ANNUAL REPORT Year ended March 31, 2009

SHIN NIPPON AIR TECHNOLOGIES CO., LTD. Hamacho Center Bldg. 2-31-1, Nihonbashi Hamacho, Chuo-ku, Tokyo 103-0007, Japan Phone: 81-3-3639-2700 Facsimile...
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SHIN NIPPON AIR TECHNOLOGIES CO., LTD. Hamacho Center Bldg. 2-31-1, Nihonbashi Hamacho, Chuo-ku, Tokyo 103-0007, Japan Phone: 81-3-3639-2700 Facsimile: 81-3-3639-2732 URL:http://www.snk.co.jp

This annual report is Printed in Japan on recycled paper

ANNUAL REPORT 2009 Year ended March 31, 2009

Profile

Financial Highlights Shin Nippon Air Technologies Co., Ltd. Years ended March 31

The predecessor of Shin Nippon Air Technologies co., Ltd. was Toyo Carrier Engineering Co., Ltd., launched in 1930 as a joint venture between the Mitsui Group and Carrier Corporation of the U.S., an early pioneer of air conditioning. The present company became a separate, independent entity in 1969. S.N. Air Technologies has an outstanding record of achievement, including the air conditioning for Japan’s first nuclear reactor at the Japan Atomic Energy Research Institute (1957) and for Japan’s first skyscraper, the Kasumigaseki Building (1968), a district heating and cooling system for Shinjuku’s city center (1971) and the air conditioning for the Johyoh fast breeder reactors in Ibaraki Prefecture(1974). That S.N. Air Technologies has on 22 occasions received the air conditioning industry’s top prize, awarded by the Society of Heating, Air-Conditioning and Sanitary Engineers of Japan, demonstrates that we have consistently remained in the forefront of environmental control engineering. Today, we design and install air conditioning systems for factories, office buildings, hotels, hospitals, nuclear power plants and leisure facilities. We also provide district heating and cooling systems, cogeneration systems, and customdesigned clean rooms to semiconductor and medical equipment manufacturers, the food industry and research facilities. We have also won acclaim for our many overseas projects, which include some on a colossal scale, like Singapore’s Raffles City, the Bank of China in Hong Kong and the Di Wang building in Shenzhen, China. S.N. Air Technologies gained listing on the second section of the Tokyo Stock Exchange in 1990. First-section listing came in 1993, the year in which we opened a three-story research institute that is now engaged in developing technology that will keep us at the vanguard of environmental engineering.

Thousands of U.S. Dollars

Millions of Yen

2008

2009

2007

2009

For the year: Orders received Revenues from construction Operating income Net income (Loss)

¥ 89,646 92,864 2,570 (368)

¥ 100,867 105,199 1,598 815

¥ 101,266 106,227 1,104 520

$ 914,755 947,591 26,224 (3,755)

At year-end: Total assets Current assets Net property, plant and equipment Current liabilities Net shareholders’ equity

¥ 64,938 45,069 3,560 35,658 26,028

¥

¥

$ 662,632 459,887 36,326 363,857 265,591

79,785 56,734 3,625 46,348 27,930

87,104 61,080 4,043 49,604 30,464

Note: U.S. dollar amounts represent translations of Japanese yen amounts at the exchange rate on March 31, 2009 of ¥98 to US$1.

Contents Financial Highlights 1 Message from the President 2 Construction Project Examples, Topics 4 Consolidated Balance Sheets 6 Consolidated Statements of Operations 8 Consolidated Statements of Changes in Equity 9 Consolidated Statements of Cash Flows 10 Notes to Consolidated Financial Statements 12 Independent Auditors’ Report 23 Board of Directors, Corporate Data 24 Directory 25

Orders Received (Billions of yen)

Revenues from Construction (Billions of yen)

150

150

125

125

100

100

75

75

50

50

25

25

Net Income (Billions of yen) 1.0

0.5

0

(0.5)

0

’09

’08

’07

0

’09

’08

1

’07

(1.0)

’09

’08

’07

Message from the President

Review of Operations 1) Business Operations and Results During the fiscal year ended March 31, 2009, the Japanese economy fell into recession as a severe credit crunch, falling stock prices, and the appreciation of the yen dealt heavy blows to the real economy while the global economy deteriorated as a consequence of the financial crisis originating in the U.S. In the construction industry, the environment for order-taking remained harsh, characterized by fierce price competition. The downward trend of investment in public works evident in recent years continued, while private-sector capital investment was lackluster owing to the recession. In these business conditions, the Group continued to pursue a profit-oriented strategy, the principal policy themes being to reinforce sales and marketing capabilities and to focus resources on growth sectors. We continued to avoid accepting any unprofitable contracts. The value of new construction contracts fell 11.1% year on year to ¥89,646 million. Revenues from completed construction contracts declined 11.7% to ¥92,864 million. Fully displaying our strength in the field of air-conditioning systems for nuclear power facilities in which we excel, we recorded results greatly exceeding the previous fiscal year for both the value of new construction contracts and revenues from completed construction contracts. In the industrial airconditioning field, which we position as a priority field, both the value of new construction contracts and revenues from completed construction contracts were lower than the results for the previous fiscal year, affected by curbing of capital investment and postponement of projects. On the other hand, in the field of facility renewal, which is another priority field, we meticulously addressed increasing needs associated with our customers’ efforts to mitigate global warming by cutting CO2 emissions and to achieve energy saving. As a result, renewal projects accounted for 65% of the value of new construction contracts, clearing the target. Revenues from completed construction contracts increased 4.8% year on year. 2

Message from the President

Although fierce price competition made it difficult to secure profits, the Company’s efforts to thoroughly reduce product costs and fixed costs, together with a great reduction in allowance for losses on construction contracts due to the selective policy on orders, had a positive impact on profits. The gross margin on completed construction contracts was ¥9,171 million, an increase of 3.1% over the previous year, operating income rose 60.8% to ¥2,570 million, and ordinary income increased 55.2% to ¥2,550 million. Extraordinary losses included a loss on devaluation of investment securities of ¥2,151 million reflecting a sharp decline in share prices and a loss on revision of retirement benefit plan of ¥218 million. As a result, net loss amounted to ¥368 million compared with net income of ¥815 million recorded for the previous fiscal year. Among other highlights, in addition to the existing consolidated subsidiaries, namely, Shin Nikku Service Co., Ltd. and Shin Nippon Air Technologies (Shanghai) Co., Ltd., Shin Nippon Lanka (Pte.) Ltd. in Sri Lanka became a consolidated subsidiary during the fiscal year under review and is expected to contribute to the Group’s performance from now on. 2) Issues to be Addressed The outlook for the Japanese economy remains unclear in view of the sluggish U.S. economy, which is still overshadowed by the financial crisis triggered by the Lehman Brothers bankruptcy, and weak stock markets in Japan. In the construction industry, while the downward trend of public-works spending continues, competition to secure orders for private-sector capital investment projects is expected to intensify. Overall, we anticipate that conditions for securing construction orders will remain challenging. In these circumstances, in the second year of its three-year plan, Shin Nikku Target Plan 2010, the Group is stepping up its efforts to achieve the overriding goal: to transform the Group into an enterprise that is focused on environmental facility engineering. Responding to the demands of customers and society, we aim to create new sources of earnings while reinforcing operations in our specialty areas within existing business segments. In doing so, we plan to diversify the Group’s earnings base. We request the continued support of our shareholders as we move forward.

