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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****Form 10-K****ANNUAL REPORT****PURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**   (Mark One)  þ     **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934**   **For the fiscal year ended December 31, 2005** **OR** o     **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: 001-32343****Arlington Tankers Ltd.***(Exact name of Registrant as specified in its charter)***Bermuda***(Jurisdiction of incorporation or organization)***First Floor, The Hayward Building****22 Bermudiana Road****Hamilton HM 11, Bermuda***(Address of principal executive offices)***Registrant’s telephone number, including area code:****(441) 292-4456****Securities registered pursuant to Section 12(b) of theAct.**   **Title of Each Class** **Name of Each Exchange on Which Registered**       Common Shares, par value $0.01 per share     New York Stock Exchange**Securities registered pursuant to Section 12(g) of theAct.****None***(Title of Class)*     Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the SecuritiesAct.     Yes o          No þ     Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of theAct.     Yes o          No þ     Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days.     Yes þ          No o     Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 ofRegulation S-K isnot contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of thisForm 10-K or anyamendment to thisForm 10-K.     o     Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-acceleratedfiler. See definition of “accelerated filer and largeaccelerated filer” inRule 12b-2 of theExchange Act. (Check one):Large acceleratedfiler o          Acceleratedfiler þ          Non-acceleratedfiler o     Indicate by check mark whether the registrant is a shell company(as defined inRule 12b-2 of theExchangeAct).     Yes o          No þ     The aggregate market value of the registrant’s commonshares held by non-affiliates of the registrant as ofJune 30, 2005, was approximately $233,250,139.82 based onthe closing price of $21.79 per share for theregistrant’s common shares as reported on the New YorkStock Exchange on that date.     As of February 28, 2006, the registrant had 15,500,000common shares issued and outstanding.**DOCUMENTS INCORPORATED BY REFERENCE**     Specified portions of the registrant’s proxy statement forthe registrant’s 2006 Annual General Meeting ofShareholders to be held on May 10, 2006, which are expectedto be filed pursuant to Regulation 14A within 120 daysafter the end of the registrant’s fiscal year endedDecember 31, 2005, are incorporated by reference intoPart III of this report.  

 
**TABLE OF CONTENTS**      ** PART I**     ITEM 1. BUSINESS  1       Overview  1       Strategy  2       Competitive Strengths  3       Our Fleet  3       Charter Arrangements  4       Ship Management Agreements  10       Risk of Loss and Insurance  11       Inspection by a Classification Society  12       Tanker Industry Overview  12       Environmental Regulation  14       Executive Officers Of The Registrant  19      ITEM 1A. RISK FACTORS  20       Company Specific Risk Factors  20       Industry Specific Risk Factors  26       Risks Related To Our Common Shares  30      ITEM 1B. UNRESOLVED STAFF COMMENTS  30      ITEM 2. PROPERTIES  30      ITEM 3. LEGAL PROCEEDINGS  30      ITEM 4. SUBMISSION OF MATTERS TO A    VOTE OF SECURITY HOLDERS  30  ** PART II**     ITEM 5. MARKET FOR REGISTRANT’S    COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES    OF EQUITY SECURITIES  31       Market Price of Arlington Tankers’    Common Shares and Related Shareholder Matters  31       Dividends  31      ITEM 6. SELECTED FINANCIAL DATA  32      ITEM 7. MANAGEMENT’S DISCUSSION    AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  33      ITEM 7A. QUANTITATIVE AND QUALITATIVE    DISCLOSURES ABOUT MARKET RISK  46      ITEM 8. FINANCIAL STATEMENTS AND    SUPPLEMENTARY DATA  47       Index to Consolidated Financial    Statements  47      ITEM 9. CHANGES IN AND DISAGREEMENTS    WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  70      ITEM 9A. CONTROLS AND PROCEDURES  70       Conclusion Regarding the Effectiveness of    Disclosure Controls and Procedures  70       Management’s Report on Internal    Controls Over Financial Reporting  70       Changes in Internal Controls over Financial    Reporting  71       Report of Independent Registered Public    Accounting Firm on Internal Controls over Financial Reporting  71      ITEM 9B. OTHER INFORMATION  73  ** PART III**     ITEM 10. DIRECTORS AND EXECUTIVE    OFFICERS OF THE REGISTRANT  73      ITEM 11. EXECUTIVE COMPENSATION  73      ITEM 12. SECURITY OWNERSHIP OF CERTAIN    BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER    MATTERS  73      ITEM 13. CERTAIN RELATIONSHIPS AND    RELATED TRANSACTIONS  73      ITEM 14. PRINCIPAL ACCOUNTANT FEES AND    SERVICES  73  ** PART IV**     ITEM 15. EXHIBITS AND FINANCIAL    STATEMENT SCHEDULES  74      EXHIBIT INDEX  76  Ex-21.1 Subsidiaries Ex-31.1 Section 302 Certification of C.E.O. Ex-31.2 Section 302 Certification of C.F.O. Ex-32.1 Section 906 Certification of C.E.O. Ex-32.2 Section 906 Certification of C.F.O. In this Annual Report onForm 10-K,references to “we,” “our,” “us”and the “company” refer to Arlington Tankers Ltd. and,as the context requires, our subsidiaries.

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**PART I****Cautionary Statement Regarding Forward Looking Statements**     This Annual Report onForm 10-K containscertain forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, asamended, which we refer to as the Exchange Act, and informationrelating to us that are based on beliefs of our management aswell as assumptions made by us and information currentlyavailable to us, in particular under the headings“Item 1. Business” and “Item 7.Management’s Discussion and Analysis of Financial Conditionand Results of Operations.” When used in this document,words such as “believe,” “intend,”“anticipate,” “estimate,”“project,” “forecast,” “plan,”“potential,” “will,” “may,”“should,” and “expect” and similarexpressions are intended to identify forward-looking statementsbut are not the exclusive means of identifying such statements.All statements in this document that are not statements ofhistorical fact are forward-looking statements. Forward-lookingstatements include, but are not limited to, such matters as: •     future operating or financial results;  •     future payments of quarterly dividends and the availability of    cash for payment of quarterly dividends;  •     statements about future, pending or recent acquisitions,    business strategy, areas of possible expansion, and expected    capital spending or operating expenses;  •     statements about tanker market trends, including charter rates    and factors affecting vessel supply and demand;  •     expectations about the availability of vessels to purchase, the    time which it may take to construct new vessels, or    vessels’ useful lives; and  •     our ability to repay our secured term loan at maturity, to    obtain additional financing and to obtain replacement charters    for our vessels.     Such statements reflect our current views with respect to futureevents and are subject to certain risks, uncertainties andassumptions. Many factors could cause our actual results,performance or achievements to be materially different from anyfuture results, performance or achievements that may beexpressed or implied by such forward-looking statements,including, among others, the factors described in“Item 1A. Risk Factors” and the factors otherwisereferenced in this report. Should one or more of these risks oruncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from thosedescribed in the forward-looking statements included herein. Wedo not intend, and do not assume any obligation, to update theseforward-looking statements.**ITEM 1.*****BUSINESS*****Overview**     We were incorporated on September 21, 2004 under the lawsof Bermuda as a jointly owned subsidiary of Stena AB (publ), orStena, and Concordia Maritime AB (publ), or Concordia, a Swedishcompany and an affiliate of Stena. Stena is one of the largestprivately held companies in Sweden, with over 6,700 employees.Concordia has been involved in the shipping business for over20 years. Stena and Concodia continue to be shareholders ofthe Company.     Our fleet consists of eight tankers. On November 10, 2004,we acquired our original fleet of six tankers consisting of twoV-MAX tankers, two Panamax tankers and two Product tankers. OnJanuary 5, 2006 we acquired two additional Product tankers.We have eight wholly owned subsidiaries, each of which owns oneof the tankers in our fleet. We purchased the two V-MAX tankersfrom subsidiaries of Concordia, the four Product tankers fromsubsidiaries of Stena and the two Panamax tankers from twocompanies owned 75% by Stena and 25% by Fram Shipping Ltd.,which we refer to as Fram.     We have chartered our two V-MAX tankers to two wholly ownedsubsidiaries of Concordia, which have currently sub-charteredthose tankers to Sun International. We acquired the two V-MAXtankers subject to
