephone:    (44) 1246-221 228
Jl. Pancatama Raya Kav. 18	Facsimile:    (44) 1246-274 773
Desa Leuwilimus, Cikande
Serang, Jawa Barat
Indonesia
Telephone:    (62) 254-400 934
Facsimile:    (62) 254-400 939
Disposable Soft Goods (Malaysia) Sdn Bhd
Lot 542, Jalan Subang 2
Sg Penaga Industrial Park
47500 Subang Jaya, Selangor Darul Ehsan
Malaysia
Telephone:    (60) 3-8023 1833
Facsimile:    (60) 3-8024 9033

52

DSG International Limited

Principal Executive Office

17/F Watson Centre

16-22 Kung Yip Street

Kwai Chung, N T

Hong Kong

Telephone:    (852) 2484 4820

Facsimile:    (852) 2480 4491

53

EX-23

EXHIBIT 23

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statement No. 333-84898 of DSG International Limited on Form S-8 of our report dated June 4, 2002, appearing in this Annual Report on Form 20-F of DSG International Limited for the year ended December 31, 2001.

                                    

Deloitte Touche Tohmatsu

Hong Kong

June 13, 2002