Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 11/14/2006 16:31:14)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(mark one)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF 1934

For the transition period from                          to                         

Commission File number 001-32959


AIRCASTLE LIMITED
(Exact name of registrant as specified in its charter)
   
Bermuda 98-0444035
(State or other jurisdiction of
incorporation or organisation)
(IRS Employer
Idenfication No.)
300 First Stamford Place, 5 th Floor, Stamford, CT 06902
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (203) 504-1020

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. Yes [X]         No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act (Check one):


Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). YES [ ]          NO [X]

Number of shares outstanding as of November 13, 2006: 51,507,252 common shares, par value $0.01 per share.

    




Aircastle Limited and Subsidiaries

Table of Contents


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Table of Contents

Part I. – Financial Information

Item 1.    Financial Statements

Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)


  December 31, 2005 September 30, 2006
    (unaudited)
ASSETS  
 
Cash and cash equivalents $ 79,943
$ 38,970
Accounts receivable 3,115
5,489
Debt securities, available for sale 26,907
120,271
Restricted cash and cash equivalents 40,652
106,714
Flight equipment held for sale 54,917
Flight equipment held for lease, net of accumulated depreciation of $14,685 and $52,267 746,124
1,509,443
Leasehold improvements, furnishings and equipment, net of accumulated depreciation of $165 and $547 1,529
1,494
Fair value of derivative assets 3,608
308
Aircraft purchase deposits 3,465
2,000
Other assets 7,272
23,770
Total assets $ 967,532
$ 1,808,459
LIABILITIES AND SHAREHOLDERS’ EQUITY  
 
LIABILITIES  
 
Borrowings under credit facilities $ 490,588
$ 351,226
Borrowings from securitization
554,733
Accounts payable, accrued expenses and other liabilities 12,038
29,829
Payable to affiliates 105
179
Lease rentals received in advance 6,241
10,233
Repurchase agreements 8,665
83,839
Security deposits and maintenance payments 37,089
111,190
Fair value of derivative liabilities 1,870
18,869
Total liabilities 556,596
1,160,098
Commitments and Contingencies – Note 12  
 
SHAREHOLDERS’ EQUITY  
 
Common shares, $.01 par value, 100,000,000 shares authorized, 40,000,000 shares issued and outstanding at December 31, 2005; and 51,507,252 shares issued and outstanding at September 30, 2006 400
515
Additional paid-in capital 400,009
629,238
(Accumulated deficit) retained earnings (1,237
)
9,405
Accumulated other comprehensive income 11,764
9,203
Total shareholders’ equity 410,936
648,361
Total liabilities and shareholders’ equity $ 967,532
$ 1,808,459

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Table of Contents

Aircastle Limited and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2005 2006 2005 2006
Revenues  
 
 
 
Lease rentals $ 6,850
$ 50,415
$ 13,047
$ 121,413
Interest income 943
2,487
2,225
6,588
Other revenue 65
153
65
153
Total revenues 7,858
53,055
15,337
128,154
Expenses  
 
 
 
Depreciation 3,182
16,419
6,644
38,182
Interest (net of interest income of $333 and $1,830 for the three months ended and $537 and $4,394 for the nine months ended September 30, 2005 and 2006, respectively) 1,604
14,177
3,217
35,058
Selling, general and administrative (including non-cash share based payment expense of $158 and $1,044 for the three months and $249 and $7,729 for the nine months ended September 30, 2005 and 2006, respectively) 4,103
5,179
7,950
21,219
Other expenses 367
312
921
1,229
Total expenses 9,256
36,087
18,732
95,688
Income (loss) from continuing operations before income taxes (1,398
)
16,968
(3,395
)
32,466
Income tax provision 208
1,786
461
4,453
Income (loss) from continuing operations (1,606
)
15,182
(3,856
)
28,013
Earnings from discontinued operations net of income taxes
3,399
Net income (loss) $ (1,606
)
$ 15,182
$ (3,856
)
$ 31,412
Basic earnings (loss) per share:  
 
 
 