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existing sub-charters with Sun International Limited Bermuda, anindirect wholly owned subsidiary of Sunoco, Inc. which we referto as Sun International. One of these sub-charters expires inJune 2007 and the other expires in September 2007. We havechartered our two Panamax tankers and four Product tankers toStena Bulk AB, a wholly owned subsidiary of Stena. We refer toour charters for our vessels as the Charters. We refer to thesetwo Concordia subsidiaries and Stena Bulk AB collectively as theCharterers. Our purchase of the V-MAX tankers from subsidiariesof Concordia and our chartering of these vessels back to theseConcordia subsidiaries do not affect the existing fixed ratesub-charters with Sun International.     The Charters have fixed terms with between three and five yearsremaining. There are also charter period options exercisable bythe Charterers. The Charters provide for a fixed base charterrate and, in some cases, the potential to earn Additional Hireas explained below under the caption Additional Hire. Each ofour wholly owned subsidiaries has also entered into a fixed rateship management agreement with Northern Marine Management Ltd.,a wholly owned subsidiary of Stena which we refer to as NorthernMarine, to provide for the operation and maintenance of each ofour vessels.     We believe that our fleet is one of the youngest in the world,with an average age as of January 31, 2006 of approximately2.2 years compared to the world average of 11.6 yearsfor all tankers according to Clarkson Research Studies Ltd. Thetwo V-MAX tankers, which came into service in 2001 areapproximately four years old, and the Panamax and Producttankers, which came into service during 2004 and 2005, are eachless than two years old. All of our tankers have double hullsand are of very high quality.**Strategy**     Our strategy is designed to generate stable and generallypredictable cash flow through long-term fixed rate charters,which reduces our exposure to volatility in the market forseaborne oil and oil product transportation. We intend to paydividends in accordance with our dividend policy, which isdescribed below in “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results ofOperations — Dividend Policy”. The following arethe key elements of our strategy: • *Acquire high quality tankers.* Our two V-MAX tankers were    built in 2001 and our six other tankers were completed during    2004 and 2005. All of our tankers have double hulls and have    been designed to provide more efficient transportation of oil    and oil products compared to other standard ship designs. We    will consider acquiring additional tankers in the future. Any    such acquisition will require additional financing and the    consent of our lenders under our credit facility.  • *Time charter our tankers to experienced charterers.* We    time charter our tankers to subsidiaries of Stena and Concordia.    Stena and Concordia have agreed to guarantee their respective    subsidiaries’ obligations under the Charters. Stena    operates a fleet of oil tankers. Stena’s current customers    for its fleet of owned and chartered-in tankers include major    oil companies such as ChevronTexaco Corporation, the Royal    Dutch/ Shell Group of Companies, ConocoPhillips and BP p.l.c.    The two V-MAX tankers    in our fleet were owned by Concordia and have been chartered to    Sun International since their delivery.  • *Charter our tankers under long term fixed rate charters.*    Our existing Charters are designed to generate stable and    generally predictable cash flow and reduce our exposure to the    volatility in tanker spot rates. In some of our charters we have    preserved an opportunity to earn Additional Hire during    favorable market conditions. The charterhire payable to us under    our Charters will increase annually by an amount equal to the    annual increase in the fees payable by us under the ship    management agreements.  • *Arrange for ship management contracts with an experienced    ship manager.* We have entered into ship management contracts    with Northern Marine for each of our vessels. Under these    agreements, Northern Marine has assumed all responsibilities for    the technical management of the vessels, including crewing,    maintenance, repair, drydocking and insurance for a fixed daily    fee per vessel which increases 5% annually. In addition,    Northern Marine has agreed to indemnify us for our loss of Basic    Hire in the event, for circumstances specified under the    Charters, the vessel is off hire or receiving
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     reduced hire for more than five days during any twelve-month    period, net of amounts received from off hire insurance. These    arrangements are designed to provide stable and generally    predictable operating costs for our fleet.**Competitive Strengths**     We believe that our fleet, together with our contractualarrangements with the Charterers and Northern Marine, give us anumber of competitive strengths, including: •     one of the youngest fleets of tankers in the world;  •     diversified exposure to three segments of the tanker market;  •     two unique V-MAX tankers;  •     vessels managed by Northern Marine, which we believe is one of    the industry’s most qualified vessel managers;  •     fixed rate time charters intended to provide stable and    generally predictable cash flow, reducing our exposure to    volatility in tanker spot rates, and in six of our charters,    profit sharing agreements, providing the opportunity to earn    additional revenue; and  •     fixed operating costs under our ship management agreements.**Our Fleet**     We acquired our original six tankers from Stena, Concordia andFram concurrently with the completion of our initial publicoffering on November 10, 2004. We acquired *Stena Concept*and *Stena Contest*from Stena on January 5, 2006.The following chart summarizes certain information about ourfleet.                 **Vessel Type** **Year Built** **Dwt** **Flag** **Date Acquired**         **V-MAX**                *Stena Victory*  2001   314,000   Bermuda   November 10, 2004 *Stena Vision*  2001   314,000   Bermuda   November 10, 2004 **Panamax**                *Stena Companion*  2004   72,000   Bermuda   November 10, 2004 *Stena Compatriot*  2004   72,000   Bermuda   November 10, 2004 **Product**                *Stena Concord*  2004   47,400   Bermuda   November 10, 2004 *Stena Consul*  2004   47,400   Bermuda   November 10, 2004 *Stena Concept*  2005   47,400   Bermuda   January 5, 2006 *Stena Contest*  2005   47,400   Bermuda   January 5, 2006      All of our tankers have double hulls and are of very highquality. These tankers are fitted with long-term plannedmaintenance software programs so that all routine machineryadjustments are done effectively and with minimal disruption inservice.     Our V-MAX tankers were designed by Stena and Concordia toprovide more efficient transportation and increased safety overstandard VLCCs. The body of our V-MAX tankers is wider than aconventional VLCC. This enables the vessels to carry more cargoat a shallower draft, which lowers transportation costs. OurV-MAX tankers also havetwo rudders and propellers which improve vessel maneuverabilityand port access. These tankers have been designed for astructural fatigue life of 40 years. Our V-MAX tankerstypically load crude oil in West Africa and discharge inPhiladelphia, which is a port that cannot be accessed byconventional VLCCs.     Our Panamax tankers have fully epoxy coated tanks and a tankdesign that permit the vessels to change from transporting dirtyto clean petroleum products faster than a standard vessel ofthis class. Our Panamax
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tankers also have integrated bridge systems, unique in vesselsof this class, that provide increased efficiency, safety,visibility, communication and maneuvering capabilities to thebridge team navigating the vessel. Our Panamax tankers typicallytrade in the North, South and Central Americas primarilycarrying crude oil but also dirty products.     Our Product tankers have one of the most efficient designs forvessels in this class with 10 completely independentmultiple-grade cargo segregations providing increasedflexibility over the six segregations standard in Producttankers. Compared to standard vessels in this class, our Producttankers also have more powerful engines that provide flexibilityto respond to weather conditions and market demands and a tankdesign that permits quicker discharge and reduced tankpreparation time to load the next cargo. Our Product tankerscurrently trade primarily in the Caribbean and the Transatlanticand primarily carry clean products such as gasoline, diesel andjetfuel.**Charter Arrangements**     *The following summary of the material terms of the Chartersdoes not purport to be complete and is subject to, and qualifiedin its entirety by reference to, all the provisions of theCharters. Because the following is only a summary, it does notcontain all information that you may find useful. For morecomplete information, you should read the entire Time CharterParty for each vessel filed as an exhibit to this Annual Reporton Form 10-K.****General***     Our wholly owned subsidiaries have time chartered our vessels tothe Charterers. Upon completion of our initial public offeringin November 2004, each of our original six vessels was charteredfor a fixed term expiring in November 2009, followed by threeone-year options exercisable at the option of the Charterers. InJanuary 2006, in connection with our acquisition of twoadditional Product tankers from Stena, the fixed term for one ofour Product tankers (*Stena Consul*) and one of our Panamaxtankers (*Stena Compatriot*) was extended to November 2010,followed by three one-year options exercisable by the Chartererand the fixed term for one of our Product tankers (*StenaConcord*) and one of our Panamax tankers (*StenaCompanion*) was reduced to November 2008, followed by threeone-year options exercisable by the Charterer. The terms of theCharters for our V-MAX tankers were not amended.     The fixed charter period for the two Product tankers that weacquired in January 2006 expires in January 2009. At the end ofthe initial three-year period, both we and the Charterer havethe option to extend the time charters on a vessel-by-vesselbasis for an additional 30 months. Furthermore, if theCharterer exercises the30-month option, therewill be two additional one-year options, exercisable by theCharterer.     We have agreed to guarantee the obligations of each of oursubsidiaries under the Charters.     The Charterers are Stena Bulk AB, a wholly owned subsidiary ofStena, and CM V-MAX I Limited and CM V-MAX II Limited, eacha wholly owned subsidiary of Concordia.     Under the Charters, we are required to keep the vesselsseaworthy, and to crew and maintain them. Northern Marineperforms those duties for us under the ship managementagreements described below. If a structural change or newequipment is required due to changes in law, classificationsociety or regulatory requirements, the Charterers will berequired to pay for such changes if the cost is less than$100,000 per year per vessel. Otherwise the cost of anysuch improvement or change will be shared between us and theCharterer of the vessel based on the remaining charter periodand the remaining depreciation period of the vessel (calculatedas 25 years from the year built). The Charterers are notobligated to pay us charterhire for off hire days of fewer thanfive days per vessel per year, which include days a vessel isunable to be in service due to, among other things, repairs ordrydockings. Each Charter also provides that the Basic Hire willbe reduced if the vessel does not achieve the performancespecifications set forth in the Charter. However, under the shipmanagement agreements described below, Northern Marine willreimburse us for any loss of or reduction in Basic Hire, inexcess of five days during any twelve-month period following thedate the vessels are delivered to us, net of any proceeds wereceive from our off-hire insurance.
