Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 11/13/2007 06:02:36)

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 SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

or

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

For the transition period from                to                

Commission File number 001-32959

AIRCASTLE LIMITED

(Exact name of registrant as specified in its charter)


Bermuda 98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification 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 7, 2007: 78,417,321 common shares, par value $0.01 per share.





Aircastle Limited and Subsidiaries

Form 10-Q

Table of Contents






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,
2006
September 30,
2007
    (unaudited)
ASSETS    
Cash and cash equivalents $ 58,118 $ 26,867
Accounts receivable 7,696 4,365
Debt investments 121,273 114,717
Restricted cash and cash equivalents 106,069 125,362
Flight equipment held for sale 31,280
Flight equipment held for lease, net of accumulated depreciation
of $64,111 and $147,937
1,559,365 3,029,686
Aircraft purchase deposits and progress payments 4,650 226,167
Leasehold improvements, furnishings and equipment, net of
accumulated depreciation of $694 and $1,160
1,506 1,320
Fair value of derivative assets 313 2,007
Other assets 28,433 44,615
Total assets $ 1,918,703 $ 3,575,106
LIABILITIES AND SHAREHOLDERS’ EQUITY    
LIABILITIES    
Borrowings under credit facilities $ 442,660 $ 336,165
Borrowings from securitizations 549,400 1,693,232
Accounts payable, accrued expenses and other liabilities 31,384 64,224
Dividends payable 22,584 43,822
Lease rentals received in advance 11,068 17,736
Repurchase agreements 83,694 67,506
Security deposits 39,767 66,645
Maintenance payments 82,914 153,432
Fair value of derivative liabilities 18,035 55,105
Total liabilities 1,281,506 2,497,867
Commitments and Contingencies – Note 13    
SHAREHOLDERS’ EQUITY    
Preference shares, $.01 par value, 50,000,000 shares authorized,
no shares issued and outstanding at December 31, 2006
and September 30, 2007
Common shares, $.01 par value, 250,000,000 shares authorized,
51,621,279 shares issued and outstanding at December 31, 2006;
and 67,417,321 shares issued and outstanding at September 30, 2007
516 674
Additional paid-in capital 630,154 1,129,179
Dividends in excess of earnings (3,382 )   (29,220 )  
Accumulated other comprehensive income (loss) 9,909 (23,394 )  
Total shareholders’ equity 637,197 1,077,239
Total liabilities and shareholders’ equity $ 1,918,703 $ 3,575,106

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

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


  Three Months Ended
September 30,
Nine Months Ended
September 30,
2006 2007 2006 2007
Revenues:        
Lease rentals $ 48,796 $ 102,863 $ 116,557 $ 252,147
Interest income 2,487 2,367 6,588 7,683
Other revenue 153 34 153 553
Total revenues 51,436 105,264 123,298 260,383
Expenses:        
Depreciation 15,502 34,980 35,740 84,378
Interest, net – Note 17 14,069 27,074 34,147 63,151
Selling, general and administrative (including non-cash share based payment expense of $1,044 and $1,230 for the three months ended and $7,729 and $5,276 for the nine months ended September 30, 2006 and 2007, respectively) 5,107 8,380 20,976 27,324
Other expense 304 503 1,200 110
Total expenses 34,982 70,937 92,063 174,963
Income from continuing operations before income taxes 16,454 34,327 31,235 85,420
Income tax provision 1,742 1,857 4,380 4,935
Income from continuing operations 14,712 32,470 26,855 80,485
Earnings from discontinued operations, net of
income taxes
470 4,557 11,594
Net income  $ 15,182 $ 32,470 $ 31,412 $ 92,079
Basic earnings per share:        
Income from continuing operations $ 0.31 $ 0.49 $ 0.61 $ 1.26
Earnings from discontinued operations, net of
income taxes
0.01 0.11 0.18
Net income per share $ 0.32 $ 0.49 $ 0.72 $ 1.44
Diluted earnings per share:        
Income from continuing operations $ 0.31 $ 0.49 $ 0.60 $ 1.25
Earnings from discontinued operations, net of
income taxes
0.01 0.11 0.18
Net income per share $ 0.32 $ 0.49 $ 0.71 $ 1.43
Dividends declared per share $ 0.506 $ 0.65 $ 0.506 $ 1.75

