Details of the Related-Party Transactions and Governance Issues

+ (i) Oasis suspects Personal Property Purchase

Fujitec purchased Domus Moto Azabu Apartment 104 (427 sqm / 4,600 sq ft, link) for an undisclosed amount in February 2013. The apartment is located in the upscale Minami Azabu neighborhood. The current market value of the apartment is approximately JPY730 million, based on estimates from local real estate brokers.

Based on our research of a publicly accessible property registration database, we discovered that the apartment was registered in the personal property filing as the residential address of President Uchiyama’s wife in September 2013, just six months after its acquisition by Fujitec. Later, it also became the registered residential address of Yusuke Uchiyama, President Uchiyama’s son, a 28-year-old representative director of Santo KK, an Uchiyama family entity, in July 2015.

Prior to our discovery that the apartment was registered as the residential address of President Uchiyama’s wife, the company explained in a letter that the purchase of the apartment was:

“to strengthen the top-to-top sales activities with a view to improving our status within the Greater Tokyo Area, and the Real Property was used as our guest house and company house for our officers”.

This explanation does not seem credible to us and does not address why the apartment was registered as the residential address of President Uchiyama’s wife and son. We also do not understand why the Company would need an ultra-luxury apartment for these purposes anyway, and have never seen a situation like this at any other listed company in Japan before.

Oasis suspects based on the evidence that the apartment was acquired for the personal use of the Uchiyama family. This thesis is further supported by the fact that the apartment was later sold by Fujitec to Yusuke Uchiyama’s private entity, Santo KK, in 2021. And Oasis identified that Uchiyama family entity, Santo KK also owns Domus Moto Azabu Apartment 101, where we suspect another Uchiyama family member lives. This reinforces our thesis that the apartment 104 was bought for use by the Uchiyama family. If our suspicions are correct, it raises questions as to why there is no publicly available information on any rent being paid by the Uchiyama family for the residence. This raises further questions about undisclosed additional compensation provided in the form of reduced rent, if any, taxes owed on that compensation, disclosure to the regulatory authority of the compensation, and more.

And, Oasis suspects that the selling price of Domus Moto Azabu 104 from Fujitec to Uchiyama family entity in June 28, 2021 was at far too low price. At the time, we believe the apartment value is approximately JPY730 million yen but the cash flow statement just release on May 13, 2022 shows a total cash inflow for ALL proceeds from sales of property, plant and equipment of only 471 million yen. This is another concern that President Uchiyama conducted the abuse of his power.

We have never before seen a Japanese company register a company-owned luxury apartment as the residential address for family members of the Company’s President. Oasis strongly believes that President Uchiyama has abused his position to benefit himself and his family at a cost to Fujitec and its shareholders.

For details, see presentation here. See Tanshin: FY2022

+ (ii) Fujitec Lent Substantial Capital to President Uchiyama Related Entity

From at least FY2001 to FY2015, a period encompassing at least 14 years, the Uchiyama family’s entity has taken debt guarantees and borrowed from Fujitec. At peak, loan guarantees totaled nearly JPY6 billion and direct loans reached JPY4.1 billion. At times, these personal loans amounted to over 20% of Fujitec’s cash on hand. We have never seen a sequence of loans like this at any other listed public company.

Poor capital allocation

It is shocking that instead of investing in growth through capital investment and M&A, Fujitec lent its capital to President Uchiyama related entity to invest for the family’s benefit. This was very damaging because the interest rate was far below Fujitec’s cost of capital and thus was destructive to corporate value.

Shareholders have been frustrated for years by the Company’s reticence to invest in capital expenditure, M&A and raising shareholder returns. However, the Company clearly had no reticence in lending cash to President Uchiyama’s related entity.

Had Fujitec invested this capital early in aggressively building its presence in India and China, the Company would have been far better off and would not have fallen behind its competitors. Instead, President Uchiyama’s control of Fujitec set the Company back, while he was pursuing questionable related party transactions for his own personal benefit.

We have a reason to doubt that the loans were properly collateralized

Moreover, we are unable to identify any evidence that the Uchiyama family or Uchiyama family companies provided collateral for the large loans that they received from Fujitec. In fact, most of their Fujitec shares and major real estate had been used as collateral for loans from other banks during this period, according to government filings and a public property registration database. It is concerning that the banks needed collateral, while Fujitec seems to have lent to President Uchiyama’s related entity with no security. If this were valid a concern, it would be unfair and unequal treatment of shareholders.

Frequent extension of repayment deadlines

President Uchiyama’s related entity did not pay back debt at the initial deadline and postponed repayment to Fujitec three times.