3

Construction Project Examples

Photo provided by Mitsui Fudosan Co., Ltd.

Topics

Aoyama OM-SQUARE (Construction period: June 2006 – August 2008) Aoyama OM-SQUARE (Minato Ward, Tokyo) is a multipurpose building situated on the redeveloped vacant lot of the former Hazama Building and its annex. The lower floors of the building house shops and showrooms, and the upper floors are offices. The building has 25 floors above ground and 3 underground floors, and the total floor area is 47,135 square meters. It connects directly with Gaiemmae Station on the Ginza Line subway and is located on Aoyama Dori near the Itochu Corporation headquarters and Chichibunomiya Rugby Stadium. We installed the air-conditioning and sanitation facilities at Aoyama OM-SQUARE. The building’s heat source is the Aoyama 2-chome district heating and cooling system. The underground floors use a system that combines an air-conditioning unit and a fan-control unit, and the retail area from the first underground floor to the first aboveground floor uses an air-cooled heat pump package air-conditioning system. The air conditioning for the tenant area from the 3rd to the 24th floor comprises individual variable air volume boxes for the interior zone and water-cooled heat pump package units for the perimeter zones, elevator halls, and lavatories. In addition to the use of district heating and cooling, the air-conditioning system incorporates active energy conservation measures that include the installation of a thermal storage system, a large temperature differential water supply system, a large temperature differential air distribution system, and an outside air cooling system. The building also has grey water facilities and rainwater filtering facilities for the reuse of water.

Olympus Corporation Technology Research Institute (Ishikawa) (Construction period: February 2008 – March 2009) This project began in 2008 as the Ishikawa Redevelopment Project at the Olympus Corporation Technology Research Institute (Ishikawa) in Hachioji City, Tokyo. The first stage of the redevelopment project involved culvert laying, water purification facilities relocation, and the construction of New Building 1, New Building 2, an electromagnetic anechoic chamber building, a furnace building, and the No. 2 Security Building. We installed the air-conditioning, sanitation, and fire control facilities for all the buildings except New Building 2. The institute, which ranks among the largest R&D facilities in Japan and has 2,300 workers, conducts research and development for nearly all Olympus products, including imaging, medical, and analysis products. New Building 1 functions as the institute’s nerve center. It has 10 floors above ground and a two-story tower, and the total floor area is 32,059 square meters. The upper floors house offices and laboratories, and the lower floors house a server room, a cafeteria and other employee welfare facilities, meeting and reception rooms, showrooms, a presentation hall, and other facilities. The low-rise buildings have rooftop gardens. The heat source facilities consist of a turbo freezer, boiler, modular chiller, and heat storage tank, which supply air-conditioning with air-conditioning equipment and fan-coil units. Nearly all the upper floors use the under-floor air supply method, which provides a healthy, comfortable environment with no uncomfortable drafts or spreading of contaminated air. Since these floors need no ceiling ducts, they accommodate flexible portioning with no layout restrictions. The system is also eco-friendly thanks to thermal storage operation using late-night power.

Development of a Pump Control Technology Using Heat Source System Modeling (Patent Pending) We has developed a pump control technology (patent pending) that makes possible simultaneous control of flow rate and pressure in single-pump pipe facilities. This technology models portions of heat source systems, such as the heat source equipment, pumps, and pipes as pump units, measures the relationship between flow rate and pressure of the pump units of facilities that have already been installed, and incorporates the results into a program. In this way, it computes pump operation frequency and sets pressure using the differential pressure between headers decided based on the air-conditioning flow rate and differential pipe resistance and optimally controls pumps within the allowable operating flow rate range of the heat source equipment. This has made possible the stable operation of heat source equipment while controlling both flow rate and pressure, something previously impossible with single-pump systems. Depending on building characteristics, this enables an annual reduction of from 40% to 60% in pump power consumption as well as a reduction in machine room space since a secondary pump is unnecessary. This heat source system modeling pump control technology can be applied not only to single-pump systems, but also to secondary pumps of multiple-pump systems. Therefore, it is expected to be used for various facilities and buildings, in new construction and renewal projects alike.

■ Pump Control Technology Using Heat Source System Modeling Measured flow rate

Air-conditioning equipment

Flow rate computing unit

Air-conditioning equipment

Pressure computing unit

Flow meter F Differential pressure gauge

Variable control of the optimum pressure target value Measured pressure

Pressure regulator

dP

Valve opening Bypass valve

Header (supply)

Heat source equipment

Topics

Header (return)

Variable control of the optimum operation frequency (flow rate)

Pump

Inverter

Our Rain Capture External Air Intake Louver Receives the Award of Excellence of the 7th Environmental and Equipment Design Awards At the 7th Environmental and Equipment Design Awards sponsored by the Association of Building Engineering and Equipment, a rain capture external air intake louver developed by us and Shinryo Aquair Corporation won the Award of Excellence in the Equipment and Systems Design category. In the second round of public judging for this award, the applicants gave five-minute presentations and the judging committee judged the designs on the basis of four evaluation criteria: aesthetics, functionality, economic efficiency, and social performance. The ultra-high-performance vertical louvers offer high rainwater collection efficiency, low pressure loss, and low noise. Since the unique blade shape and water drain-off understructure virtually eliminate rainwater infiltration during operation from low speeds to high speeds, the system is appropriate for use for outer wall openings in electrical equipment rooms and similar installation areas. Also, since the system delivers low pressure loss and low noise even in high-speed use, it is effective in reducing air-conditioning power consumption. The system has already been introduced at approximately 70 nuclear power plants in Japan.