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

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


  Nine Months Ended
September 30,
  2006 2007
Cash flows from operating activities    
Net income $ 31,412 $ 92,079
Adjustments to reconcile net income to net cash provided by operating activities (inclusive of amounts related to discontinued operations):    
Depreciation 38,182 85,139
Amortization of deferred financing costs 5,827 5,150
Amortization of lease premiums and discounts, and other related lease items (2,846 )   (6,673 )  
Deferred income taxes 2,239 (3,652 )  
Accretion of purchase discounts on debt investments (619 )   (627 )  
Non-cash share based payment expense 7,729 5,276
Capitalized interest (2,733 )  
Cash flow hedges reclassified into earnings (1,197 )   (3,481 )  
Realized gain on derivative contract (1,154 )  
Ineffective portion of cash flow hedges (815 )   52
Gain on the sale of flight equipment (2,240 )   (10,219 )  
Changes in certain assets and liabilities:    
Accounts receivable (2,374 )   3,331
Restricted cash and cash equivalents (53,244 )   (19,130 )  
Other assets (818 )   (6,413 )  
Accounts payable, accrued expenses and other liabilities 922 6,440
Lease rentals received in advance 3,992 6,668
Security deposits and maintenance payments 74,101 103,621
Net cash provided by operating activities 100,251 253,674
Cash flows from investing activities    
Acquisition and improvement of flight equipment (746,081 )   (1,494,683 )  
Disposition of flight equipment held for sale 57,157 34,946
Aircraft purchase deposits and progress payments (40,997 )   (153,657 )  
Leasehold improvements, furnishings and equipment (347 )   (280 )  
Margin deposits (1,555 )   3,688
Purchase of debt investments (92,726 )   (15,251 )  
Principal repayments on debt investments 3,589 20,262
Net cash used in investing activities (820,960 )   (1,604,975 )  
Cash flows from financing activities    
Issuance of common shares 258,547 493,056
Issuance, net of repurchases, of common shares to employees 851
Repurchase of shares from affiliate (36,932 )  
Proceeds from securitizations 560,000 1,170,000
Securitization repayments (5,267 )   (26,168 )  
Restricted cash and cash equivalents related to unreleased securitization borrowings (12,818 )   (163 )  
Deferred financing costs (14,978 )   (11,174 )  
Credit facility borrowings 660,302 1,330,962
Credit facility repayments (799,664 )   (1,533,383 )  
Proceeds from repurchase agreements 76,007 894
Principal repayments on repurchase agreements (833 )   (17,082 )  
Proceeds from terminated cash flow hedges 16,142 8,936
Dividends paid (20,770 )   (96,679 )  
Net cash provided by financing activities 679,736 1,320,050
Net decrease in cash and cash equivalents (40,973 )   (31,251 )  
Cash and cash equivalents at beginning of period 79,943 58,118
Cash and cash equivalents at end of period $ 38,970 $ 26,867

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

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

Note 1.    Summary of Significant Accounting Policies

Organization

Aircastle Limited, (‘‘Aircastle,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’) is a Bermuda exempted company that was incorporated on October 29, 2004 by funds managed by affiliates of Fortress Investment Group LLC and certain of its affiliates (together, the ‘‘Fortress Shareholders’’ or ‘‘Fortress,’’ and such funds the ‘‘Fortress Funds’’) under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including acquiring, managing and leasing commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments. Fortress Shareholders owned a majority of our outstanding common shares as of September 30, 2007; however, the Fortress Shareholders and certain officers of Fortress held approximately 39% of our common shares after our follow-on offering of common shares that closed on October 10, 2007 (See Note 18 ‘‘Subsequent Events — Follow-On Public Offering of Common Shares’’).

Basis of Presentation

Aircastle is a holding company that conducts its business through subsidiaries. Aircastle owns, directly or indirectly, all of the outstanding common shares or economic ownership interest of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’).

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 condensed financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, its Quarterly Report on Form 10-Q filed on August 14, 2007 and its Current Report on Form 8-K filed on September 26, 2007 reporting events under item 8.01.

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates two Variable Interest Entities (‘‘VIEs’’) 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. All intercompany transactions and balances have been eliminated in consolidation.