Initially, they were obligated to repay a number of the loans in FY2006; however, instead of repaying then, the loan term was extended to five years with repayment in FY2009. However, in FY2009, the term was extended again to FY2012, and then again to FY2015, when it was finally repaid, as opposed to repaying their bank loan after just one annual extension.

The effective interest rate charged to President Uchiyama’s related entity for the loans was between 0.4-1.2%. Although the Yuho claims this interest rate was at the fair market rate, we doubt that this is the case, especially considering questions over whether these loans were properly collateralized and the frequent repayment extensions. President Uchiyama and his entity are also likely to have had a low credit profile as most of their assets had been secured by banks for other loans, and the need to extend the repayment date suggests an inability to repay the loans. With this all in mind, Fujitec should have been charging a far higher interest rate, even if the extension of the loan was a reasonable business decision for Fujitec.

We await a response from Fujitec to justify the business rationale behind lending so much capital to President Uchiyama’s related entity over such a long period of time. Had Fujitec used this capital to invest in its own business, we believe the Company would have been significantly larger today.

For details, see presentation here. See Yuho: FY2004, FY2005, FY2009 and FY2015

+ (iii) Unexplained Rental Payments from Fujitec to Uchiyama Family Entities

Annual real estate rent payments paid by Fujitec to Uchiyama family entities also require much further investigation. According to the Yuho, these rental payments have occurred since 2001. Rent paid in FY2014 to a President Uchiyama related entity was JPY54 million. This increased to JPY141 million in FY2015 and then to JPY229 million in FY2016. Moreover, despite the increase in rental payments, Oasis was not able to identify any discernable changes in the buildings being rented from Uchiyama related-entities. We suspect this is simply another example of transactions that were intended to serve President Uchiyama’s personal interests.

For details, see presentation here. See Yuho: FY2014, FY2015 and FY2016

+ (iv) Unexplained Sale of a Company to President Uchiyama’s Related Entity

In FY2015, the Uchiyama family paid JPY179 million to acquire an undisclosed company/equity stake from Fujitec. We have not identified any change in ownership or new subsidiaries when comparing Fujitec’s FY2014 and FY2015 Yuhos. We struggle to find any business rationale for Fujitec to sell an entity to President Uchiyama’s related entity directly, rather than put it up for public sale to achieve the highest price. Fujitec’s Yuho stated the transaction price was fair as determined by a third-party valuation firm; however, shareholders were not given any further details. As such, we question the legitimacy of this transaction and call on Fujitec to explain what assets were transferred to the Uchiyama family and provide the justification for this transaction.

For details, see presentation here. See Yuho: FY2015

+ (v) Oasis suspects Fujitec bought assets from Uchiyama family companies to cover their failed investments

In December 2006, a President Uchiyama related entity acquired a recreational sports facility from a public agency for JPY239.5 million and renamed it Fit Will Hikone (“FWH”). FWH offered table tennis, swimming, fitness, and cultural classes to the public.

According to the minutes of the 166th House of Representatives-Secretariat Administration Monitoring Committee No. 3 on April 24, 2007, FWH was barely managing to stay in the black just prior to its sale to the President Uchiyama related entity. After buying FWH, Uchiyama International began charging Fujitec facility usage fees. Oasis suspects the sole purpose of these payments was to cover potential losses and operating costs for FWH paid by Uchiyama International, but justified as “usage fees”. Fujitec paid JPY18 million in usage fees over approximately two years. In FY2010, Fujitec bought FWH from Uchiyama International for JPY252 million, which seems to have allowed Uchiyama International to profit off of what we believe was a barely profitable or loss-making facility. The facility was later shut down.

We seriously question the rationale for this transaction for Fujitec.

For details, see presentation here.

+ (vi) Oasis suspects Payments of tax advisory fees to an individual tax advisor who has close connection with two Uchiyama family companies

Fujitec retained Mr. Yoshinori Shinohara, a certified public accountant, as its tax advisor (Komon), according to his office website and confirmed by Fujitec in a letter to Oasis.

We find it unusual that Fujitec would need an accounting and tax-related advisory agreement with a single individual or his small advisory firm, as Fujitec already has a large tax and accounting advisory firm for its tax advisory services (Grant Thorton Taiyo ASG).

Then we discovered that the address of Mr. Shinohara’s office is used by the two Uchiyama family companies (Santo KK and Uchiyama International) as their registered addresses in their corporate registries. This mysteriously close connection between Mr. Shinohara’s company and the Uchiyama family companies has led us to suspect that Fujitec has been paying fees to Mr. Shinohara purely due to his connection to the Uchiyama family. In the worst case, Fujitec may have been paying him fees that should have been paid by Uchiyama family companies.

For details, see presentation here.See his website: here