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     The terms of the Charters do not provide the Charterers with anoption to terminate the Charter before the end of its term.However, the Charters may terminate in the event of the totalloss or constructive total loss of a vessel. In addition, eachCharter provides that we may not sell the related vessel withoutthe Charterer’s consent, which consent may be withheld atthe Charterer’s sole discretion.     The two V-MAX tankers that we have chartered to subsidiaries ofConcordia are currently chartered to Sun International, anindirect wholly owned subsidiary of Sunoco. Our purchase of theV-MAX tankers from the subsidiaries of Concordia and ourchartering of these vessels back to these Concordia subsidiariesdid not affect the existing fixed rate charters with SunInternational. Sunoco does not guarantee SunInternational’s obligations under the charters. If SunInternational defaults under these charters, the subsidiaries ofConcordia will continue to be obligated under the terms of theCharters with us. Concordia has agreed to guarantee theperformance of its subsidiaries under the Charters, includingpayment of charterhire.     Upon expiration of the Sun International charters, which arescheduled to expire 30 days before or after June 2007 forone charter and 30 days before or after September 2007 forthe other, if Sun International does not extend a charter withConcordia at a time charter rate at least equal to the BasicHire under our charters with Concordia, we will have the optionto terminate that charter with Concordia on 60 days priornotice until one year following the expiration of the SunInternational charters, unless Concordia has (a) enteredinto new time charters for each of the vessels at a time charterrate at least equal to the Basic Hire under our charters withConcordia for the remainder of the charter period with a company(or its subsidiary) having a credit rating of “BBB” orhigher from Standard & Poor’s Rating Services or“Baa2” or higher from Moody’s Investors Service,Inc. or (b) provided cash collateral initially in an amountequal to $7.5 million per charter, decreasing quarterlythereafter pro rata, as security for its payment obligationsunder the Charter. If we terminate a charter with Concordia asdescribed above, Stena has agreed to cause Stena Bulk to charterfrom us the V-MAX tanker previously subject to that charter at atime charter rate equal to the Basic Hire under that charter forthe remainder of the charter period, and otherwise on the termsand conditions of that charter and to guarantee the obligationsof Stena Bulk under the new charter with us.     The vessels that we have time chartered to Stena Bulk are notcurrently subject to any time charters. Stena has agreed toguarantee the performance of Stena Bulk under the Charters,including payment of charterhire.***Basic Hire***     The daily base charter rate for each of our vessels, which werefer to as Basic Hire, is payable to us monthly in advance andwill increase annually by an amount equal to the annual increasein the fee payable under the applicable ship managementagreement.     The following table sets forth the daily Basic Hire for ourinitial six vessels.                       **Stena Vision,** **Stena** **Stena** **Stena** **Stena**  **Stena Victory** **Compatriot** **Companion** **Consul** **Concord****Period** **(V-MAX)** **(Panamax)** **(Panamax)** **(Product)** **(Product)**               Nov. 11, 2005 - Nov. 10, 2006 $36,075  $17,688  $17,688  $15,765  $15,765     Nov. 11, 2006 - Nov. 10, 2007  36,469   17,989   17,989   16,043   16,043     Nov. 11, 2007 - Nov. 10, 2008  36,882   18,306   18,306   16,335   16,335     Nov. 11, 2008 - Nov. 10, 2009(1)  37,316   18,639   18,639   16,642   16,642     Nov. 11, 2009 - Nov. 10, 2010(2)  37,772   18,989   18,989   16,964   16,964     Nov. 11, 2010 - Nov. 10, 2011(3)  38,251   19,356   19,356   17,303   17,303     Nov. 11, 2011 - Nov. 10, 2012  38,753   19,741   —   17,658   —     Nov. 11, 2012 - Nov. 10, 2013  —   20,145   —   18,031   —  (1)     This period is the first for which the Charterer has the option    to extend the Charters for *Stena Companion*and *Stena    Concord.* There can be no assurance that the Charterer will    exercise any option.
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(2)     This period is the first for which the Charterer has the option    to extend the Charters for the V-MAX Tankers, *Stena Vision*and *Stena Victory.* There can be no assurance that the    Charterer will exercise any option. (3)     This period is the first for which the Charterer has the option    to extend the Charters for *Stena Compatriot*and *Stena    Consul.* There can be no assurance that the Charterer will    exercise any option.     The following table sets forth the daily Basic Hire for thevessels we acquired in January 2006.       **Stena Concept**  **Stena Contest****Period** **(Product)**       January 5, 2006 - January 4, 2007 $19,765     January 5, 2007 - January 4, 2008  20,043     January 5, 2008 - January 4, 2009  20,335     January 5, 2009 - January 4, 2010(1)  17,942     January 5, 2010 - January 4, 2011  18,264     January 5, 2011 - July 4, 2011  18,603     July 5, 2011 - July 4, 2012(2)  21,158     July 5, 2012 - July 4, 2013  21,531  (1)     At the end of the initial fixed charter period expiring on    January 4, 2009, either we or the Charterers may extend the    Charters on a vessel-by-vessel basis for an additional    30-month period    expiring on July 4, 2011. If the Charterer extends the    Charter for this    30-monthly period, we    would be eligible to earn Additional Hire in addition to Basic    Hire. (2)     This period is the first for which the Charterer has the option    to extend the Charters if either one of the Charter exercises    the option described in Footnote 1 above.     The related ship management agreement provides that NorthernMarine will reimburse us for any reduced hire or off-hire if thetotal of the reduced hire and off-hire days as specified in theship management agreement exceeds five days during eachtwelve-month period following the date the vessels are deliveredto us to ensure that we receive a total of 360 days ofBasic Hire for each vessel during that period. However, there isno obligation on the part of Northern Marine to compensate usfor lost Additional Hire as a result of anyoff-hire periods.***Additional Hire***     In addition to the Basic Hire, the Charterers of our vesselsother than *Stena Concept*and *Stena Contest*haveagreed to pay us quarterly in arrears an additional payment,which we refer to as the Additional Hire. We would be eligibleto earn Additional Hire for *Stena Concept*or *StenaContest*if the Charterer extends the Charters for eithersuch vessel for the initial30-month option periodfor such vessels. We would not be eligible to earn AdditionalHire for such vessels if the Charterer exercises the subsequentone-year options. Under the Charters, the Additional Hire, ifany, in respect of each of our vessels, is payable on the25th day following the end of each calendar quarter.     The Additional Hire, if any, payable in respect of a vessel,other than the V-MAX tankers as described below, for anycalendar quarter will be an amount equal to 50% of the WeightedAverage Hire for the quarter after deduction of the Basic Hirein effect for that quarter. The Weighted Average Hire is definedas a daily rate equal to the weighted average of the followingamounts: •     a weighted average of the time charter hire per day received by    the Charterer for any periods during the Calculation Period that    the vessel is subchartered by the Charterer under a time    charter, less ship broker commissions paid by the Charterer in    an amount not to exceed 2.5% of such time charter hire and    commercial management fees paid by the Charterer in an amount    not to exceed 1.25% of such time charter hire; and
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 •     the Time Charter Equivalent Hire, calculated as described below,    for any periods during the Calculation Period that the vessel is    not subchartered by the Charterer under a time charter.     For each Calculation Period, these amounts will be weightedbased on the number of days the vessel was subchartered by theCharterer under a time charter during the Calculation Period andthe number of days the vessel was not subchartered by theCharterer under a time charter during the Calculation Period.There is no obligation to pay Additional Hire during any periodwhen the obligation to pay Basic Hire is suspended under theCharter if due to technical reasons the vessel is off hireunless the vessel is off hire as a result of a class conditionor recommendation determined by the vessel’s classificationsociety discovered by us prior to delivery or during theinspection undertaken by us in connection with the purchase ofthe vessel and such condition or recommendation cannot beremedied or complied with during a regularly scheduleddrydocking without increasing the duration of such drydocking.     The Calculation Period is the twelve month period ending on thelast day of each calendar quarter. If the Weighted Average Hirecalculated for any calendar quarter (or portion thereof), isequal to or less than the Basic Hire for the same period, theAdditional Hire for that quarter will be zero. However, if atthe end of any calendar quarter, the deduction of the Basic Hirefrom the Weighted Average Hire would result in a negative amountin respect of any vessel, a Charterer will have the right to use50% of that negative amount to reduce any Additional Hirepayable by that Charterer for the same quarter in respect of anyof our other vessels chartered by that Charterer.     In the case of the current sub-charters with Sun International,we will receive Additional Hire equal to the difference betweenthe amount paid by Sun International under its time charters andthe Basic Hire, less ship broker commissions paid by theCharterer in an amount not to exceed 2.5% of the charterhirereceived by the Charterer and commercial management fees paid bythe Charterer in an amount not to exceed 1.25% of thecharterhire received by the Charterer. We immediately beganearning Additional Hire under the V-MAX tanker charters becausethese vessels are currently sub-chartered to Sun Internationalby subsidiaries of Concordia for an amount per day in excess ofthe Basic Hire payable to us in respect of these vessels.     We earned Additional Hire of $5.6 million in 2005,consisting of $2.7 million in Additional Hire for our V-MAXtankers and $2.9 million for our other vessels.     The Time Charter Equivalent Hire referred to above is a weightedaverage of day rates calculated using the parameters set forthbelow, which we call the Daily Value. The Daily Value iscalculated using average spot rates expressed in WorldscalePoints determined by a shipbrokers panel for the routesspecified below which are the routes on which our vessel typesgenerally trade. We refer to these rates as the Average SpotRates and we refer to these routes as the Notional Routes. DailyValue is determined as follows: •     multiplying the Average Spot Rate expressed in Worldscale Points    by the applicable Worldscale flat rate and multiplying that    product by the cargo size for each vessel type to calculate    freight income;  •     subtracting voyage costs consisting of brokerage commissions of    2.5% and commercial management fees of 1.25%, bunker costs and    port charges to calculate voyage income; and  •     dividing voyage income by voyage duration, including time in    port, to calculate the Daily Value.     The Time Charter Equivalent Hire is then determined as aweighted average of the Daily Values calculated for each of theNotional Routes for each of our vessel types. In the case of theV-MAX tankers an amount equal to 10% of such weighted average isadded to the Time Charter Equivalent Hire to adjust for theadditional cargo capacity of V-MAX tankers as compared to astandard VLCC.     The shipbrokers panel, which we call the Brokers Panel, is theAssociation of Shipbrokers and Agents Tanker Broker Panel. Wecan change the panel of brokers to a new panel mutuallyacceptable to us and the Charterer. On the last day of eachcalendar quarter and on the expiration date of the Charter, weand the Charterer will instruct the Brokers Panel to determinefor each Notional Route the Average Spot Rate over any periodsduring the Calculation Period that a vessel is not subcharteredby the Charterer under a time charter. If Worldscale ceases tobe published, the Brokers Panel will use its best judgment indetermining the nearest alternative method of assessing themarket rates on the specified voyages.