Income (loss) from continuing operations $ (.04
)
$ .32
$ (.10
)
$ .64
Earnings from discontinued operations, net of income taxes
.08
Net income (loss) per share $ (.04
)
$ .32
$ (.10
)
$ .72
Diluted earnings (loss) per share:  
 
 
 
Income (loss) from continuing operations $ (.04
)
$ .32
$ (.10
)
$ .63
Earnings from discontinued operations, net of income taxes
.08
Net income (loss) per share $ (.04
)
$ .32
$ (.10
)
$ .71
Dividends paid per share $
$ .506
$
$ .506

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Table of Contents

Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)


  Nine Months ended September 30,
  2005 2006
Cash flows from Operating activities  
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities (inclusive of amounts related to discontinued operations): $ (3,856
)
$ 31,412
Depreciation 6,644
38,182
Amortization 1,497
2,981
Deferred income taxes 38
2,239
Accretion of purchase discounts on debt securities (524
)
(619
)
Non-cash share based payment expense 249
7,729
Cash flow hedges reclassified into earnings
(1,197
)
Ineffective portion of cash flow hedges (38
)
(815
)
Gain on the sale of flight equipment held for sale
(2,240
)
Changes on certain assets and liabilities:  
 
Accounts receivable (917
)
(2,374
)
Restricted cash and cash equivalents (11,046
)
(66,062
)
Other assets (4,111
)
(818
)
Accounts payable, accrued expenses and other liabilities 3,907
848
Payable to affiliates (785
)
74
Lease rentals received in advance 1,493
3,992
Security deposits and maintenance payments 8,215
74,101
Net cash provided by operating activities 766
87,433
Cash flows from investing activities  
 
Acquisition and improvement of flight equipment (173,293
)
(746,081
)
Disposition of flight equipment held for sale
57,157
Purchase of debt securities (22,981
)
(92,726
)
Margin call on derivative
(1,555
)
Leasehold improvements, furnishings and equipment (618
)
(347
)
Aircraft purchase deposits (5,280
)
(40,997
)
Principal repayments on debt securities 312
3,589
Proceeds from sale of debt securities 3,294
Net cash used in investing activities (198,566
)
(820,960
)
Cash flows from financing activities  
 
Issuance of common shares
279,156
Transaction costs from issuance of common shares
(20,609
)
Repurchase of shares
(36,932
)
Proceeds from securitization
560,000
Credit facility borrowings 129,120
660,302
Securitization repayments
(5,267
)
Credit facility repayments
(799,664
)
Deferred financing costs (2,806
)
(14,978
)
Proceeds from repurchase agreements 3,039
76,007
Proceeds from terminated cash flow hedges
16,142
Principal repayment on repurchase agreement
(833
)
Dividends paid
(20,770
)
Capital contributions 130,533
Net cash provided by financing activities 259,886
692,554
Net increase (decrease) in cash and cash equivalents 62,086
(40,973
)
Cash and cash equivalents at beginning of period
79,943
Cash and cash equivalents at end of period $ 62,086
$ 38,970
Supplemental Disclosures of cash flow information  
 
Cash paid during the period for interest $ 2,475
$ 33,776
Cash paid during the period for income taxes $
$ 1,079

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

Note 1.    Summary of Significant Accounting Policies

Organization and Basis of Presentation

Aircastle Limited, formerly Aircastle Investment Limited, (‘‘Aircastle’’, the ‘‘Company’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’) is a Bermuda exempted company that was incorporated on October 29, 2004 by Fortress Investment Group LLC and certain of its affiliates (together, the ‘‘Fortress Shareholders’’ or ‘‘Fortress’’) under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. On August 11, 2006, we closed the sale of 10,454,535 common shares of Aircastle at $23.00 per share in an initial public offering (the ‘‘initial public offering’’).

Aircastle is a holding company that conducts its business through its subsidiaries. Aircastle owns directly or indirectly substantially all of the outstanding common shares of its subsidiaries. Aircastle consolidates a Variable Interest Entity (‘‘VIE’’) in accordance with the Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 46, Consolidation of Variable Interest Entities (‘‘FIN 46’’) of which Aircastle is the primary beneficiary. The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated.