Recent Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (‘‘SFAS No. 159’’). SFAS No 159, which amends SFAS No. 115, allows certain financial assets and liabilities to be recognized, at the company’s election, at fair market value, with

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

any gains or losses for the period recorded in the statement of income. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Currently, the Company records the gains or losses for the period in the statement of comprehensive income and in the equity section of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact of SFAS No. 159 on its consolidated results of operations and financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements (‘‘SFAS No. 157’’). This Statement defines fair value, establishes a framework for measuring fair value 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 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the potential impacts of SFAS No. 157 on its consolidated results of operations and financial position.

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 investments, accounts payable, amounts borrowed under credit facilities, borrowings from securitizations, repurchase agreements and cash flow hedges. The fair value of cash and 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, securitizations and repurchase agreements bear floating rates of interest which reset monthly 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 investments 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, 2007 were as follows:


Year Ending December 31, Amount
Remainder of 2007 $ 102,993
2008 391,742
2009 338,479
2010 280,379
2011 232,298
2012 169,487
Thereafter 250,953
  $ 1,766,331

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

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 2006 2007 2006 2007
Europe 44 %   42 %   44 %   44 %  
Asia 16 %   29 %   15 %   27 %  
North America 27 %   15 %   28 %   18 %  
Latin America 8 %   6 %   8 %   6 %  
Middle East and Africa 5 %   8 %   5 %   5 %  
  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.

For the three months ended September 30, 2006, one customer accounted for 23% of lease rental revenues and three additional customers combined accounted for 22% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenues. For the three months ended September 30, 2007, one customer accounted for 11% of lease rental revenues and three additional customers combined accounted for 17% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenues.

For the nine months ended September 30, 2006, two customers accounted for 26% and 10%, respectively, of lease rental revenues. No other customer accounted for more than 5% of lease rental revenues. For the nine months ended September 30, 2007, one customer accounted for 13% of lease rental revenues and two additional customers combined accounted for 13% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenues.

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


  December 31, 2006 September 30, 2007
Region Number of
Aircraft
Net Book
Value %
Number of
Aircraft
Net Book
Value %
Europe 35 46 %   53 45 %  
Asia 14 21 %   30 28 %  
North America 11 23 %   12 11 %  
Latin America 5 6 %   7 5 %  
Middle East and Africa 3 4 %   7 11 %  
  68 100 %   109 100 %  

At December 31, 2006 and September 30, 2007, lease acquisition costs included in other assets on the consolidated balance sheets were $377 and $417, respectively. Prepaid lease incentive costs included in other assets on the consolidated balance sheets were $656 and $184 at December 31, 2006 and September 30, 2007, 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 three months ended March 31, 2006, we completed the sale of this aircraft. In accordance with the terms of 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.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

As of March 31, 2007, one of our aircraft was classified as flight equipment held for sale. In May 2007, we completed the sale of this aircraft. Lease rentals, depreciation, other expenses and the gain on disposition related to this aircraft have been recorded as earnings from discontinued operations, net of income tax provision, for the nine months ended September 30, 2007. For the nine month period ended September 30, 2007, we had no outstanding borrowings and incurred no interest expense related to this aircraft.

Earnings from discontinued operations for the three months and the nine months ended September 30, 2006 and 2007 related solely to the two aircraft held for sale, were as follows:


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2006 2007 2006 2007
Earnings from discontinued operations:        
Lease rentals $ 1,618 $ $ 6,991 $ 2,364
Depreciation (917 )   (2,442 )   (761 )  
Gain on disposition 2,240 10,219
Interest expense (107 )   (1,439 )  
Other expenses (80 )   (272 )   (185 )  
Earnings before income tax provision 514 5,078 11,637
Income tax provision (44 )   (521 )   (43 )  
Earnings from discontinued operations $ 470 $ $ 4,557 $ 11,594

Note 5.    Debt Investments

At September 30, 2007, debt investments with an aggregate fair value of $100,516 were U.S. corporate obligations and were classified as available-for-sale. These debt obligations are interests in pools of loans and are collateralized by interests in commercial aircraft of which $79,511 are senior tranche with an investment grade rating and $21,005 are subordinate to other debt related to such aircraft. All of our debt investments which are classified as available-for-sale had unrealized gain positions relative to their net book values, which aggregated to $14,390 and $12,218 at December 31, 2006 and September 30, 2007, respectively.