Scope of the modeling (pump unit)

The louver understructure

Blade cross-section

4

Frequency computing unit

5

Consolidated Balance Sheets

Consolidated Balance Sheets

Shin Nippon Air Technologies Co., Ltd. and Subsidiaries March 31, 2009 and 2008

Millions of Yen

ASSETS

2008

2009

CURRENT ASSETS: Cash and cash equivalents Short-term investments (Notes 3 and 13) Receivables (Note 12): Notes receivable – trade Accounts receivable – trade Allowance for doubtful accounts Inventories (Note 4) Deferred tax assets (Note 8) Other current assets

¥ 3,976 41

Total current assets

¥ 3,113 252

Thousands of U.S. Dollars (Note 1) 2009

$ 40,571 418

1,416 33,935 (280) 2,989 1,546 1,447

2,749 43,117 (347) 5,715 1,314 821

14,449 346,276 (2,857) 30,500 15,776 14,765

45,070

56,734

459,898

Millions of Yen

LIABILITIES AND EQUITY

2009

CURRENT LIABILITIES: Short-term borrowings (Note 6) Current maturities of long-term debt (Note 6) Payables: Notes payable – trade Accounts payable – trade (Note 13) Income taxes payable Advances received on construction work in progress (Note 7) Accrued expenses Allowance for losses on construction contracts Other current liabilities Total current liabilities

PROPERTY AND EQUIPMENT: Land Buildings and structures Machinery and equipment Tools, furniture and fixtures Lease assets Construction in progress Total Accumulated depreciation

679 6,140 132 830

649 6,199 137 837

36 34

Net property and equipment

INVESTMENTS AND OTHER ASSETS: Investment securities (Note 3) Lease and other deposits Investments in insurance contracts Deferred tax assets (Note 8) Other assets Allowance for doubtful accounts Total investments and other assets TOTAL

6,929 62,653 1,347 8,469 367 347

7,851 (4,291)

7,822 (4,197)

80,112 (43,785)

3,560

3,625

36,327

11,853 1,314 1,285 1,082 1,866 (1,092)

15,559 1,350 901 799 2,192 (1,375)

120,949 13,408 13,112 11,041 19,041 (11,143)

16,308

19,426

166,408

¥64,938

¥79,785

$662,633

LONG-TERM LIABILITIES: Long-term debt (Note 6) Liability for retirement benefits (Note 9): Employees Directors and corporate auditors Other liabilities Total long-term liabilities EQUITY (Notes 10 and 17): Common stock – authorized, 84,252,100 shares; issued, 25,282,225 shares in 2009 and 2008 Additional paid-in capital Retained earnings Net unrealized gain on available-for-sale securities Foreign currency translation adjustments Treasury stock – at cost, 26,836 shares in 2009 and 23,338 shares in 2008

TOTAL

See notes to consolidated financial statements.

6

¥ 2,970 1,837

¥ 4,230 315

$ 30,306 18,745

1,661 25,189 175

1,939 35,105 995

16,949 257,031 1,786

907 1,626 187 1,106

1,125 1,565 319 756

9,255 16,592 1,908 11,285

35,658

46,349

363,857

1,014

2,700

10,346

1,569 33 635

2,696 43 66

16,010 337 6,480

3,251

5,505

33,173

5,159 6,888 13,727 337 (64)

5,159 6,888 14,474 1,354 71

52,643 70,286 140,071 3,439 (653)

(18)

Total equity

7

2008

Thousands of U.S. Dollars (Note 1) 2009

(15)

(183)

26,029

27,931

265,603

¥64,938

¥79,785

$662,633

Consolidated Statements of Operations

Consolidated Statements of Changes in Equity

Shin Nippon Air Technologies Co., Ltd. and Subsidiaries Years Ended March 31, 2009 and 2008

Shin Nippon Air Technologies Co., Ltd. and Subsidiaries Years Ended March 31, 2009 and 2008

Millions of Yen 2008

2009

REVENUES FROM CONSTRUCTION (Note 12) COSTS OF CONSTRUCTION CONTRACTS (Note 9) Gross profit

Thousands of U.S. Dollars (Note 1) 2009

¥92,864

¥105,200

$947,592

83,693

96,301

854,010

9,171

8,899

93,582

6,601

7,301

67,358

2,570

1,598

26,224

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 9 and 11) Operating income OTHER INCOME (EXPENSES): Interest and dividend income Interest expense Foreign exchange loss – net (Loss) gain on sales of investment securities Loss on devaluation of investment securities

420 (147) (377) 836 (528) (167) (156) 18

272 (110) (261) (24) (2,152) (5) (39) 18 (219) 96 (2,424)

Loss on sales of fixed assets

Impairment loss (Note 5) Reversal of allowance for doubtful accounts Loss on revision of retirement benefit plan Other – net Other (loss) income – net

147 46

2,776 (1,122) (2,663) (246) (21,959) (51) (398) 184 (2,235) 980 (24,734)

INCOME BEFORE INCOME TAXES

146

1,644

1,490

INCOME TAXES (Note 8): Current Prior Deferred Total

178 172 164 514

1,222

1,816 1,755 1,674 5,245

(393) 829 ¥

¥ (368)

NET (LOSS) INCOME

815

Yen

PER SHARE OF COMMON STOCK (Note 2.r): Basic net (loss) income Cash dividends applicable to the year

¥(14.58) 15.00

See notes to consolidated financial statements.

BALANCE, APRIL 1, 2007

$(0.15) 0.15

25,282

Additional Common Paid-in Stock Capital

¥5,159

BALANCE, MARCH 31, 2008

BALANCE, MARCH 31, 2009

Millions of Yen Net Unrealized Gain on Available-for-sale Retained Securities Earnings

¥14,037

¥4,333

Foreign Currency Translation Treasury Adjustments Stock

¥ 60

¥(13)

815 (378) (2,979) (2) 11 25,282

5,159

6,888

Net loss Cash dividends, ¥15.0 per share Net decrease in unrealized gain on available-for-sale securities Net increase in treasury stock (3,498 shares) Net change in foreign currency translation adjustments

14,474

1,354

71

(15)

(368) (379) (1,017) (3) (135) 25,282

¥5,159

¥6,888

¥13,727

¥ 337

¥(64)

¥(18)

Thousands of U.S. Dollars (Note 1) Net Unrealized Foreign Additional Gain on Currency Common Paid-in Retained Available-for-sale Translation Treasury Stock Capital Earnings Securities Adjustments Stock

BALANCE, MARCH 31, 2008

$52,643

Net loss Cash dividends, $0.15 per share Net decrease in unrealized gain on available-for-sale securities Net increase in treasury stock (3,498 shares) Net change in foreign currency translation adjustments BALANCE, MARCH 31, 2009

$70,286 $147,693

$13,816

$ 724

$(153)

(3,755) (3,867) (10,377) (30)

$52,643

See notes to consolidated financial statements.