The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the ‘‘SEC’’) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’) have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Registration Statement on Form S-1 (File No. 333-134669), as such registration statement became effective on August 7, 2006, and all of our other filings filed with the SEC from August 7, 2006 through the current date pursuant to the Securities Exchange Act of 1934.

Recent Accounting Pronouncements

In July 2006, FASB issued FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes’’ (‘‘FIN 48’’), which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB No. 109, ‘‘Accounting for Income Taxes.’’ FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact, if any, of applying the guidance provided by FIN 48.

On September 15, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 ‘‘Fair Value Measurements’’ (‘‘SFAS 157’’). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies in conjunction with other accounting pronouncements that require or permit fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is in the process of analyzing the impact of SFAS 157, if any.

Note 2.    Fair Value of Financial Instruments

Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, debt securities, accounts payable, amounts borrowed under

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

credit facilities, borrowings from securitization, repurchase agreements and cash flow hedges. The fair value of cash, cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short term nature. Borrowings under our credit facilities, securitization and repurchase agreements bear floating rates of interest which reset monthly or quarterly to a market benchmark rate plus a credit spread. We believe that, for similar financial instruments with comparable credit risks, the effective rate of these agreements approximates market rates at the balance sheet dates. Accordingly, the carrying amounts of these agreements are believed to approximate their fair values. The fair value of our debt securities and cash flow hedges is generally determined by reference to broker quotations.

Note 3.    Lease Rental Revenues and Flight Equipment Held for Lease

Minimum future annual lease rentals contracted to be received under our existing operating leases at September 30, 2006 were as follows:


Year Ending December 31, Amount
Remainder of 2006 $ 56,567
2007 208,030
2008 183,980
2009 153,666
2010 122,381
2011 91,720
Thereafter 60,545
  $ 876,889

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:


  Three Months Ended September 30, Nine Months Ended September 30,
Region 2005 2006 2005 2006
Europe 42
%
45
%
46
%
43
%
Asia 38
%
21
%
43
%
23
%
North America
26
%
27
%
Latin America 20
%
5
%
11
%
5
%
Africa
3
%
2
%
  100
%
100
%
100
%
100
%

The classification of regions in the tables above and the table and discussion below is determined based on the principal location of the lessee of each aircraft.

In the three months ended September 30, 2005, six customers accounted for 79% of lease rental revenue. No other customers accounted for more than 6% of lease rental revenues. In the three months ended September 30, 2006 four customers accounted for 44% of lease rental revenue. No other customers accounted for more than 4% of lease rental revenue.

In the nine months ended September 30, 2005, four customers accounted for 73% of lease rental revenue. No other customer accounted for more than 6% of lease rental revenue. In the nine months ended September 30, 2006, three customers accounted for 39% of lease rental revenue. No other customers accounted for more than 4% of lease rental revenue.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

Geographic concentration of net book value of flight equipment held for lease was as follows:


  December 31, 2005 September 30, 2006
Region Number of
Aircraft
Net Book
Value %
Number of
Aircraft
Net Book
Value %
Europe 16
40
%
34
46
%
Asia 9
26
%
14
23
%
North America 4
29
%
11
24
%
Latin America 3
5
%
4
4
%
Africa
2
3
%
  32
100
%
65
100
%

At December 31, 2005 and September 30, 2006, lease acquisition costs included in other assets were $775 and $2,468, respectively. Prepaid lease incentive costs included in other assets were $453 at December 31, 2005 and September 30, 2006, respectively.

Note 4.    Discontinued Operations and Flight Equipment Held for Sale

As of December 31, 2005, one of our aircraft was classified as flight equipment held for sale. During the nine months ended September 30, 2006, we completed the sale of this aircraft. In accordance with the credit facility associated with this aircraft, a portion of the proceeds was used to repay $36,666 of debt related to the aircraft plus accrued interest.