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     We instruct the Brokers Panel to deliver their determination ofthe Average Spot Rates no later than the fifth business dayfollowing the instruction to make such determination. The costsof the Brokers Panel are shared equally between us and theCharterer. For each Calculation Period, the Charterer willcalculate the amount of Time Charter Equivalent Hire and theamount of Additional Hire payable, if any, and deliver suchcalculation to us no later than the fifth business day followingthe date on which the Charterer receives the determination ofAverage Spot Rates from the Brokers Panel. These determinationsof the Brokers Panel are binding on us and the Charterer.     The Notional Routes and the weighting to be applied to eachroute in calculating the Time Charter Equivalent Hire is asfollows:*Product tankers:*    Rotterdam to New York with 37,000 tons clean (40% weight)    Curacao to New York with 38,000 tons clean (60% weight) *Panamax tankers:*    Curacao to New York with 50,000 tons dirty (50% weight) Augusta    to Houston with 50,000 tons dirty (50% weight) *V-MAX tankers:*    West-Africa to LOOP with 260,000 tons of crude (50% weight)    Middle East Gulf to LOOP with 265,000 tons of crude (50% weight)     Additional terms used in the calculation of Time CharterEquivalent Hire are as follows: • *Calculation of freight income.* The freight income for    each Notional Route is calculated by multiplying the Average    Spot Rate for such route, as supplied by the Brokers Panel, by    the Worldscale flat rate for such route as set forth in the New    Worldwide Tanker Nominal Freight Scale issued by the Worldscale    Association and current for the relevant period and then    multiplying such product by the cargo size for such route.  • *Calculation of voyage income.* The voyage income for each    Notional Route is calculated by deducting from the freight    income for such route ship broker commissions equal to 2.5% of    the freight income, commercial management fees equal to 1.25% of    the freight income, the port charges and bunker costs (equal to    the bunkers used multiplied by the bunkers prices) specified    below for each vessel. Bunkers used are determined based on    speed, distance and consumption of bunkers at sea and in port.  • *Calculation of voyage duration.* The voyage duration for    each Notional Route is calculated using the distance, speed and    time in port specified below for each vessel.  • *Data used in calculations.* The following data is used by    the Charterer in the above calculations:                   • Bunkers    in port. For Product tankers: 40 tons per voyage all-inclusive    loading and discharging ports. For Panamax tankers: 65 tons per port call all-inclusive    loading and discharging ports. For V-MAX tankers: loading 12 tons per day; idling 3 tons    per day; discharging 145 tons per day.                    • Bunker    prices. For Product tankers and Panamax tankers: the mean of the    average prices during the quarter for Marine Fuel Oil grade IFO    380 CST prevailing at Houston, New York and Curacao as published    by Platts Bunkerwire, or similar publication, plus barge    delivery charges in amount equal to the average barge delivery    charges in the applicable port over the prior twelve-month    period.
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For V-MAX tankers: the mean of the average prices during    the quarter for Marine Fuel Oil grade IFO 380 CST prevailing at    Curacao and Fujairah as published by Platts Bunkerwire, or    similar publication, plus barge delivery charges in amount equal    to the average barge delivery charges in the applicable port    over the prior twelve-month period.                    • Port    charges.     The port charges for loading and discharging ports on each    Notional Route are equal to the published tariffs and exchange    rates in effect on the last calendar day of the quarter and    include all vessel costs for port calls.                    • Time    in port. For Product tankers and Panamax tankers: 5.5 days,    which are split 2 days loading, 2 days discharging and    the balance of the time idling. For V-MAX tankers: 7.5 days, which are split    3 days loading, 3 days discharging and the balance of    the time idling.                    • Distance.     The distance for each Notional Route is determined according to    the “World-Wide Marine Distance Tables” published by    Veson Nautical Distance Tables.                    • Speed    and consumption at sea. For Product tankers: 14 knots at 36 tons per day in laden    condition and 14 knots at 35 tons per day in ballast condition    less a steaming allowance of 7.5 percent applied to the    speeds to allow for weather and navigation. For Panamax tankers: 14 knots at 41.5 tons per day in    laden condition and 14 knots at 39.5 tons per day in ballast    condition less a steaming allowance of 7.5 percent applied    to the speeds to allow for weather and navigation. Fuel    consumption for cargo heating to be actual figures of fuel    consumed but not to exceed 8 tons per day. For V-MAX tankers: 16.9 knots at 127 tons per day in    laden condition and 17.7 knots at 127 tons per day in ballast    condition less a steaming allowance of 7.5 percent applied    to the speeds to allow for weather and navigation.     The Notional Routes are intended to represent routes on whichProduct tankers, Panamax tankers and VLCCs are typically used.If during the term of the Charter, in the Charterer’sreasonable opinion, these routes cease to be used by Producttankers, Panamax tankers or VLCCs, or the assumptions regardingbunkering ports for purposes of determining bunker prices ceaseto be applicable, the Charterer may, with our consent, which wemay not unreasonably withhold, instruct the Brokers Panel tosubstitute alternative notional routes and bunkering ports thatmost closely match the routes and bunkering ports typically usedby Product tankers, Panamax tankers or VLCCs and to applyappropriate weights to such routes.     If in the Charterer’s reasonable opinion it becomesimpractical or dangerous, due to war, hostilities, warlikeoperations, civil war, civil commotion, revolution or terrorismfor Product tankers, Panamax tankers and VLCCs to operate on theNotional Routes, the Charterer may request our agreement, whichwe may not
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unreasonably refuse, for the Daily Value to be determined duringthe period of such danger or restriction of trading usingAverage Spot Rates determined by the Brokers Panel foralternative notional routes proposed by the Charterer thatreasonably reflect realistic alternative round voyage trade forProduct tankers, Panamax tankers and VLCCs during the period ofsuch danger or restriction of trading. In such event, the TimeCharter Equivalent Hire will be calculated using the Daily Valuefor such alternative routes and applying such weights asdetermined by the Charterer.**Ship Management Agreements**     *The following summary of the material terms of the shipmanagement agreements does not purport to be complete and issubject to, and qualified in its entirety by reference to, allthe provisions of the ship management agreements. Because thefollowing is only a summary, it does not contain all informationthat you may find useful. For more complete information, youshould read the entire Ship Management Agreement for each vesselfiled as an exhibit to this Annual Report onForm 10-K.*     Our vessel owning subsidiaries have entered into fixed rate shipmanagement agreements with Northern Marine. Under the shipmanagement agreements, Northern Marine is responsible for alltechnical management of the vessels, including crewing,maintenance, repair, drydockings, vessel taxes and other vesseloperating and voyage expenses. Northern Marine has outsourcedsome of these services to third-party providers. We have agreedto guarantee the obligations of each of our subsidiaries underthe ship management agreements.     Under the ship management agreements, Northern Marine has agreedto return our vessels in-class and in the same good order andcondition as when delivered, except for ordinary wear and tear.     Northern Marine is also obligated under the ship managementagreements to maintain insurance for each of our vessels,including marine hull and machinery insurance, protection andindemnity insurance (including pollution risks and crewinsurances), war risk insurance and off-hire insurance. Underthe ship management agreements, we pay Northern Marine a fixedfee per day per vessel for all of the above services, whichincreases 5% per year, for so long as the relevant Charteris in place. Under the ship management agreements, NorthernMarine has agreed to indemnify us for the loss of the Basic Hirefor each of our vessels in the event, for circumstancesspecified under the Charters, the vessel is off hire orreceiving reduced hire for more than five days during anytwelve-month period, net of amounts received by us from off-hireinsurance. Stena has agreed to guarantee this indemnification byNorthern Marine. Both we and Northern Marine have the right toterminate any of the ship management agreements if the relevantCharter has been terminated.     The following table sets forth the daily base operating costsfor our initial six vessels.                       **Stena Vision,** **Stena** **Stena**   **Stena**  **Stena Victory** **Compatriot** **Companion** **Stena Consul** **Concord****Period** **(V-MAX)** **(Panamax)** **(Panamax)** **(Product)** **(Product)**               Nov. 11, 2005 - Nov. 10, 2006 $7,875  $6,038  $6,038  $5,565  $5,565     Nov. 11, 2006 - Nov. 10, 2007  8,269   6,339   6,339   5,843   5,843     Nov. 11, 2007 - Nov. 10, 2008  8,682   6,656   6,656   6,135   6,135     Nov. 11, 2008 - Nov. 10, 2009  9,116   6,989   6,989   6,442   6,442     Nov. 11, 2009 - Nov. 10, 2010(1)  9,572   7,339   7,339   6,764   6,764     Nov. 11, 2010 - Nov. 10, 2011(2)  10,051   7,706   7,706   7,103   7,103     Nov. 11, 2011 - Nov. 10, 2012(3)  10,553   8,091   —   7,458   —     Nov. 11, 2012 - Nov. 10, 2013  —   8,495   —   7,831   —  (1)     This period is the first for which the Charterer has the option    to extend the Charters for Stena Companion and Stena Concord.    There can be no assurance that the Charterer will exercise any    option. (2)     This period is the first for which the Charterer has the option    to extend the Charters for the V-MAX Tankers. There can be no    assurance that the Charterer will exercise any option.