8

¥6,888

Net income Cash dividends, ¥15.0 per share Net decrease in unrealized gain on available-for-sale securities Net increase in treasury stock (2,724 shares) Net change in foreign currency translation adjustments

$ (3,755) U.S. Dollars

¥32.28 15.00

Thousands Issued Number of Shares of Common Stock

9

$70,286 $140,071

$ 3,439

(1,377) $(653)

$(183)

Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows

Shin Nippon Air Technologies Co., Ltd. and Subsidiaries Years Ended March 31, 2009 and 2008

Thousands of U.S. Dollars (Note 1) 2009

Millions of Yen 2009

OPERATING ACTIVITIES: Income before income taxes Adjustments for: Income taxes – paid Depreciation and amortization Impairment loss Loss on sales of fixed assets Loss on disposal of fixed assets

¥

Loss (gain) on sales of short-term investment Loss on devaluation of investment securities

Gain on sales of investment securities Provision of allowance for doubtful accounts Changes in assets and liabilities: Decrease in receivables – trade Decrease (increase) in inventories Decrease in payables – trade (Decrease) increase in advances received on construction work in progress (Decrease) increase in allowance for bonus to directors (Decrease) increase in liability for retirement benefits to employees and directors and corporate auditors

Decrease in allowance for losses on construction contracts Other – net Net cash provided by (used in) operating activities

146

2008

¥1,644

$ 1,490 (17,673) 4,888 398 51 71 153 21,959

(349)

(288) 431 156 167 3 (75) 528 (836) 702

10,832 2,699 (10,160)

2,452 (2,232) (5,410)

110,531 27,541 (103,673)

(1,732) 479 39 5 7 15 2,152

(3,561)

(216) (11)

67 46

(2,204) (112)

(1,128)

27

(11,510)

(131) 1,061

(270) 144

(1,337) 10,825

3,708

(2,744)

37,837

Millions of Yen 2009

INVESTING ACTIVITIES: Purchases of property and equipment Purchases of intangible fixed assets Proceeds from sales of short-term investments and investment securities Purchases of short-term investments and investment securities Increase in loan receivables – net (Increase) decrease in other assets

(265) (113)

Net cash (used in) provided by investing activities

2008

(339) (114) 4,649

21,449

(2,052) (14) (300)

(3,204) (15) 442

(20,939) (143) (3,061)

1,419

(6,551)

(642)

¥(1,325)

¥3,066

FINANCING ACTIVITIES: (Decrease) increase in short-term borrowings – net Repayment of long-term debt – net Dividends paid Repayment of lease obligations Purchase of treasury stock

(1,346) (315) (379) (27) (2)

2,007 (334) (378)

(2,069)

1,293

Net cash (used in) provided by financing activities FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, END OF YEAR See notes to consolidated financial statements.

11

(2,704) (1,153)

2,102

FORWARD

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

10

Thousands of U.S. Dollars (Note 1) 2009

(2)

$ 31,286 (13,735) (3,214) (3,867) (276) (20) (21,112)

(134)

(33)

(1,368)

863

(65)

8,806

3,113

3,178

31,765

¥3,976

¥ 3,113

$ 40,571

Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

Shin Nippon Air Technologies Co., Ltd. and Subsidiaries Years Ended March 31, 2009 and 2008

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation – The consolidated financial statements as of March 31, 2009 include the accounts of the Company and all subsidiaries (together, the “Group”). The Company has three consolidated subsidiaries, SNK Service Co., Ltd. in Japan, Shin Nippon Air Technologies (Shanghai) Co., Ltd. in China, and Shin Nippon Lanka (Private) Limited in Sri Lanka. The accounts of Shin Nippon Lanka (Private) Limited have been included in the consolidated financial statements for the year ended March 31, 2009 since it was newly established during the year. Under the control concept, those companies in which the parent company, directly or indirectly, is able to exercise control over operations are fully consolidated. The excess of the cost of an acquisition over the fair value of the net assets of subsidiaries acquired is charged to income when incurred because of the immateriality. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated. b. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements – In May 2006, the Accounting Standards Board of Japan (the “ASBJ”) issued ASBJ Practical Issues Task Force (“PITF”) No. 18, “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements.” PITF No. 18 prescribes (1) the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should in principle be unified for the preparation of the consolidated financial statements, (2) financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, (3) however, the following items should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in the equity; (c) expensing capitalized development costs of R&D; (d) cancellation of the fair value model accounting for property, plant and equipment and investment properties and incorporation of the cost model accounting; (e) recording the prior years’ effects of changes in accounting policies in the consolidated statements of operations where retrospective adjustments to financial statements have been incorporated; and (f) exclusion of minority interests from net income, if contained. PITF No. 18 was effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted. The Company applied this accounting standard effective April 1, 2008. The effect of this change was immaterial. c. Cash Equivalents – Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits and certificates of deposit that represent short-term investments, which mature or become due within three months of the date of acquisition. d. Inventories – Construction work in progress is stated at cost, determined by the specific identification method. Prior to April 1, 2008, materials and supplies were stated at cost, determined by the moving-average method. In July 2006, the ASBJ issued ASBJ Statement No. 9, “Accounting Standard for Measurement of Inventories,” which was effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted. This standard requires that inventories held for sale in the ordinary course of business be measured at the lower of cost or net selling value, which is defined as the selling price less additional estimated manufacturing costs and estimated direct selling expenses. The replacement cost may be used in place of the net selling value, if appropriate.

The Group applied the new accounting standard for measurement of inventories effective April 1, 2008. This change has no effect on the consolidated statements of operations. e. Short-term Investments and Investment Securities – Marketable and investment securities are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. Non-marketable available-for-sale securities are stated at cost determined by the moving-average method. Investment in limited partnership is accounted for by the equity method. For other than temporary declines in fair value, available-for-sale securities are reduced to net realizable value by a charge to income. f. Property and Equipment – Property and equipment are carried at cost. Depreciation of property and equipment of the Company and its domestic subsidiary, except for buildings and lease assets, is computed substantially by the declining-balance method, while the straight-line method is principally applied to buildings and lease assets of the Company and its consolidated domestic subsidiary, and property and equipment of the consolidated foreign subsidiaries. g. Long-lived Assets – The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. h. Research and Development Costs – Research and development costs are charged to income as incurred. i. Allowance for Doubtful Accounts – The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the Group’s past credit loss experience and an evaluation of potential losses in the receivables outstanding. j. Retirement Benefits and Pension Plan – The Group has defined contribution pension plan, cash balance pension plan and unfunded retirement plans substantially covering all of its employees. The Group accounts for the liability for employees’ retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. Retirement benefits to directors and corporate auditors were provided at the amount which would be required if all directors and corporate auditors retired at the balance sheet date. The Board of Directors resolved on May 11, 2005 that the Group would terminate retirement benefits plan for directors and corporate auditors upon closing of the shareholders meeting to be held on June 23, 2005. Accordingly, shareholders approved on June 23, 2005 that current directors and corporate auditors upon retirement should receive retirement benefits based on their services through June 23, 2005. k. Allowance for Losses on Construction Contracts – The Group provides an allowance for losses on construction contracts which are probable and estimable at balance sheet date. l. Construction Contracts – Revenues and related costs are recognized on a percentage-of-completion method for contract amounts more than ¥10 million and contract periods beyond one year. Revenue posted by way of the percentage-of-completion method was ¥26,362 million ($269,000 thousand) and ¥32,799 million for the years ended March 31, 2009 and 2008, respectively. m. Leases – In March 2007, the ASBJ issued ASBJ Statement No. 13, “Accounting Standard for Lease Transactions,” which revised the previous accounting standard for lease transactions issued in June 1993. The revised accounting standard for lease transactions is effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted for fiscal years beginning on or after April 1, 2007. Under the previous accounting standard, finance leases that deem to transfer ownership of the leased property to the lessee were to be capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain “as if capitalized” information is disclosed in the note to the lessee’s financial statements. The revised accounting standard requires that all finance lease transactions should be capitalized to recognize lease assets and lease obligations in the balance sheet. In addition, the revised accounting standard permits leases which existed at the transition date and do not transfer ownership of the leased property to the lessee to be accounted for as operating lease transactions. The Group applied the revised accounting standard effective April 1, 2008. In addition, the Group accounted for leases which existed at the transition date and do not transfer ownership of the leased property to the lessee as operating lease transactions. The effect of this change was immaterial.