Earnings from discontinued operations for the nine months ended September 30, 2006, related solely to the aircraft held for sale, were as follows:


Earnings from discontinued operations  
Lease rentals $ 2,135
Gain on disposition 2,240
Interest expense (528
)
Earnings before income tax provision 3,847
Income tax provision (448
)
Earnings from discontinued operations $ 3,399

Note 5.    Debt Securities

As of December 31, 2005 and September 30, 2006, all of our debt securities were corporate obligations and were classified as available-for-sale. The aggregate fair value of these debt securities at September 30, 2006 was $120,271. These debt obligations are interests in pools of loans and are collateralized by interests in commercial aircraft of which $97,741 are investment grade and $22,530 are subordinate to other debt related to such aircraft. All of our debt securities had unrealized gain positions relative to their net book values, which aggregated to $9,900 and $13,508 at December 31, 2005 and September 30, 2006, respectively.

Two of our debt securities, with a fair value of $49,936 at September 30, 2006 have stated maturities in 2010. One of our debt securities with a fair value of $50,729 has a stated maturity in 2011. Our other three debt securities with an aggregate fair value of $19,606 have remaining terms to stated maturity in excess of 10 years after September 30, 2006. All of our debt securities provide for the periodic payment of both principal and interest and are subject to prepayment and/or acceleration depending on certain events, including sale of underlying collateral aircraft and events of default. Therefore, the actual maturity of our debt securities may be less than the stated maturities.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

Note 6.    Securitization and Borrowings under Credit Facilities

On June 15, 2006, we completed our first securitization, a $560,000 transaction comprising of 40 aircraft, which we refer to as Securitization No. 1. In connection with Securitization No. 1, two of our subsidiaries, ACS Aircraft Finance Ireland plc (‘‘ACS Ireland’’) and ACS Aircraft Finance Bermuda Limited (‘‘ACS Bermuda’’), which we refer to together with their subsidiaries as the ‘‘ACS Group’’, issued $560,000 of Class A-1 notes, or the ‘‘notes,’’ to a newly formed trust, the ACS 2006-1 Pass Through Trust, or the ‘‘trust.’’ The trust simultaneously issued a single class of Class G-1 pass through trust certificates, or the ‘‘certificates,’’ representing undivided fractional interests in the notes. Payments on the notes will be passed through to holders of the certificates. The notes are secured by ownership interests in aircraft-owning subsidiaries of ACS Bermuda and ACS Ireland and the aircraft leases, cash, rights under service agreements and any other assets they may hold. Each of ACS Bermuda and ACS Ireland has fully and unconditionally guaranteed the other’s obligations under the notes. However, the notes are neither obligations of nor guaranteed by Aircastle Limited.

The ACS Group used the proceeds from the sale of the notes to acquire 40 aircraft from Aircastle and we paid for certain expenses incurred in connection with the certificates offering of $14,356. We used a portion of the proceeds of Securitization No. 1 to return $36,932 to Fortress in exchange for the cancellation of 3,693,200 of our common shares and to repay amounts owed on Credit Facility No. 1 and Credit Facility No. 2, each as defined below. The notes provide for monthly payments of interest at a floating rate of one-month LIBOR plus 0.27%, which at September 30, 2006 was 5.60%, and scheduled payments of principal. Financial Guaranty Insurance Company issued a financial guaranty insurance policy to support the payment of interest when due on the certificates and the payment, on the final distribution date, of the outstanding principal amount of the certificates. The certificates are rated Aaa and AAA by Moody's Investors Service and Standard & Poor's rating services, respectively. We have entered into a series of interest rate hedging contracts intended to hedge the interest rate exposure associated with issuing floating-rate obligations backed by primarily fixed-rate lease assets. These contracts, together with the guarantee premium, the spread referenced above and other costs of trust administration, result in a fixed rate cost of 6.60% per annum, after the amortization of issuance fees and expenses.

ACS Ireland, which had total assets of $156,938 at September 30, 2006, is a VIE which we consolidate. At September 30, 2006, the outstanding principal amount of ACS Ireland’s notes was $107,159.