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(3)     This period is the first for which the Charterer has the option    to extend the Charters for Stena Compatriot and Stena Consul.    There can be no assurance that the Charterer will exercise any    option.     The following table sets forth the daily base operating costsfor the vessels we acquired in January 2006.       **Stena Concept**  **Stena Contest****Period** **(Product)**       January 5, 2006 - January 4, 2007 $5,565     January 5, 2007 - January 4, 2008  5,843     January 5, 2008 - January 4, 2009  6,135     January 5, 2009 - January 4, 2010(1)  6,442     January 5, 2010 - January 4, 2011  6,767     January 5, 2011 - July 4, 2011  7,103     July 5, 2011 - July 4, 2012(2)  7,458     July 5, 2012 - July 4, 2013  7,831  (1)     At the end of the initial fixed charter period expiring on    January 4, 2009, either we or the Charters may extend the    Charters on a vessel-by-vessel basis for an additional    30-month period    expiring on July 4, 2011. If the Charter extends the    Charter for this    30-monthly period, we    would be eligible to earn Additional Hire in addition to Basic    Hire. (2)     This period is the first for which the Charter has the option to    extend the Charters if either one of the Charter exercises the    option described in Footnote 1 above.     We have also agreed to pay to Northern Marine an incentive feefor each day a vessel is on hire for over 360 days duringany twelve-month period following the date the applicable vesselwas delivered to us in amount equal to the Basic Hire for suchvessel. If we terminate our ship management agreements withNorthern Marine because Northern Marine has failed to performits obligations under such agreements, Stena has agreed toprovide a replacement ship manager to perform the obligationsset forth in our ship management agreements on the same termsand for the same fixed amounts payable to Northern Marine.     Northern Marine provides technical and crewing management andpayroll and support sources to the Stena Sphere shippingdivisions. Other clients include ChevronTexaco Corporation,Technip Offshore UK and Gulf Marine Management.**Risk of Loss and Insurance**     Our operations may be affected by a number of risks, includingmechanical failure of our vessels, collisions, property loss tothe vessels, cargo loss or damage and business interruption dueto political circumstances in foreign countries, hostilities andlabor strikes. In addition, the operation of any ocean-goingvessel is subject to the inherent possibility of catastrophicmarine disaster, including oil spills and other environmentalmishaps, and the liabilities arising from owning and operatingvessels in international trade.     Northern Marine is responsible for arranging for the insuranceof our vessels on terms specified in the ship managementagreements and our secured term loan facility, which we believeare in line with standard industry practice. In accordance withthe ship management agreements, Northern Marine has procuredmarine hull and machinery and war risks insurance, whichincludes the risk of actual or constructive total loss, andprotection and indemnity insurance with mutual assuranceassociations. In accordance with the ship management agreements,Northern Marine has also obtained off-hire insurance in respectof each of our vessels. Currently, the amount of coverage forliability for pollution, spillage and leakage available to us oncommercially reasonable terms through protection and indemnityassociations and providers of excess coverage is $1 billionper vessel per occurrence. Protection and indemnity associationsare mutual marine indemnity associations formed by shipowners toprovide protection from large financial loss to one member bycontribution towards that loss by all members.
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     We believe that our current insurance coverage is adequate toprotect us against the accident-related risks involved in theconduct of our business and that we currently maintainappropriate levels of environmental damage and pollutioninsurance coverage, consistent with standard industry practice.However, there is no assurance that all risks are adequatelyinsured against, that any particular claims will be paid or thatwe will be able to obtain adequate insurance coverage atcommercially reasonable rates in the future followingtermination of the ship management agreements.**Inspection by a Classification Society**     Every commercial vessel’s hull and machinery is evaluatedby a classification society authorized by its country ofregistry. All of our tankers have been certified as being“in-class” by the American Bureau of Shipping. TheAmerican Bureau of Shipping is a recognized member of theInternational Association of Classification Societies and hasbeen recognized by Bermuda as an authorized classificationsociety. The classification society certifies that the vesselhas been built and maintained in accordance with the rules ofthe classification society and complies with applicable rulesand regulations of the vessel’s country of registry and theinternational conventions of which that country is a member.Each vessel is inspected by a surveyor of the classificationsociety in three surveys of varying frequency and thoroughness:every year for the annual survey, every two to three years forintermediate surveys and every four to five years for specialsurveys. Should any defects be found, the classificationsurveyor will issue a “recommendation” for appropriaterepairs which have to be made by the shipowner within the timelimit prescribed. Vessels may be required, as part of the annualand intermediate survey process, to be drydocked for inspectionof the underwater portions of the vessel and for necessaryrepair stemming from the inspection. Special surveys alwaysrequire drydocking.**Tanker Industry Overview*****Overview***     The tanker industry provides seaborne transportation for themovement of crude oil and refined petroleum products, whichinclude among others naphtha, gasoline, jet fuel, kerosene,gasoil and residual fuel oil. The tanker business can be dividedbetween crude oil carriers and refined product carriers,although many tanker owners participate in both segments. Theprice for transporting crude oil or refined petroleum productsfor one voyage on a specific route is referred to as tanker spotmarket freight rate.***Tanker Types***     The tanker fleet is divided into several categories of vessels,based on their carrying capacity as defined by the vesselsdeadweight capacity, which is commonly referred to as dwt. Thedifferent tanker types as classified by their deadweightcapacity are: •     ULCCs — tankers over 320,000 dwt;  •     VLCCs — tankers from 200,000 to 320,000 dwt;  •     Suezmax tankers — tankers from 120,000 to 200,000 dwt;  •     Aframax/ LR2 tankers — uncoated/coated tankers from    80,000 to 120,000 dwt;  •     Panamax/ LR1 tankers — uncoated/coated tankers from    50,000 to 80,000 dwt;  •     Handy product tankers/ MR tankers — normally coated    tankers from 20,000 to 50,000 dwt; and  •     Small tankers — normally coated tankers up to 20,000    dwt.     Crude carriers are either uncoated or partially coated toprotect the cargo tanks from the corrosive properties of crudeor dirty products, such as residual fuel oils. Coated tankersare those vessels whose cargo carrying tanks are coated toprotect the integrity of the cargo that the vessel is carrying.Coated vessels are utilized in the transportation of cleanproducts such as gasoline, jet fuel and gas oil.
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***Industry Conditions***     Freight rates are set in highly competitive and often volatilemarkets, where the daily balance of demand and supply forparticular vessel types is a primary driver. The oil tankerindustry historically has been highly cyclical, experiencingvolatility in spot market freight rates, time charter rates andvessel values, resulting from changes in the supply of and thedemand for oil and tanker capacity. The demand for tankers isinfluenced by, among other factors, global and regional economicconditions, changes in seaborne transportation patterns, weatherpatterns and events, oil production, armed conflicts, portcongestion, canal closures, embargoes and strikes. Demand forthe seaborne carriage of oil depends largely on the distancebetween areas that produce crude oil and refined products andareas that consume them. The incremental supply of tankercapacity is a function of the delivery of new vessels and thenumber of older vessels scrapped, in lay-up, converted to otheruses, reactivated or lost. This supply may be affected byregulation of maritime transportation by governmental andinternational authorities. These factors are generally outsideof our control, and are unpredictable.***Tanker Demand***     The volume of crude oil and refined petroleum productstransported and the relative distances over which they aretransported determines demand for tankers. Tanker demand isgenerally expressed in ton-miles and is measured as the productof the volume of oil carried (measured in metric tons)multiplied by the distance over which it is carried (measured inmiles). Tanker demand is determined largely by the state of theworld economy and the global demand for crude oil and refinedpetroleum products. Other factors affecting tanker demandinclude relative levels of inventories of crude oil and refinedpetroleum products, political events, conflicts between nationsand unexpected variations in weather. When consuming areas ofthe world are unable to meet their domestic demand needs, theincremental supply is generally satisfied by increased importswhich are typically delivered by tankers.*Global Oil Demand*     According to the International Energy Agency, or IEA, in 2005,world oil demand increased by 1.1 million barrels per day,or 1.3%, to 83.3 million barrels per day. Between 2003 and2004 global oil demand increased by approximately3.0 million barrels per day, or 3.8%. The IEA has forecastworld oil demand in 2006 to grow by 1.8 million barrels perday or 2.2%. The increases in oil demand have been primarilydriven by demand growth in the United States and Asia. Thesemajor areas of the world are both net importers of crude oil andrefined products, and consequently the tanker industry andtanker demand benefited significantly from this increase in oildemand.*Seasonality*     Historically, oil transportation freight rates increase in thewinter months and ease in the summer months. Generally thedemand for oil in the Northern Hemisphere rises in colderweather and falls in warmer weather. Additionally, due to thelong distances of ocean transportation and delivery timeconcerns, oil traders typically require oil transportation inadvance of the peak consumer demand for certain types of oilcargoes.***Tanker Supply***     The supply and availability of tankers, measured in deadweighttons, is affected by several factors including the age profileof the global fleet. Older, single hull vessels face a mandatoryphase out age as contained in international conventions. Ourfleet consists of modern, double-hulled vessels. The supply oftankers is also affected by the delivery schedule ofnewbuildings and by the number of vessels removed throughscrapping; conversions to other types of employment such asfloating production and storage facilities, and unforeseenevents such as seaborne casualties. Newbuilding activity ishighly correlated to increases and decreases in charter rates,but the delivery schedule is constrained by shipyard capacityand the strength of orders from other marine transportationsegments.