At September 30, 2007, debt investments with a fair value of $41,437 and $41,128, respectively, have stated maturities in 2010 and 2011, respectively. Debt investments with an aggregate fair value of $17,951 have remaining terms to stated maturity in excess of 10 years after September 30, 2007. All of our debt investments provide for the periodic payment of both principal and interest and are subject to prepayment and/or acceleration depending on certain events, including the sale of the underlying collateral aircraft and events of default. Therefore, the actual maturity of our debt investments may be less than the stated maturities.

In 2007, we acquired a loan secured by a commercial jet aircraft with a cash purchase of $15,251 that is classified as held to maturity. The loan matures in December 2007 and at September 30, 2007 had a net book value of $14,201, which we believe approximates its fair value as of that date.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

Note 6.    Securitization and Borrowings under Credit Facilities

The outstanding amounts of our securitizations and borrowings under our credit facilities were as follows:


  At
December 31,
2006
At September 30, 2007
Debt Obligation Outstanding
Borrowings
Outstanding
Borrowings
Interest Rate (1) Final Stated
Maturity
Securitizations:        
Securitization No. 1 $ 549,400 $ 532,999 1 M LIBOR + .27% = 6.02% 6/20/31
Securitization No. 2 1,160,233 1 M LIBOR + .26% = 6.08% 6/14/37
Total Securitizations 549,400 1,693,232    
Credit Facilities:        
747 PDP Credit Facility 64,127 1 M LIBOR + 1.00% = 6.67% 4/15/08
Revolving Credit Facility 1 M LIBOR + 1.50% — N/A 6/15/08
Amended Credit Facility No. 2 369,328 272,038 1 M LIBOR + 1.25% = 7.00% 12/15/08
Credit Facility No. 3 73,332 1 M LIBOR + 1.50% — N/A N/A
Total Credit Facilities 442,660 336,165    
Total $ 992,060 $ 2,029,397    
(1) London Interbank Offered Rate, or ‘‘LIBOR,’’ in effect at the applicable reset date.

Securitization No. 1

In connection with Securitization No. 1, two of our subsidiaries, ACS Aircraft Finance Ireland plc and ACS Aircraft Finance Bermuda Limited issued $560,000 of Class A-1 notes, of which $532,999 remains outstanding as of September 30, 2007.

ACS Aircraft Finance Ireland plc, which had total assets of $143,848 at September 30, 2007, is a VIE which we consolidate. At September 30, 2007, the outstanding principal amount of ACS Aircraft Finance Ireland plc’s notes was $103,318.

Securitization No. 2

On June 8, 2007, we completed our second securitization, a $1,170,000 transaction comprising 59 aircraft, which we refer to as ‘‘Securitization No. 2.’’ In connection with Securitization No. 2, two of our subsidiaries, ACS Aircraft Finance Ireland 2 Limited (‘‘ACS Ireland 2’’) and ACS 2007-1 Limited (‘‘ACS Bermuda 2’’), to which we refer together with their subsidiaries as the ‘‘ACS 2 Group’’ issued $1,170,000 of Class A notes, or the ‘‘ACS 2 Notes,’’ to a newly formed trust, the ACS 2007-1 Pass Through Trust, or the ‘‘ACS 2 Trust.’’ The ACS 2 Trust simultaneously issued a single class of Class G-1 pass through trust certificates, or the ‘‘ACS 2 Certificates,’’ representing undivided fractional interests in the ACS 2 Notes. Payments on the ACS 2 Notes will be passed through to the holders of the ACS 2 Certificates. The ACS 2 Notes are secured by ownership in aircraft owning subsidiaries of ACS Bermuda 2 and ACS Ireland 2 and the aircraft leases, cash, rights under service agreements and any other assets they may hold. Each of ACS Bermuda 2 and ACS Ireland 2 has fully and unconditionally guaranteed the other’s obligations under the ACS 2 Notes. However, the ACS 2 Notes are neither obligations of nor guaranteed by Aircastle Limited. The ACS 2 Notes mature on June 14, 2037.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

The terms of Securitization No. 2 require the ACS 2 Group to satisfy certain financial covenants, including the maintenance of debt service coverage ratios. The ACS 2 Group’s compliance with these covenants depends substantially upon the timely receipt of lease payments from their lessees. In particular, during the first five years from issuance, Securitization No. 2 has an amortization schedule that requires that lease payments be applied to reduce the outstanding principal balance of the indebtedness so that such balance remains at 60.6% of an assumed value of the 59 aircraft securing the ACS 2 Notes. If the debt service coverage ratio requirements are not met on two consecutive monthly payment dates in the fourth and fifth year following the closing date of Securitization No. 2, and in any month following the fifth anniversary of the closing date, all excess securitization cash flow is required to be used to reduce the principal balance of the indebtedness and will not be available to us for other purposes, including paying dividends to our shareholders.