On February 28, 2006, we entered into a $500,000 revolving credit facility with a group of banks, as lenders, to finance the acquisition of aircraft and related improvements which we refer to as Credit Facility No. 2. The borrowing base is equal to 85% of the net book value of the aircraft. Borrowings under this credit facility incur interest at the one-month LIBOR rate plus 1.25%. Additionally, we are subject to a 0.25% fee on any unused portion of the total committed facility. Credit Facility No. 2 requires the monthly payment of interest and principal, to the extent of 85% of any decrease in the net book value of the assets. Prior to the initial public offering, Credit Facility No. 2 limited our ability to pay dividends. After the initial public offering, Credit Facility No. 2 has no restrictions on the amount of dividends we can pay, provided that we are not in default. Additionally, we are required under Credit Facility No. 2 to maintain a net worth determined in conformity with GAAP of no less than $500,000. Effective June 15, 2006, Credit Facility No. 2 was amended to increase the maximum committed amount to $750,000 and to extend the maturity to November 15, 2007. As of September 30, 2006, we had borrowed $277,894 under Credit Facility No. 2.

On February 24, 2006, the revolving period of our $600,000 credit facility, which we refer to as Credit Facility No. 1, was extended to April 28, 2006 and the maximum amount of this credit facility was reduced to $525,000. The other terms of Credit Facility No. 1 remained the same. Monthly payments of interest only continued through repayment of Credit Facility No. 1. Credit Facility No. 1 was repaid in full on August 4, 2006.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

In October 2005, the Company entered into a credit facility for $109,998 with a bank to finance the acquisition of three aircraft which we refer to as Credit Facility No. 3. On March 30, 2006, $36,666 of Credit Facility No. 3 was repaid using a portion of the proceeds from the disposition of flight equipment held for sale which had been financed under this facility. Credit Facility No. 3 was amended on July 18, 2006, to increase the maximum committed amount by approximately $25,116 and to extend the maturity date to March 31, 2007. The increase in the maximum committed amount was reduced by $25,116 with the closing of the initial public offering. On or prior to maturity, we intend to refinance Credit Facility No. 3 with long-term financing. However, we can give no assurances the Company will be able to obtain this financing. As of September 30, 2006, we had borrowed $73,332 under Credit Facility No. 3.

Note 7.    Repurchase Agreements

We entered into repurchase agreements to fund a portion of the purchase price of certain of our debt investments. At December 31, 2005 and September 30, 2006, the repurchase agreements are secured by liens on the debt investments with a fair value of $11,107 and $104,336, respectively. The repurchase agreements are substantially all with parties other than those from whom we originally purchased the debt investments. At September 30, 2006, the repurchase agreements are scheduled to mature through June 2007. Upon maturity, we intend to refinance the repurchase agreements on similar terms and conditions. However, there is no assurance the Company will be able to refinance the repurchase agreements. The weighted average interest rate of these repurchase agreements at September 30, 2006 was 5.67%.

Note 8.    Initial Public Offering

On August 11, 2006, the Company completed its initial public offering of 10,454,535 common shares at a price of $23 per share, raising $240,454 before offering costs. The net proceeds of the initial public offering, after our payment of $16,832 in underwriting discounts and commissions, and $3,777 in offering expenses were $219,845. $205,470 of the net proceeds was used to repay a portion of Credit Facility No. 2. The remainder of the proceeds were used for working capital requirements and to fund additional aircraft acquisitions.

Note 9.    Shareholders’ Equity, Share Based Payments and Earnings (Loss) Per Share

In January 2006, the board of directors (the ‘‘Board’’) and the Fortress Shareholders adopted the Aircastle Investment Limited 2005 Equity and Incentive Plan, and the Board and the Fortress Shareholders approved an amendment to and restatement thereof on July 20, 2006 (as so amended and restated, the ‘‘2005 Plan’’). The purpose of the 2005 Plan is to provide additional incentive to selected management employees. The 2005 Plan provides that the Company may grant (a) share options, (b) share appreciation rights, (c) awards of restricted shares, deferred shares, performance shares, unrestricted shares or other share-based awards, or (d) any combination of the foregoing. Four million shares were reserved under the 2005 Plan, increasing by 100,000 each year beginning in 2007 through and including 2016. The 2005 Plan provides that grantees of restricted shares will have all of the rights of shareholders, including the right to receive dividends, other than the right to sell, transfer, assign or otherwise dispose of the shares until the lapse of the restricted period.