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*Tanker Fleet And Newbuildings*     According to Clarksons Research Services Ltd, as ofDecember 31, 2005: • *VLCCs:* The large tanker fleet (which includes ULCCs)    consisted of 476 tankers totaling 139.1 million dwt. 303 of    these vessels, or 91.9 million dwt, were double hull, and    173 vessels, or 47.2 million dwt were non-double hull.    There were 94 vessels, or 28.5 million dwt, on the    newbuilding orderbook.  • *Panamax/ LR1:* The Panamax tanker fleet consisted of 340    tankers totaling 22.4 million dwt. 207 of these vessels, or    14.2 million dwt, were double hull and 133 vessels, or    8.2 million dwt were non-double hull. There were    183 vessels, or 11.9 million dwt, on the newbuilding    orderbook.  • *Handy product tankers/ MR tankers:* The handy product    tanker fleet consisted of 1492 tankers totaling    55.9 million dwt. 916 of these vessels, or    36.3 million dwt, were double hull, and 576 vessels,    or 19.6 million dwt, were non-double hull. There were    366 vessels, or 15.3 million dwt, on the newbuilding    orderbook.*Tanker Scrapping*     Tanker owners may conclude that it is more economical to disposeof or scrap a vessel that has exhausted its useful life ratherthan continue to maintain or upgrade the vessel in accordancewith international standards and rules monitored by theclassification societies. Generally when tankers reach an age ofapproximately 25 years, the costs of conducting therequired surveys of the vessel and performing associated repairsmay not be economical, particularly if the repairs requirereplacement of steel plate. There are international regulationsthat currently call for the mandatory and accelerated scrappingor disposal of vessels in certain parts of the world.***Tanker Values***     Tanker values have historically experienced high volatility. Thefair market value of tankers can be expected to fluctuate duringtheir life. Factors that may determine vessel values may be,among other things, the general economic and market conditionsaffecting the tanker industry, especially the spot voyagefreight market, and the age, type, and the general maintenancecondition of a vessel. As vessels age they typically willdecline in value. We believe that the current market value ofour tanker fleet is at a very high level.**Environmental Regulation**     Government regulation significantly affects the ownership andoperation of our tankers. They are subject to internationalconventions, as well as national, state and local laws andregulations in force in the countries where our tankers operateor are registered. Under our ship management agreements,Northern Marine has assumed technical management responsibilityfor our fleet, including compliance with all environmentalregulations. If Northern Marine fails to perform its obligationsunder the ship management agreements, we could be liable underenvironmental laws. If our ship management agreements withNorthern Marine terminate, we would attempt to hire anotherparty to assume this responsibility, including compliance withthe regulations described in this report and any costsassociated with such compliance. However, we may be unable tohire another party to perform these and other services for afixed fee as is the case with Northern Marine.     A variety of governmental and private entities subject ourtankers to both scheduled and unscheduled inspections. Theseentities include the local port authorities, such as theU.S. Coast Guard, harbor master or equivalent,classification societies, flag state administration andcharterers, particularly terminal operators and oil companies.Certain of these entities require us to obtain permits, licensesand certificates for the operation of our tankers. Failure tomaintain necessary permits or approvals could require us toincur substantial costs or temporarily suspend operation of oneor more of our tankers.     We believe that the heightened level of environmental andquality concerns among insurance underwriters, regulators andcharterers is leading to greater inspection and safetyrequirements on all tankers and may
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accelerate the scrapping of older tankers throughout theindustry. Increasing environmental concerns have created ademand for tankers that conform to the stricter environmentalstandards. Our two V-MAX tankers were built in 2001 and our sixother tankers were completed in 2004 and 2005. Northern Marineis required to maintain operating standards for all of ourtankers which address operational safety, quality ofmaintenance, training of our officers and crews and compliancewith U.S. and international regulations. We believe that theoperation of our vessels is in substantial compliance withapplicable environmental laws and regulations. However, becausesuch laws and regulations are frequently changed and may imposeincreasingly strict requirements, we cannot predict the ultimatecost of complying with these requirements, or the impact ofthese requirements on the resale value or useful lives of ourtankers.***International Maritime Organization***     In 1992, the International Maritime Organization adoptedregulations that set forth pollution prevention requirementsapplicable to tankers. The International Maritime Organization,commonly referred to as the IMO, is the United Nations agencyfor maritime safety and the prevention of marine pollution byships. The IMO’s regulations, which have been adopted byover 150 nations, including many of the jurisdictions in whichour tankers operate, provide, in part, that: •     tankers between 25 and 30 years old must be of double hull    construction or of a mid-deck design with double sided    construction, unless: •     they have wing tanks or double-bottom spaces not used for the    carriage of oil, which cover at least 30% of the length of the    cargo tank section of the hull or bottom; or  •     they are capable of hydrostatically balanced loading (loading    less cargo into a tanker so that in the event of a breach of the    hull, water flows into the tanker, displacing oil upwards    instead of into the sea); •     tankers 30 years old or older must be of double hull    construction or mid-deck design with double sided construction;    and  •     all tankers are subject to enhanced inspections.     Also, under IMO regulations, a tanker must be of double hullconstruction or a mid-deck design with double sided constructionor be of another approved design ensuring the same level ofprotection against oil pollution if the tanker: •     is the subject of a contract for a major conversion or original    construction on or after July 6, 1993;  •     commences a major conversion or has its keel laid on or after    January 6, 1994; or  •     completes a major conversion or is a newbuilding delivered on or    after July 6, 1996.     All of our vessels are double-hulled.     The IMO has also negotiated international conventions thatimpose liability for oil pollution in international waters and asignatory’s territorial waters. In September 1997, the IMOadopted Annex VI to the International Convention for thePrevention of Pollution from Ships to address air pollution fromships. Annex VI became effective in May 2005. Annex VIlimits sulfur oxide and nitrogen oxide emissions from shipexhausts, prohibits deliberate emissions of ozone depletingsubstances, such as chlorofluorocarbons, and prohibits onboardincineration of certain materials, such as contaminatedpackaging or polychlorinated biphenyls. Annex VI includes aglobal cap on the sulfur content of fuel oil and allows forspecial areas to be established with more stringent controls onsulfur emissions. All of our vessels are currently compliantwith these regulations. Additional or new conventions, laws andregulations may be adopted that could adversely affect NorthernMarine’s ability to manage our ships.     Under the International Safety Management Code, or ISM Code,promulgated by the IMO, the party with operational control of avessel is required to develop an extensive safety managementsystem that includes, among other things, the adoption of asafety and environmental protection policy setting forth
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instructions and procedures for operating its vessels safely anddescribing procedures for responding to emergencies. NorthernMarine relies upon its safety management system in connectionwith its management of our vessels.     The ISM Code requires that vessel operators obtain a safetymanagement certificate for each vessel they operate. Thiscertificate evidences compliance by a vessel’s managementwith code requirements for a safety management system. No vesselcan obtain a certificate unless its operator has been awarded adocument of compliance, issued by each flag state, under the ISMCode. Northern Marine has the requisite documents of compliancefor its offices and safety management certificates for all ofour vessels for which the certificates are required by the IMO.Northern Marine will be required to renew these documents ofcompliance and safety management certificates annually.     Noncompliance with the ISM Code and other IMO regulations maysubject the shipowner or bareboat charterer to increasedliability, may lead to decreases in available insurance coveragefor affected vessels and may result in the denial of access to,or detention in, some ports. For example, the U.S. CoastGuard and European Union authorities have indicated that vesselsnot in compliance with the ISM Code will be prohibited fromtrading in U.S. and European Union ports.     Although the United States is not a party to these conventions,many countries have ratified and follow the liability planadopted by the IMO and set out in the International Conventionon Civil Liability for Oil Pollution Damage of 1969. Under thisconvention and, depending on whether the country in which thedamage results is a party to the 1992 Protocol to theInternational Convention on Civil Liability for Oil PollutionDamage, a vessel’s registered owner is strictly liable forpollution damage caused in the territorial waters of acontracting state by discharge of persistent oil, subject tocertain complete defenses. Under an amendment to the Protocolthat became effective on November 1, 2003, for vessels of5,000 to 140,000 gross tons (a unit of measurement for thetotal enclosed spaces within a vessel), liability is limited toapproximately $6.5 million plus $912 for each additionalgross ton over 5,000. For vessels of over 140,000 grosstons, liability is limited to approximately $130 million.As the convention calculates liability in terms of a basket ofcurrencies, these figures are based on currency exchange rateson February 1, 2006. Under the 1969 Convention, the rightto limit liability is forfeited where the spill is caused by theowner’s actual fault. Under the 1992 Protocol, a shipownercannot limit liability where the spill is caused by theowner’s intentional or reckless conduct. Vessels trading tostates that are parties to these conventions must provideevidence of insurance covering the liability of the owner. Injurisdictions where the International Convention on CivilLiability for Oil Pollution Damage has not been adopted, variouslegislative schemes or common law govern, and liability isimposed either on the basis of fault or in a manner similar tothat convention. We believe that our protection and indemnityinsurance covers the liability under the plan adopted by the IMO.***U.S. Oil Pollution Act of 1990 and Comprehensive    Environmental Response, Compensation, and Liability Act***     The United States regulates the tanker industry with anextensive regulatory and liability regime for environmentalprotection and cleanup of oil spills, consisting primarily ofthe U.S. Oil Pollution Act of 1990, or OPA, and theComprehensive Environmental Response, Compensation, andLiability Act, or CERCLA. OPA affects all owners and operatorswhose vessels trade with the United States or its territories orpossessions, or whose vessels operate in the waters of theUnited States, which include the U.S. territorial sea andthe 200 nautical mile exclusive economic zone around the UnitedStates. CERCLA applies to the discharge of hazardous substances(other than oil) whether on land or at sea. Both OPA and CERCLAimpact our operations.     Under OPA, vessel owners, operators and bareboat charterers are“responsible parties” who are jointly, severally andstrictly liable (unless the spill results solely from the act oromission of a third party, an act of