As of September 30, 2007, the ACS 2 Group used the proceeds from the sale of the ACS 2 Notes to acquire all 59 aircraft from us and we paid certain expenses incurred in connection with the ACS 2 Certificates offering of approximately $12,620. We used a portion of the proceeds from Securitization No. 2 to repay amounts owed under Amended Credit Facility No. 2.

Financial Guaranty Insurance Company issued a financial guaranty insurance policy to support the payment of interest when due on the ACS 2 Certificates and the payment, on the final distribution date, of the outstanding principal amount of the ACS 2 Certificates. The ACS 2 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 related guarantee premium, the spread referenced above and other costs of trust administration, result in a fixed rate cost of 6.20% per annum, after the amortization of issuance fees and expenses.

ACS Ireland 2, which had total assets of $243,362 at September 30, 2007, is a VIE which we consolidate. At September 30, 2007, the outstanding principal amount of the ACS2 notes issued by ACS Ireland 2 was $188,978. The assets of ACS Ireland 2 as of September 30, 2007 include nine aircraft transferred to ACS Ireland 2 in connection with Securitization No. 2.

747 PDP Credit Facility

On July 26, 2007, we made an accelerated payment to the relevant Guggenheim Aviation Investment Fund LP (‘‘GAIF’’) seller under our acquisition agreement with GAIF (the ‘‘GAIF Acquisition Agreement’’) for 3 Boeing Model 747-400ERF aircraft in the amount of $106,668 and assumed a pre-delivery payment credit facility related to such 747-400ERF aircraft (the ‘‘Accelerated ERF Aircraft’’), which we refer to as the 747 PDP Credit Facility. The total outstanding amount of borrowings assumed under the 747 PDP Credit Facility was $95,926. Borrowings under this facility were used to finance progress payments made to Boeing during the manufacturing of the aircraft and bear interest at one-month LIBOR plus 1.00% per annum and will mature upon delivery of the final aircraft scheduled for April 2008. On July 30, 2007, we took delivery of the first Accelerated ERF Aircraft and paid down $31,799 under the 747 PDP Credit Facility.

Revolving Credit Facility

On January 22, 2007, our Revolving Credit Facility was amended to increase the maximum committed amount to $450,000.  The maximum committed amount was subsequently reduced to $250,000 upon the closing of our follow-on offering in February 2007.

On April 5, 2007, we entered into an amendment to the Revolving Credit Facility which increased our minimum net worth covenant from $550,000 to $750,000 plus one-half of the net

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

proceeds of any future equity capital we raise. We are not permitted to pay dividends on our common shares to the extent a default or an event of default exists under our Revolving Credit Facility.

On August 20, 2007, the Company and the other parties to the Revolving Credit Facility entered into a third amendment to the Revolving Credit Facility extending its maturity to June 15, 2008.

At September 30, 2007, there were no outstanding loans and $13,883 of letters of credit outstanding under the Revolving Credit Facility.

Amended Credit Facility No. 2

We are currently utilizing a senior secured credit facility, which we refer to as Amended Credit Facility No. 2, to finance up to 65% of the purchase price of certain aircraft not included in our two securitizations. The maximum committed amount of this credit facility was $1,250,000. On June 8, 2007, the maximum committed amount of Amended Credit Facility No. 2 was reduced to $1,000,000 and $509,942 was repaid on Amended Credit Facility No. 2 from the proceeds of Securitization No. 2.

On September 14, 2007, the parties to the credit agreement entered into an amendment to the credit agreement permitting us to finance under the credit agreement a portion of the cost of converting from passenger to freighter configuration three Boeing Model 747-400 aircraft which we have acquired or committed to acquire.

Credit Facility No. 3

Credit Facility No. 3, with an outstanding balance of $73,332 as of June 30, 2007, was repaid in full in July of 2007 out of the proceeds of Securitization No. 2.