In February and March of 2006, the Board ratified the initial grants under the 2005 Plan of 347,500 restricted shares in the first half of 2005 and 25,000 restricted shares on July 5, 2005 which were provided for in certain employment contracts, and approved new grants of 412,500 restricted shares. Generally, the restricted shares vest over five year periods based on continued service and are being expensed on a straight line basis over the requisite service period of the awards. The terms of the grants provide for accelerated vesting under certain circumstances, including termination without cause following a change of control. The grants also impose lock-up restrictions on restricted shares

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

from the date of grant through 120 days after the date of any initial public offering, and provide for certain further restrictions and notice periods thereafter.

On July 20, 2006, the Board declared a dividend from cash on hand in the amount of $0.35 per common share, or an aggregate of $14,367 to shareholders of record on July 26, 2006, which was paid on July 31, 2006. In addition, on August 2, 2006, our Board declared a dividend of $0.156 per common share, or an aggregate of $6,403 to shareholders of record on August 1, 2006, which was paid on August 15, 2006. The Company paid these dividends so that holders of our common shares prior to the initial public offering would receive a distribution for the period prior to the initial public offering.

On July 21, 2006, the Company returned $36,932 of cash to Fortress in exchange for the cancellation of 3,693,200 of our common shares at $10 per share.

A summary of the fair value of nonvested shares for the nine months ended September 30, 2006 is as follows:


Nonvested Shares Shares
(in 000’s)
Weighted
Average
Grant Date
Fair Value
Fair Value of
Nonvested
Shares at
Grant Date
Nonvested at January 1, 2006 372.5
$ 8.50
$ 3,166
Granted 483.7
22.23
10,753
Cancelled (4.5
)
22.00
(99
)
Vested (71.0
)
14.92
(1,059
)
Forfeited
Nonvested at September 30, 2006 780.7
$ 16.35
$ 12,761

The fair value of the restricted shares granted in 2006 prior to the initial public offering was determined based on an estimate of the offering range per share from the anticipated initial public offering. The fair value of restricted shares granted in 2006 subsequent to the date of the initial public offering was determined based upon the market price of the shares at the grant date. We anticipate that the current requisite service periods will be obtained for employees with awards. The total unrecognized compensation cost as of September 30, 2006 in the amount of $10,006 is expected to be recognized over a weighted average period of four years.

During the nine months ended September 30, 2005, a total of 372,500 restricted shares were granted at a fair value of $8.50. The fair value of the restricted shares granted in 2005 was determined based on a retrospective valuation performed by an unrelated valuation specialist. The valuation relied on observed equity investments made by the Fortress Shareholders, adjusted to reflect the lack of marketability of the shares granted to employees.

On August 7, 2006, 65,215 restricted shares were granted to non-officer directors on our board. The fair value of the restricted shares was based upon the initial public offering price of $23 per share.

In September, 2006, 6,000 restricted shares were granted to a new employee under the terms of the employee’s employment contract. The fair value of the restricted shares was based upon the market price of the shares at the grant date.

Aircastle is required to present both basic and diluted earnings (loss) per share (‘‘EPS’’). Basic EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. The weighted average shares outstanding exclude our unvested shares for purposes of Basic EPS. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period while also giving effect to all potentially dilutive common shares that were outstanding during the period based on the treasury stock method. For the three and nine months ended September 30, 2005, based on the treasury stock

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

method, we had 20,032 and 14,655, respectively, anti-dilutive common share equivalents resulting from restricted shares. There were no anti-dilutive common shares for the three and nine months ended September 30, 2006.