12

13

1.

BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in Japan in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2008 financial statements to conform to the classifications used in 2009. The consolidated financial statements are stated in Japanese yen, the currency of the country in which Shin Nippon Air Technologies Co., Ltd. (the “Company”) is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥98 to U.S.$1, the approximate rate of exchange at March 31, 2009. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 2.

Notes to Consolidated Financial Statements



n.

Bonuses to Directors and Corporate Auditors – Bonuses to directors and corporate auditors are accrued at the year end to which such bonuses are attributable. o. Foreign Currency Transactions – All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the statement of operations to the extent that they are not hedged by forward exchange contracts. p. Foreign Currency Financial Statements – The balance sheet accounts of the foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical rate. Differences arising from such translation were shown as “Foreign currency translation adjustments” in a separate component of equity. Revenue and expense accounts of the foreign subsidiaries are translated into yen at the average exchange rate. q. Income Taxes – The provision for income taxes is computed based on the pretax income included in the consolidated statements of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted tax laws to the temporary differences. r. Per Share Information – Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share for the years ended March 31, 2009 and 2008 is not disclosed because the Group did not have any convertible bonds, bonds with warrants or stock options. Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to the respective years including dividends to be paid after the end of the year. s. New Accounting Pronouncements Asset Retirement Obligations – On March 31, 2008, the ASBJ published a new accounting standard for asset retirement obligations, ASBJ Statement No. 18 “Accounting Standard for Asset Retirement Obligations” and ASBJ Guidance No. 21 “Guidance on Accounting Standard for Asset Retirement Obligations.” Under this accounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and the normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an increase or a decrease in the carrying amount of the liability and the capitalized amount of the related asset retirement cost. This standard is effective for fiscal years beginning on or after April 1, 2010 with early adoption permitted for fiscal years beginning on or before March 31, 2010. Construction Contracts – Under the current Japanese GAAP, either the completed-contract method or the percentage-of-completion method is permitted to account for construction contracts. On December 27, 2007, the ASBJ published a new accounting standard for construction contracts. Under this accounting standard, the construction revenue and construction costs should be recognized by the percentage-of-completion method, if the outcome of a construction contract can be estimated reliably. When total construction revenue, total construction costs and the stage of completion of the contract at the balance sheet date can be reliably measured, the outcome of a construction contract can be estimated reliably. If the outcome of a construction contract cannot be reliably estimated, the completed-contract method shall be applied. When it is probable that total construction costs will exceed total construction revenue, an estimated loss on the contract should be immediately recognized by providing for loss on construction contracts. This standard is applicable to construction contracts and software development contracts and effective for fiscal years beginning on or after April 1, 2009 with early adoption permitted for fiscal years beginning on or before March 31, 2009 but after December 27, 2007.

14

Notes to Consolidated Financial Statements

3.

SHORT-TERM INVESTMENTS AND INVESTMENT SECURITIES Short-term investments and investment securities as of March 31, 2009 and 2008, consisted of the following: Thousands of U.S. Dollars 2009

Millions of Yen 2008

2009



Current: Time deposits which mature over three months from acquisition Investment in trust Investment in limited partnership

¥

41

¥

44 170 38

$

418

Total

¥

41

¥ 252

$

418

Non-current: Equity securities Debt securities Investment in limited partnership and other

¥ 8,312 2,463 1,078

¥11,811 3,644 104

$ 84,816 25,133 11,000

Total

¥11,853

¥15,559

$120,949

The carrying amounts and aggregate fair values of marketable securities included in short-term investments and investment securities at March 31, 2009 and 2008, were as follows: Millions of Yen March 31, 2009

Cost

Unrealized Gains

Unrealized Losses

Fair Value

Securities classified as available-for-sale: Equity securities Debt securities

¥ 6,923 1,000

¥1,218

¥601 36

¥7,540 964

Total

¥ 7,923

¥1,218

¥637

¥8,504

Securities classified as available-for-sale: Equity securities Debt securities

¥ 8,700 2,000

¥2,931

¥598 56

¥11,033 1,944

Total

¥10,700

¥2,931

¥654

¥12,977

Cost

Unrealized Gains

Unrealized Losses

Fair Value

March 31, 2008

Thousands of U.S. Dollars March 31, 2009

Securities classified as available-for-sale: Equity securities Debt securities

$70,643 10,204

$12,429

$6,133 367

$76,939 9,837

Total

$80,847

$12,429

$6,500

$86,776

15

Notes to Consolidated Financial Statements



Notes to Consolidated Financial Statements

Available-for-sale securities whose fair value is not readily determinable as of March 31, 2009 and 2008, were as follows: Carrying Amount Thousands of U.S. Dollars 2009

Millions of Yen 2009

2008

Debt securities Equity securities Investment in trust Investment in limited partnership

¥1,500 772 13 1,064

¥1,700 778 170 142

$15,306 7,878 133 10,856

Total

¥3,349

¥2,790

$34,173

Proceeds from sales of available-for-sale securities for the years ended March 31, 2009 and 2008, were ¥226 million ($2,306 thousand) and ¥2,749 million, respectively. Gross realized gains and losses on these sales, computed on the moving average cost basis, were ¥9 million ($92 thousand) and ¥24 million ($246 thousand), respectively, for the year ended March 31, 2009 and ¥911 million and nil, respectively, for the year ended March 31, 2008. The carrying values of debt securities and other securities by contractual maturities for securities classified as available-for-sale at March 31, 2009, are as follows:

6.

SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings represent borrowings under bank overdraft agreements and notes due within one year, bearing interest ranging from 0.820% to 1.925% and from 0.970% to 2.820% at March 31, 2009 and 2008, respectively. Long-term debt at March 31, 2009 and 2008, consisted of the following: Millions of Yen

Unsecured loan from bank and insurance company, maturing serially through 2012, with interest rates ranging from 1.49% to 1.75% (2009) and from 1.06% to 1.60% (2008), respectively Obligations under finance leases Less current portion Total long-term debt



Total 4.

¥1,064

$10,857

2,463

25,133

¥3,527

$35,990

INVENTORIES Inventories at March 31, 2009 and 2008, consisted of the following: Thousands of U.S. Dollars 2009

Millions of Yen

5.

2009

2008

Construction work in progress Materials and supplies

¥2,975 14

¥5,698 17

$30,357 143

Total

¥2,989

¥5,715

$30,500

LONG-LIVED ASSETS For the year ended March 31, 2009, the Group recognized loss on impairment of the following assets: Location Hokkaido Prefecture Sri Lanka

Purpose of Use Assets used for rent Assets used for business

Type of Assets Buildings and land Machinery and others

Total

Millions of Yen

Thousands of U.S. Dollars

¥21 18

$214 184

¥39

$398

For purposes of evaluating and measuring impairment, assets used for business are considered to constitute a group by each branch. Asset used for rent and idle properties are individually evaluated. Carrying amounts of idle properties and assets used for business were devalued to their recoverable amounts, due to reconsideration of purpose of use and a decline in the profitability, respectively. As a result, the Group recognized an impairment loss of ¥39 million ($398 thousand), which consisted of buildings valued at ¥15 million ($153 thousand), land valued at ¥8 million ($82 thousand) and others valued at ¥16 million ($163 thousand) for the year ended March 31, 2009. Recoverable amounts of certain assets were the anticipated net selling price at disposition. The Group used appraisal value of significant assets to calculate reasonable net selling price at disposition.

¥2,700 151 (1,837) ¥1,014

¥3,015

7.

(315) ¥2,700

$27,550 1,541 (18,745) $10,346

Annual maturities of long-term debt, excluding finance leases (see Note 14), at March 31, 2009, were as follows: Thousands of U.S. Dollars

Millions of Yen

2010 2011 2012

¥1,800 600 300

$18,367 6,122 3,061

Total

¥2,700

$27,550

ADVANCES RECEIVED ON CONSTRUCTION WORK IN PROGRESS As is customary in Japan, the Group normally receives payments from customers on a progress basis in accordance with the terms of the respective construction contracts.

8.

INCOME TAXES The Company and its domestic subsidiary are subject to Japanese national and local income taxes which, in the aggregate, resulted in a normal effective statutory tax rate of approximately 40.5% for the years ended March 31, 2009 and 2008. The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2009 and 2008, are as follows: Millions of Yen

Deferred tax assets: Allowance for doubtful accounts Employee accrued bonuses Liability for employees' retirement benefits Liability for retirement benefits to directors and corporate auditors Loss on devaluation of golf club memberships Loss on devaluation of investment securities Loss on devaluation of land Allowance for losses on construction contracts Loss carryforward Other Valuation allowance

2009

2008

¥ 527 518 636

¥  657 508 1,092

14 144 307 250 76 645 590 (787)

Total

2,920

Deferred tax liabilities: Unrealized gain on available-for-sale securities Other Total Net deferred tax assets

16

2008

Year Ending March31

Thousands of U.S. Dollars

Millions of Yen

Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years



2009

Thousands of U.S. Dollars 2009

705 (593) 3,038

$ 5,378 5,286 6,490 143 1,469 3,133 2,551 776 6,582 6,020 (8,031) 29,797

(243) (49)

(922) (4)

(2,480) (500)

(292)

(926)

(2,980)

¥2,628

17

17 132 141 250 129

Thousands of U.S. Dollars 2009

¥2,112

$26,817

Notes to Consolidated Financial Statements



Notes to Consolidated Financial Statements

A reconciliation between the normal effective statutory tax rates for the years ended March 31, 2009 and 2008, and the actual effective tax rates reflected in the accompanying consolidated statements of operations is as follows: 2009

2008

Normal effective statutory tax rate Expenses not deductible permanently for income tax purposes Income not taxable permanently for income tax purposes Inhabitant tax Lower income tax rates applicable to income in certain foreign countries Special tax deductions Income taxes for prior periods income taxes Difference in statutory tax rates of overseas subsidiaries Taxable income difference for the business tax Valuation allowance Other—net

28.1 (13.2) 28.6 133.0 (0.5)

4.3 (0.5)

Actual effective tax rate

353.1%

50.4%

40.5% 93.6 (26.3) 53.5 15.8

40.5% 8.5 (2.4) 4.9 1.4 (1.4) (4.9)

9. RETIREMENT AND PENSION PLANS The Group has severance payment plans for employees, directors and corporate auditors. Under most circumstances, employees terminating their employment are entitled to retirement benefits determined based on the rate of pay at the time of termination, years of service and certain other factors. Employees are entitled to larger payments if the termination is involuntary by retirement at the mandatory retirement age or caused by death. According to the enactment of the Defined Contribution Pension Plan Law and Defined Benefit Pension Plan Law, the Company revised its retirement benefit policy in July 2008 and transferred from an unfunded retirement plans and a non‍‑‍contributory funded pension plan to a current defined contribution pension plan, cash balance pension plan and unfunded retirement plans. The Company applied accounting treatments specified in the guidance issued by the ASBJ. The effect of this transfer was decreased income before income taxes by approximately ¥219 million ($2,235 thousand) for the year ended March 31, 2009. Additionally, revision of retirement benefit policy resulted in a recognition of prior service cost of approximately ¥35 million ($357 thousand). This prior service cost was amortized over a certain period within the average remaining years of services of employees by the straight‍‑‍line method. The liability for employees' retirement benefits at March 31, 2009 and 2008, consisted of the following: Thousands of U.S. Dollars 2009

Millions of Yen



2009

2008

Projected benefit obligation Fair value of plan assets Unrecognized past service loss Unrecognized actuarial loss

¥3,317 (1,383) (31) (334)

¥4,417 (1,273)

Net liability

¥1,569

¥2,696

(448)

$33,847 (14,112) (316) (3,409) $16,010

The components of net periodic benefit costs for the years ended March 31, 2009 and 2008, are as follows: Thousands of U.S. Dollars 2009

