We believe that AOS underwrites UTP’s loans to distributors. Our interviews, credit reports on UTP and AOS China, and other evidence all suggest that the cash the company has in China is being held as security against bad loans to UTP clients. That would mean that a significant portion of AOS’s cash is stuck in China and at risk of being tapped to cover defaults. Yet AOS has disclosed nothing about the cash and never explained why a region accounting for 34% of company revenue needs to hold 84% of company cash.

Contrary to AOS statements to the market, we have found that China sales are declining sharply, and inventory is continuing to build in the channels. Our recent flash survey of AOS distributors indicated that: ‣ China sales to end-users will decline by about 11% in the first half. ‣ Distributor inventories have increased by about two weeks, not decreased, as AOS has repeatedly said. ‣ Distributors say they will destock in the second half, suggesting a decline in China sales for the year of more than 20%, even as the environmental product line sees flat to slightly rising sales.