The calculations of both basic and diluted earnings (loss) per share for the three months and nine months ended September 30, 2005 and 2006 are as follows:


  Three Months Ended September 30, Nine Months Ended September 30,
  2005 2006 2005 2006
Numerator  
 
 
 
Income (loss) from continuing operations $ (1,606
)
$ 15,182
$ (3,856
)
$ 28,013
Earnings from discontinued operations, net of income taxes
3,399
Net income (loss) $ (1,606
)
$ 15,182
$ (3,856
)
$ 31,412
Denominator  
 
 
 
Denominator for basic earnings per share 40,000,000
46,907,390
40,000,000
44,058,333
Effect of dilutive restricted shares (a
)
315,121
(a
)
317,865
Denominator for diluted
earnings per share
40,000,000
47,222,511
40,000,000
44,376,198
Basic Earnings (loss) per share:  
 
 
 
Income (loss) from continuing operations $ (0.04
)
$ 0.32
$ (0.10
)
$ 0.64
Earnings from discontinued operations, net of income taxes
0.08
Net income (loss) per share $ (0.04
)
$ 0.32
$ (0.10
)
$ 0.72
Diluted Earnings (loss) per share:  
 
 
 
Income (loss) from continuing operations $ (0.04
)
$ 0.32
$ (0.10
)
$ 0.63
Earnings from discontinued operations, net of income taxes $
$
$
$ 0.08
Net income (loss) per share $ (0.04
)
$ 0.32
$ (0.10
)
$ 0.71
(a) Anti-dilutive

Note 10.    Income Taxes

Income taxes have been provided based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2016. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in or earn income in jurisdictions that impose income taxes, primarily the United States and Ireland.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

The sources of income (loss) from continuing operations before income taxes for the three and nine months ended September 30, 2005 and 2006 were as follows:


  Three Months Ended September 30, Nine Months Ended September 30,
  2005 2006 2005 2006
Bermuda $ (1,700
)
$ 10,551
$ (3,936
)
$ 14,873
Non-Bermuda 302
6,417
541
17,593
Total $ (1,398
)
$ 16,968
$ (3,395
)
$ 32,466

The components of the income tax provision from continuing operations for the three and nine months ended September 30, 2005 and 2006 consisted of the following:


  Three Months Ended September 30, Nine Months Ended September 30,
  2005 2006 2005 2006
Current $ 220
$ 226
$ 424
$ 2,214
Deferred (12
)
1,560
37
2,239
Total $ 208
$ 1,786
$ 461
$ 4,453

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2005 and September 30, 2006 consisted of the following:


  December 31,
2005
September 30,
2006
Deferred tax assets:  
 
Non-cash share based payments $ 152
$ 797
Net operating loss carry forwards 49
913
Other 6
5
Total deferred tax assets 207
1,715
Deferred tax liabilities  
 
Accelerated depreciation (333
)
(3,655
)
Other
(572
)
U.S. federal withholding tax on unremitted earnings (207
)
(60
)
Total deferred tax liabilities (540
)
(4,287
)
Net deferred tax liabilities $ (333
)
$ (2,572
)

The Company had approximately $390 of net operating loss carry forwards available at December 31, 2005 to offset future taxable income in Ireland. Deferred tax assets and liabilities are included in other assets and accounts payable and accrued liabilities, respectively, in the accompanying consolidated balance sheets.

We do not expect to incur income taxes on future distributions of undistributed earnings of non-U.S. subsidiaries and, accordingly, no deferred income taxes have been provided for the distribution of such earnings. Withholding taxes have been provided on unremitted earnings of our U.S. subsidiary.

Note 11.    Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and the changes in the fair value of derivatives, reclassification into earnings of amounts previously deferred relating to our derivative financial instruments and the change in unrealized appreciation of debt securities.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

Comprehensive income for the three months and nine months ended September 30, 2005 and 2006 was as follows:


  Three Months Ended September 30, Nine Months Ended September 30,
  2005 2006 2005 2006
Net income (loss) $ (1,606
)
$ 15,182
$ (3,856