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God or an act of war) for all containment andclean-up costs andother damages arising from oil spills from their vessels. Theseother damages include: •     natural resource damages and related assessment costs;  •     real and personal property damages;  •     net loss of taxes, royalties, rents, profits or earnings    capacity;  •     net cost of public services necessitated by a spill response,    such as protection from fire, safety or health hazards; and  •     loss of subsistence use of natural resources.     OPA limits the liability of responsible parties to the greaterof $1,200 per gross ton or $10 million per tanker thatis over 3,000 gross tons, subject to possible adjustmentfor inflation. The act specifically permits individual states toimpose their own liability regimes with regard to oil pollutionincidents occurring within their boundaries, and some stateshave enacted legislation providing for unlimited liability fordischarge of pollutants within their waters. In some cases,states that have enacted this type of legislation have not yetissued implementing regulations defining tanker owners’responsibilities under these laws. CERCLA, which applies toowners and operators of vessels, contains a similar liabilityregime and provides for cleanup, removal and natural resourcedamages. Liability under CERCLA is limited to the greater of$300 per gross ton or $5 million.     These limits of liability do not apply, however, where theincident is caused by violation of applicable U.S. federalsafety, construction or operating regulations, or by theresponsible party’s gross negligence or willful misconduct.These limits do not apply if the responsible party fails orrefuses to report the incident or to cooperate and assist inconnection with the substance removal activities. OPA and CERCLAeach preserve the right to recover damages under existing law,including maritime tort law.     OPA also requires owners and operators of vessels to establishand maintain with the U.S. Coast Guard evidence offinancial responsibility sufficient to meet the limit of theirpotential strict liability under the act. The U.S. CoastGuard has enacted regulations requiring evidence of financialresponsibility consistent with the combined maximum limits ofliability described above for OPA and CERCLA. Under theregulations, evidence of financial responsibility may bedemonstrated by insurance, surety bond, self-insurance, guarantyor an alternative method subject to approval by the Director ofthe U.S. Coast Guard National Pollution Funds Center. UnderOPA regulations, an owner or operator of more than one tanker isrequired to demonstrate evidence of financial responsibility forthe entire fleet in an amount equal only to the financialresponsibility requirement of the tanker having the greatestmaximum strict liability under OPA and CERCLA. Northern Marinehas provided the requisite guarantees and has receivedcertificates of financial responsibility from theU.S. Coast Guard for each of our tankers required to haveone.     Northern Marine has arranged pollution liability insurancecoverage for each of our tankers in the amount of$1.0 billion per occurrence. However, a catastrophic spillcould exceed the insurance coverage available, in which eventthere could be a material adverse effect on our business, on theCharterers’ business, which could impair theCharterers’ ability to make payments to us under ourCharters, and on Northern Marine’s business, which couldimpair Northern Marine’s ability to manage our vessels.     Under OPA, oil tankers as to which a contract for constructionor major conversion was put in place after June 30, 1990are required to have double hulls. In addition, oil tankerswithout double hulls will not be permitted to come toU.S. ports or trade in U.S. waters by 2015. All of ourvessels have double hulls.     OPA also amended the Federal Water Pollution Control Act torequire that owners or operators of tankers operating in thewaters of the United States must file vessel response plans withthe U.S. Coast Guard, and their tankers are required tooperate in compliance with their U.S. Coast Guard approvedplans. These response plans must, among other things: •     address a “worst case” scenario and identify and    ensure, through contract or other approved means, the    availability of necessary private response resources to respond    to a “worst case discharge;”
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 •     describe crew training and drills; and  •     identify a qualified individual with full authority to implement    removal actions.     Vessel response plans for our tankers operating in the waters ofthe United States have been approved by the U.S. CoastGuard. In addition, the U.S. Coast Guard has announced itintends to propose similar regulations requiring certain vesselsto prepare response plans for the release of hazardoussubstances. Northern Marine is responsible for ensuring that ourvessels comply with any additional regulations.     OPA does not prevent individual states from imposing their ownliability regimes with respect to oil pollution incidentsoccurring within their boundaries. In fact, mostU.S. states that border a navigable waterway have enactedenvironmental pollution laws that impose strict liability on aperson for removal costs and damages resulting from a dischargeof oil or a release of a hazardous substance. These laws may bemore stringent than U.S. federal law.***European Union Tanker Restrictions***     In July 2003, in response to the *m.t. Prestige*oil spillin November 2002, the European Union adopted legislation thatprohibits all single hull tankers used for the transport of oilfrom entering into its ports or offshore terminals by 2010. TheEuropean Union, following the lead of certain European Unionnations such as Italy and Spain, has also banned all single hulltankers carrying heavy grades of oil from entering or leavingits ports or offshore terminals or anchoring in areas under itsjurisdiction. Commencing in 2005, certain single hull tankersabove 15 years of age also became restricted from enteringor leaving European Union ports or offshore terminals andanchoring in areas under European Union jurisdiction. TheEuropean Union is also considering legislation that would:(1) ban manifestly sub-standard vessels (defined as thoseover 15 years old that have been detained by portauthorities at least twice in a six-month period) from Europeanwaters and create an obligation of port states to inspectvessels posing a high risk to maritime safety or the marineenvironment; and (2) provide the European Union withgreater authority and control over classification societies,including the ability to seek to suspend or revoke the authorityof negligent societies. It is impossible to predict whatlegislation or additional regulations, if any, may bepromulgated by the European Union or any other country orauthority.***Vessel Security Regulations***     Since the terrorist attacks of September 11, 2001, therehave been a variety of initiatives intended to enhance vesselsecurity. On November 25, 2002, the Maritime TransportationSecurity Act of 2002, or MTSA, came into effect. To implementcertain portions of the MTSA, in July 2003, the U.S. CoastGuard issued regulations requiring the implementation of certainsecurity requirements aboard vessels operating in waters subjectto the jurisdiction of the United States. Similarly, in December2002, amendments to the International Convention for the Safetyof Life at Sea, or SOLAS, created a new chapter of theconvention dealing specifically with maritime security. The newchapter became effective in July 2004 and imposes variousdetailed security obligations on vessels and port authorities,most of which are contained in the newly created InternationalShip and Port Facilities Security Code, or ISPS Code. The ISPSCode is designed to protect ports and international shippingagainst terrorism. After July 1, 2004, to tradeinternationally, a vessel must attain an International ShipSecurity Certificate from a recognized security organizationapproved by the vessels flag state. Among the variousrequirements are: •     on-board installation of automatic identification systems, or    AIS, to provide a means for the automatic transmission of    safety-related information from among similarly equipped ships    and shore stations, including information on a ship’s    identity, position, course, speed and navigational status;  •     on-board installation of ship security alert systems, which do    not sound on the vessel but only alerts the authorities on shore;  •     the development of vessel security plans;  •     ship identification number to be permanently marked on a    vessel’s hull;
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 •     a continuous synopsis record kept onboard showing a    vessel’s history including, name of the ship and of the    state whose flag the ship is entitled to fly, the date on which    the ship was registered with that state, the ship’s    identification number, the port at which the ship is registered    and the name of the registered owners and their registered    addresses; and  •     compliance with flag state security certification requirements.     The U.S. Coast Guard regulations, intended to align withinternational maritime security standards, exemptnon-U.S. tankersfrom MTSA vessel security measures provided such vessels have onboard, by July 1, 2004, a valid International Ship SecurityCertificate that attests to the vessel’s compliance withSOLAS security requirements and the ISPS Code. Northern Marinehas implemented the various security measures addressed by theMTSA, SOLAS and the ISPS Code and all of our tankers are incompliance with these applicable security requirements.***Employees***     As of December 31, 2005, we had 2 employees. Our employeesare not represented by any collective bargaining agreements andwe have never experienced a work stoppage. We believe that ouremployee relations are good.**Executive Officers Of The Registrant**     Our executive officers, their ages and their positions as ofFebruary 28, 2006 are as follows:          *Arthur L. Regan*, 43, is our President and Co-Chief    Executive Officer. From 2001 to 2004, Mr. Regan was Vice    President Business Development for Stena Bulk LLC, a    U.S. based subsidiary of Stena responsible for commercial    contracts and fleet development. From 1998 to 2001    Mr. Regan was the Charter Negotiator for StenTex LLC, a    commercial joint venture between Texaco, Inc. and Stena Bulk    LLC, which was responsible for arranging all of Texaco’s    tanker transportation requirements. From 1996 to 1998    Mr. Regan was the Manager of Commercial Operations for    StenTex LLC. Mr. Regan sailed for ten years as an officer    on U.S. merchant tankers, including as a Master Mariner.    Mr. Regan is a citizen and resident of the United States.           *Edward Terino*, 52, is our Co-Chief Executive Officer and    Chief Financial Officer. Mr. Terino has over 10 years    of experience as a CFO of publicly traded companies. From    October 2001 until June 2005, Mr. Terino was Senior Vice    President and Chief Financial Officer of Art Technology Group,    Inc., a provider of Internet-based ecommerce and customer    service software. From April 1999 to September 2001, he was    Senior Vice President and Chief Financial Officer of Applix,    Inc., a provider of business intelligence software solutions.    Mr. Terino has also spent 11 years at Houghton Mifflin    in various senior financial management position and 9 years    at Deloitte and Touche in their consulting services group.    Mr. Terino is a citizen and resident of the United States.     We maintain a website at *www.arlingtontankers.com.* Theinformation contained on our website is not included as a partof, or incorporating it by reference into, this Annual Report onForm 10-K. We makeavailable free of charge through our website our Annual Reportson Form 10-K,Quarterly Reports onForm 10-Q andCurrent Reports onForm 8-K, andamendments to these reports, as soon as reasonably practicableafter its electronically files such material with, or furnishsuch material to, the Securities and Exchange Commission, or theSEC. Further, we will provide free copies of our SEC filingsupon request. Copies of our filings with the SEC may berequested through the “investor relations” section ofour website, or by calling our offices at 441-292-4456.