Millions of Yen 2009

2008

Service cost Interest cost Expected return on plan assets Amortization of past service loss Amortization of actuarial loss

¥245 70 (32) 4 85

¥310 84 (30)

Net periodic benefit costs

¥372

¥448

18

84

$2,500 714 (327) 41 867 $3,795



Assumptions used for the years ended March 31, 2009 and 2008, are set forth as follows: Discount rate Expected rate of return on plan assets Recognition period of past service loss Recognition period of actuarial loss

2009

2008

2.0% 2.5% 10 years 10 years

2.0% 2.5% 10 years

The Group is a member of comprehensive pension plan funds, which could not be reasonably allocated among members. In this case, the Japanese standard permits charging premiums for the funds to income as paid. (1) Funded status of comprehensive pension plans The total amounts recorded in the financial statements of comprehensive pension plans at March 31, 2008 are as follows: Millions of Yen

Thousands of U.S. Dollars

Amount of pension assets Amount of benefit obligation

¥40,442 42,177

$412,673 430,378

Net balance

¥(1,735)

$(17,705)

(2) The ratio of gross pay by the Group to the total amounts at March 31, 2008 was 19.6%. (3) Additional information The net balance above (1) is mainly due to the prior service liabilities of ¥364 million ($3,714 thousand), deficit of ¥2,591 million ($26,439 thousand) and reserves of ¥1,219 million ($12,439 thousand). The prior service liabilities are being amortized over the average estimated remaining service years of six years. The above ratio (2) does not conform to the actual charge ratio applied to the Group. 10. EQUITY Since May 1, 2006, Japanese companies have been subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: a. Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year‍‑‍end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having a Board of Directors, (2) having independent auditors, (3) having a Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet all the above criteria. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million. b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid‍‑‍in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid‍‑‍in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid‍‑‍in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid‍‑‍in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders. c. Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by specific formula. Under the Companies Act, stock acquisition rights are now presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. 11. RESEARCH AND DEVELOPMENT COSTS Research and development costs charged to income were ¥299 million ($3,051 thousand) and ¥289 million for the years ended March 31, 2009 and 2008, respectively.

19

Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements



12. RELATED PARTY TRANSACTIONS Transactions with related parties for the years ended March 31, 2009 and 2008, were as follows:

2008

Mitsui & Co., Ltd. (a shareholder with the shares of 14.65% and 14.65% in 2009 and 2008, respectively): Revenues from construction Receivables Mitsui & Co. Plant Systems, Ltd. (a subsidiary of Mitsui & Co., Ltd.): Revenues from construction Receivables

¥5,708 2,750

¥2,249 1,231

$22,949 12,561

4,324 3,291



Due within one year Due after one year

¥34 48

$347 490

Total

¥82

$837

Depreciation expense and interest expense, which are not reflected in the accompanying consolidated statement of operations and which are computed by the straight‍‑‍line method and the interest method, were ¥45 million ($459 thousand) and ¥2 million ($20 thousand), respectively, for the year ended March 31, 2009. For the Year Ended March 31, 2008

44,122 33,582

Millions of Yen Tools, Furniture and Fixtures

13. ASSETS PLEDGED At March 31, 2009, a time deposit of ¥27 million ($276 thousand) was pledged as collateral for accounts payable of ¥52 million ($531 thousand). 14. LEASES The Group leases certain computer equipment and other equipment. Total lease payments under finance lease arrangements that do not transfer ownership of the leased property to the lessee are ¥47 million ($480 thousand) and ¥53 million for the years ended March 31, 2009 and 2008, respectively. Obligations under finance leases and future minimum payments under noncancelable operating leases were as follows: Millions of Yen 2009 Finance Leases



Finance Leases

Other

Total

Acquisition cost Accumulated depreciation

¥123 (61)

¥124 (58)

¥247 (119)

Net leased property

¥ 62

¥ 66

¥128

Obligations under finance leases:

Thousands of U.S. Dollars 2009 Operating Leases

Thousands of U.S. Dollars

Millions of Yen

Thousands of U.S. Dollars 2009

Millions of Yen 2009

Obligations under finance leases:

Millions of Yen

Operating Leases

Due within one year Due after one year

¥ 46 85

Total

¥131





Due within one year Due after one year

¥ 37 114

¥571 178

$ 378 1,163

$5,827 1,816

Total

¥151

¥749

$1,541

$7,643

As discussed in Note 2, the Group accounts for leases which existed at the transition date and do not transfer ownership of the leased property to the lessee as operating lease transactions. For the years ended March 31, 2009 and 2008, pro forma information of leased property such as acquisition cost, accumulated depreciation, obligations under finance leases, depreciation expense and interest expense of finance leases that do not transfer ownership of the leased property to the Group on an "as if capitalized" basis was as follows:

Tools, Furniture and Fixtures

Other

Thousands of U.S. Dollars

Total

Tools, Furniture and Fixtures

Other

15. DERIVATIVES The Group had no derivative contracts outstanding at March 31, 2009 and 2008. 16. SEGMENT INFORMATION (1) Industry Segments The Group operates entirely in the air‍‑‍conditioning segment. (2) Geographical Segments Segment information by geographic area is not shown because operating revenues and total assets of the Company and its domestic subsidiary for the years ended March 31, 2009 and 2008 were more than 90% of the consolidated operating revenues and assets of the respective years.

For the Year Ended March 31, 2009 Millions of Yen

Depreciation expense and interest expense, which were not reflected in the accompanying consolidated statement of operations and which were computed by the straight‍‑‍line method and the interest method, were ¥51 million and ¥2 million, respectively, for the year ended March 31, 2008. Obligations under operating leases, other than the above finance leases, as of March 31, 2008, were immaterial.

Total

Acquisition cost Accumulated depreciation

¥80 (47)

¥88 (41)

¥168 (88)

$816 (480)

$898 (418)

$1,714 (898)

Net leased property

¥33

¥47

¥ 80

$336

$480

$ 816

(3) Sales to Foreign Customers Each area primarily refers to the following countries:

China and Taiwan Singapore Sri Lanka and Maldives United Arab Emirates

Year Ended March 31, 2009

20

East Asia: South‍‑‍East Asia: South‍‑‍West Asia: Other Areas:

Segment information by overseas revenues is not shown because operating revenues to domestic customers for the year ended March 31, 2009 were more than 90% of the consolidated operating revenues of the year.