Note 7.    Repurchase Agreements

The outstanding amounts of our repurchase agreements were as follows:


  At
December 31,
2006
At September 30, 2007
Debt Obligation Outstanding
Borrowings
Outstanding
Borrowings
Interest Rate (2) Final Stated
Maturity
Repurchase Agreement $ 75,055 $ 59,679 1 M LIBOR + .50% = 6.27% 3/1/08
Repurchase Agreement 2,759 2,524 1 M LIBOR + .50% = 5.63% 6/28/08
Repurchase Agreement (1) 5,880 5,303 1 M LIBOR + .75% = 6.55% 10/15/07
Total Repurchase Agreements $ 83,694 $ 67,506    
(1) Refinanced in October 2007 with new maturity date of November 15, 2007. We intend to refinance this repurchase agreement on a monthly basis.
(2) LIBOR in effect at the applicable reset date.

We enter into repurchase agreements to fund a portion of the purchase price of certain of our senior tranche investment grade debt investments. At December 31, 2006 and September 30, 2007 the repurchase agreements are secured by liens on the debt investments with a fair value of $105,550 and $86,089, respectively. The repurchase agreements are substantially all with parties other than those from whom we originally purchased the debt investments. Upon maturity, we plan to refinance the repurchase agreements on similar terms and conditions.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

Note 8.    Shareholders’ Equity and Share Based Payments

On February 8, 2006, Fortress purchased 3,693,200 common shares at $10.00 per share for a total amount of $36,932. 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 $10.00 per share.

In August 2006, the Company completed its initial public offering of 10,454,535 common shares at a price of $23.00 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 $4,027 in offering expenses were $219,595. Approximately $205,470 of the net proceeds was used to repay a portion of Credit Facility No. 2. The remainder of the net proceeds was used for working capital requirements and to fund additional aircraft acquisitions.

On February 13, 2007, the Company completed a follow-on public offering of 15,525,000 common shares at a price of $33.00 per share, raising $512,325 before offering costs. Net proceeds of the offering, after our payment of $17,931 in underwriting discounts and commissions and $1,338 in offering expenses, were $493,056. Approximately $473,074 of the net proceeds was used to repay borrowings under Amended Credit Facility No. 2 and the Revolving Credit Facility. The remainder of the net proceeds was used for working capital requirements and to fund additional aircraft acquisitions.

On April 12, 2007, an officer of the Company was granted 135,000 common shares and purchased an additional 35,000 shares for a total of 170,000 shares.

On April 30, 2007, the Company accelerated the vesting of 50,000 restricted shares of a former officer of the Company resulting in a non-cash share based expense of $1,670.

On October 10, 2007, the Company completed a follow-on public offering of 11,000,000 primary common shares at a public offering price of $31.75 per share, including 1,000,000 common shares pursuant to the underwriter’s option to cover over-allotments (See Note 18 ‘‘Subsequent Events — Follow-On Public Offering of Common Shares’’).

A summary of the fair value of nonvested shares for the nine months ended September 30, 2007 is as follows:


Nonvested Shares Shares
(in 000’s)
Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 2007 901.3 $ 18.05
Granted 261.5 34.16
Cancelled (17.0 )   (23.43 )  
Vested (238.1 )   (18.85 )  
Nonvested at September 30, 2007 907.7 $ 22.38

The fair value of the restricted shares granted in 2007 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, 2007 in the amount of $16,163 is expected to be recognized over a weighted average period of three years.

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Table of Contents

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 30, 2007

Note 9.    Dividends

The following table sets forth the quarterly dividends declared by our Board of Directors:


Declaration Date Dividend per
Common Share
Aggregate
Dividend
Amount
Record Date Payment Date
July 20, 2006 $ 0.35 $ 14,367 July 26, 2006 July 31, 2006
August 2, 2006 $ 0.156 (1 )   6,403 August 1, 2006 August 15, 2006
October 9, 2006 $ 0.194 (1 )   9,992 October 31, 2006 November 15, 2006
December 13, 2006 $ 0.4375 22,584 December 29, 2006 January 15, 2007
March 14, 2007 $ 0.50 33,634 March 30, 2007 April 13, 2007
June 14, 2007 $ 0.60 40,460 June 29, 2007 July 13, 2007
September 13, 2007 $ 0.65 43,822 September 28, 2007 October 15, 2007
(1) Total dividend for quarter of $0.35

Note 10.    Earnings Per Share

The following table shows the components and computation of basic and diluted earnings per share:


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2006 2007 2006 2007
Numerator        
Income from continuing operations $ 14,712 $ 32,470 $ 26,855 $ 80,485