21

Independent Auditors’ Report

Notes to Consolidated Financial Statements

Year Ended March 31, 2008 Millions of Yen South-East Asia

South-West Asia

¥2,818

¥2,084

¥3,338

¥2,243

2.7%

2.0%

3.2%

2.1%

East Asia

Overseas revenues Consolidated revenues Overseas ratio (%)

Other Areas

Total

¥ 10,483 105,200 10.0%

17. SUBSEQUENT EVENT At the general shareholders meeting held on June 24, 2009, the Company's shareholders approved the following appropriation of retained earnings: Millions of Yen

Year-end cash dividends, ¥7.5 ($0.08) per share

¥189 ******

INDEPENDENT AUDITORS’ REPORT

Thousands of U.S. Dollars

$1,929

To the Board of Directors of Shin Nippon Air Technologies Co., Ltd.: We have audited the accompanying consolidated balance sheets of Shin Nippon Air Technologies Co., Ltd. and subsidiaries as of March 31, 2009 and 2008, and the related consolidated statements of operations, changes in equity, and cash flows for the years then ended, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Japan. 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 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Shin Nippon Air Technologies Co., Ltd. and subsidiaries as of March 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in Japan. Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.

June 24, 2009



22

23

Board of Directors

Directory

(As of June 24, 2009)

Domestic Offices

President Takahiro Okamoto* Senior Managing Directors Kaoru Takahashi Osamu Arai Managing Directors Hideyuki Yamamoto Hiroshi Natsui Akira Sato Mitsumasa Tsukahara Director Tadashi Miwa Standing Corporate Auditors Tsutomu Takahashi Hisanori Sato Corporate Auditors Yonao Endo Masahisa Ichimiya *Representative Directors

Corporate Data (As of March 31, 2009)

Date of Establishment October 1, 1969 Paid-in Capital ¥5,159 millions Number of Shares Outstanding 25,282,225 shares Number of Shareholders 6,308 By Type of Shareholder Financial institutions Individuals & Others Foreign Shareholders Other domestic companies

Number of Employees 869 Stock Exchange Listing Tokyo Stock Exchange, 1st Section Transfer Agent of Common Stock The Chuo Mitsui Trust and Banking Company Limited

By Number of Shares Held 500,000 shares or more 100,000 – 499,999 shares 10,000 – 99,999 shares 1,000 – 9,999 shares Fewer than 1,000 shares

29.02% 23.47% 3.32% 44.19%

24

53.23% 24.02% 8.31% 11.13% 3.31%

OVERSEAS BRANCHES/OFFICE

Head Office Hamacho Center Bldg. 2-31-1, Nihonbashi hamacho, chuo-ku, Tokyo 103-0007, Japan Phone:81-3-3639-2700 Fax:81-3-3639-2732 URL:http://www.snk.co.jp Overseas Division Phone:81-3-3639-2719 Fax:81-3-3639-2739 Urban Facilities & Renewal Main Division Phone:81-3-3639-2703 Fax:81-3-3639-2737 Urban Facilities Division Phone:81-3-3639-2740 Fax:81-3-3639-2745 Renewal Division Phone:81-3-3639-2707 Fax:81-3-3639-2760 Industrial Facilities Division Phone:81-3-3639-2730 Fax:81-3-3639-2743 Nuclear Division (Research Center) 1-1-34, Nakahara, Isogo-ku, Yokohama 235-0036, Japan Phone:81-45-755-2221 Fax:81-45-755-2214 Hokkaido Branch Kita Ichijo Mitsui Bldg. 5-2-9, Kita Ichijo nishi, Chuo-ku, Sapporo 060-0001, Japan Tohoku Branch Denryoku Bldg. 3-7-1, Ichibancho, Aoba-ku, Sendai 980-0811, Japan Kanto Branch Chibachuotwin Bldg. Annex No.1 1-11-1, Chuo, Chuo-ku, Chiba 260-0013, Japan Yokohama Branch Yokohama Shinkannai Bldg. 4-45-1, Sumiyoshicho, Naka-ku, Yokohama 231-0013, Japan Nagoya Branch Nagoya Mitsui Bldg. 1-24-30, Meiekiminami, Nakamura-ku, Nagoya 450-0003, Japan Osaka Branch Shindai Bldg. 1-2-6, Dojimahama, Kita-ku, Osaka 5300004, Japan Chugoku Branch Nakamachi Mitsui Bldg. 9-12, Nakamachi, Naka-ku, Hiroshima 730-0037, Japan Kyushu Branch Hakata Mitsui Bldg. 10-1, Kamigofukumachi, Hakataku, Fukuoka 812-0036, Japan Research & Development Center 7033-182, Sumisujiuchi, Miyagawa-aza, Chino, Nagano 391-0013, Japan

Sri Lanka Branch Office 217 Colombo Road, Ja-Ela, Sri Lanka Phone:94-11-2236999 Fax:94-11-2236599 Singapore Branch Office 315 Outram Road, #12-03 Tan Boon Liat Building, Singapore 169074 Phone:65-6227-2300 Fax:65-6227-3122 Yangon Branch Office No.10, Myintzu Road, Yankin Township, Yangon, Myanmer Phone:95-1-661361 Fax:95-1-661361 Indonesia Representative Office C/O P.T. Cahya Nugraha Cipta, Gedung Manggala Wanabakti, Blok IV, Wing A, 7th Floor No. 704, JI. Gatot Subroto, Senayan, Jakarta, Indonesia 10270 Phone:62-21-574-7051 Fax:62-21-574-7051 Shin Nippon Airtech (Middle East) LLC P.O.Box 3256, Room 206A, A1 Shoala Building A Block, Deira, Dubai, U.A.E Phone:971-4-295-3445 Fax:971-4-295-3446 Shin Nippon Airtech Abu Dhabi LLC P.O. Box 2621, Level 01, Hamadan Bin Mubarak Building, Airport Road-Corniche Clock Roundabout, Abu Dhabi, U.A.E. Phone:971-2-622-2444 Fax:971-2-635-0325

SUBSIDIARY COMPANY Shin Nikku Service Co., Ltd. Wakamatsu Bldg. 3-3-6, Nihonbashihoncho, Chuo-ku, Tokyo 103-0023, Japan Phone:81-3-5200-3940 Fax:81-3-5200-3935 Shin Nippon Air Technologies (Shanghai) Co., Ltd. E,223, Jiang Chang San Road, Shanghai, 200436, P.R.China Phone:86-21-51060068 Fax:86-21-51060063 Shin Nippon Lanka (Private) Limited 217 Colombo Road, Ja-Ela, Sri Lanka Phone:94-11-2005300 Fax:94-11-2245953

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SHIN NIPPON AIR TECHNOLOGIES CO., LTD. Hamacho Center Bldg. 2-31-1, Nihonbashi Hamacho, Chuo-ku, Tokyo 103-0007, Japan Phone: 81-3-3639-2700 Facsimile: 81-3-3639-2732 URL:http://www.snk.co.jp

This annual report is Printed in Japan on recycled paper

ANNUAL REPORT 2009 Year ended March 31, 2009