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**ITEM 1A.*****RISK FACTORS***     *The following important factors, among others, could causeactual results to differ materially from those contained inforward-looking statements made in this report or presentedelsewhere by management from time to time.***Company Specific Risk Factors*****We cannot assure you that we will pay any dividends***     We intend to pay dividends on a quarterly basis in amountsdetermined by our board of directors. We believe our dividendswill be substantially equal to the charterhire received by usunder the Charters, less cash expenses and any cash reservesestablished by our board of directors. Such expenses consistprimarily of fees under our ship management agreements,directors’ fees, salaries and benefits of our President andCo-Chief Executive Officer and our Co-Chief Executive Officerand Chief Financial Officer, payment of interest under ourcredit facility, and other administrative costs and otherexpenses. There can be no assurance that we will not have othercash expenses, including extraordinary expenses, which couldinclude the costs of claims and related litigation expenses.There can be no assurance that we will not have additionalexpenses or liabilities, that the amounts currently anticipatedfor the items set forth above will not increase, that we willnot have to fund any required capital expenditures for ourvessels or that our board of directors will not determine toestablish additional cash reserves or change our dividendpolicy. Other than the fees under our ship managementagreements, none of our fees or expenses is fixed.     The amount of potential future dividends set forth in“Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations —Dividend Policy” represents only an estimate of futuredividends based on our charter contracts, ship managementagreements, an estimate of our other expenses and the othermatters and assumptions set forth therein and assumes that otherthan our ship management expenses, none of our expenses increaseduring the periods presented in the table. The amount of futuredividends, if any, could be affected by various factors,including the loss of a vessel, required capital expenditures,cash reserves established by our board of directors, increasedor unanticipated expenses, a change in our dividend policy,increased borrowings or future issuances of securities, many ofwhich are beyond our control. As a result, the amount ofdividends actually paid may vary from period to period and suchvariations may be material.     Our secured term loan facility also provides that we may not paydividends if an event of default under the facility agreementhas occurred and continues or if the market value of our vesselsis less than 140% of our borrowings under the facility (or, ifat the time of the proposed dividend, all of our vessels are ontime charter for a remaining period of 12 months, less than120% of the loan amount). The declaration of dividends issubject to these covenants of our loan facility, compliance withBermuda law and is subject at all times to the discretion of ourboard of directors. There can be no assurance that dividendswill be paid in the amounts anticipated or at all.***We are highly dependent on the Charterers and their    guarantors, Stena and Concordia***     All of our vessels are chartered to subsidiaries of Concordiaand a subsidiary of Stena, which we refer to collectively as theCharterers. The Charterers’ payments to us under thesecharters, which we refer to as the Charters, are our sole sourceof revenue. We are highly dependent on the performance by theCharterers of their obligations under the Charters and by theirguarantors, Stena and Concordia, of their obligations undertheir respective guarantees. Any failure by the Charterers orthe guarantors to perform their obligations would materially andadversely affect our business and financial position. Ourshareholders do not have any recourse against the Charterers orthe guarantors.
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***If we cannot refinance our loans, or in the event of a    default under our secured term loan facility, we may have to    sell our vessels, which may leave no additional funds for    distributions to shareholders***     Under the terms of the Loan Agreement providing for our securedterm loan facility, we are required to repay the total amountoutstanding at maturity, January 5, 2011. Borrowings underthe facility are guaranteed by each of our vessel owningsubsidiaries and are secured by mortgages over all of ourvessels; assignments of earnings, insurances and requisitioncompensation with respect to our vessels; and assignments of ourinterests in the Charters and our ship management agreements.Whether or not the Charterers renew the Charters, the LoanAgreement will mature in January 2011 and we will be obligatedto repay or refinance the total amount due under the loan atthat time. There is no assurance that we will be able to repayor refinance this amount. In addition, even if the Charterersrenew the Charters for one or more of our vessels, if we areunable to refinance our credit facility on acceptable terms, wemay be forced to attempt to sell our vessels. If interest ratesare higher than current rates at the time we seek to refinanceour credit facility, such higher rates could prevent our abilityto complete a refinancing or could adversely impact our futureresults, including the amount of cash available for futuredividends. In such event, we may conclude that such arefinancing is not on acceptable terms. In addition, in theevent of a default under our credit facility all of our vesselscould be sold to satisfy amounts due to the lenders under ourcredit facility. Depending on the market value for our vesselsat the time, it is possible that after payment of the amountsoutstanding under our credit facility there would not be anyfunds to distribute to our shareholders. In addition, under ourbye-laws, any sale of a vessel would require the approval of atleast a majority of our shareholders voting at a meeting.     Because we intend to distribute dividends to our shareholders inan amount substantially equal to our charterhire, less cashexpenses and any cash reserves established by our board ofdirectors, we do not believe we will be able to repay our creditfacility at the end of five years without selling some or all ofour vessels. As a result, we believe we will be required torefinance the borrowing under our credit facility at or prior toits maturity.***We may not be able to recharter our vessels profitably    after they expire, unless they are extended at the option of the    Charterers***     Our Charters have fixed terms with between three and five yearsremaining. The Charterers also have options to extend the termsof their charters. Each of the Charterers has the solediscretion to exercise that option. We cannot predict whetherthe Charterers will exercise any of their extension optionsunder one or more of the Charters. The Charterers will not oweany fiduciary or other duty to us or our shareholders indeciding whether to exercise the extension option, and theCharterers’ decision may be contrary to our interests orthose of our shareholders.     We cannot predict at this time any of the factors that theCharterers will consider in deciding whether to exercise any oftheir extension options under the Charters. It is likely,however, that the Charterers would consider a variety offactors, which may include the age and specifications of theparticular vessel, whether a vessel is surplus or suitable tothe Charterers’ requirements and whether competitivecharterhire rates are available to the Charterers in the openmarket at that time.     If the Charterers decide not to extend our current Charters, wemay not be able to re-charter our vessels with terms similar tothe terms of our Charters. We may also employ the vessels on thespot charter market, which is subject to greater ratefluctuation than the time charter market.     Under our ship management agreements, Northern Marine ManagementLtd., a wholly owned subsidiary of Stena, which we refer to asNorthern Marine, is responsible for all of the technical andoperational management of our vessels for a fixed managementfee, increasing 5% annually. Northern Marine has also agreed toindemnify us against specified off hire and reduced hire for ourvessels that exceeds five days per year. However, this indemnityonly extends to the amount payable to us as Basic Hire and wouldnot extend to any amounts that would otherwise be payable to usas Additional Hire if the vessels were not off hire. Our shipmanagement agreements with Northern Marine may be terminated byeither party if the relevant Charter is terminated or expires.If our ship management agreements with Northern Marine were toterminate, we may
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not be able to obtain similar fixed rate terms orindemnification for off hire and reduced hire periods fromanother ship manager.     If we receive lower charter rates under replacement charters,are unable to recharter all of our vessels or we incur greaterexpenses under replacement management agreements, the amountsavailable, if any, to pay distributions to our shareholders maybe significantly reduced or eliminated.     Under our Charters, there is no obligation to pay AdditionalHire during any period when the obligation to pay Basic Hire issuspended under the Charter if due to technical reasons thevessel is off hire, unless the vessel is off hire as a result ofa class condition or recommendation determined by thevessel’s classification society during the inspection ofthe vessel undertaken by us in connection with the purchase ofthe vessel and such condition or recommendation cannot beremedied or complied with during a regularly scheduleddrydocking without increasing the duration of such drydocking.***Concordia and Stena are able to influence the Company,    including the outcome of shareholder votes***     Concordia and Stena directly and indirectly owned an aggregateof approximately 14.4% of our outstanding common shares as ofFebruary 10, 2005. As a result of their share ownership andfor so long as either Concordia or Stena directly or indirectlyowns a significant percentage of our outstanding common shares,Concordia and Stena are able to influence the Company, includingthe outcome of any shareholder vote, such as the election ofdirectors.***We are leveraged and subject to restrictions in our    financing agreements that impose constraints on our operating    and financing flexibility***     We have a secured term loan facility under which we haveborrowed $229.5 million, of which $135 million wasoutstanding as of December 31, 2005 and the remaining$94.5 million was drawn down as of January 5, 2006 tofinance a portion of the cash purchase price for our vessels. Weare required to apply a substantial portion of our cash flowfrom operations to the payment of interest on borrowings underthe facility. Our facility, which is secured by, among otherthings, mortgages on our vessels, pledges of our time chartersand assignments of earnings, insurances and requisitioncompensation in respect to our vessels, requires that we complywith various operating covenants and maintain certain financialratios including that the market value of our vessels exceeds125% of the total facility amount outstanding and that themarket value of our vessels exceeds 140% of our borrowings (or125% if the loan amount at the time of such dividend all of ourvessels are on time charter for a remaining period of at least12 months) in order for us to pay dividends. The facilityalso requires that Northern Marine remain as technical managerfor our vessels.     We have a floating rate of interest under our secured term loanfacility. However, we have entered into an interest rate swapagreement that effectively fixes the interest rate at5.7325% per year through maturity of the facility inJanuary 2011. By utilizing this interest rate swap, wepotentially forego benefits that might result from declines ininterest rates.***We are a holding company, and we depend on the ability of    our subsidiaries to distribute funds to us in order to satisfy    our financial and other obligations***     We are a holding company, and have no significant assets otherthan the equity interests in our subsidiaries. Our subsidiariesown all of our vessels, and payments under our Charters are madeto our subsidiaries. As a result, our ability to pay dividendsdepends on the performance of our subsidiaries and their abilityto distribute funds to us. The ability of a subsidiary to makethese distributions could be affected by a claim or other actionby a third party, including a creditor, or by Bermuda law whichregulates the payment of dividends by companies. If we areunable to obtain funds from our subsidiaries, we will not beable to pay dividends unless we obtain funds from other sources.We cannot assure you that we will be able to obtain funds fromother sources.
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***U.S. tax authorities could treat us as a    “passive foreign investment company,” which could have    adverse U.S. federal income tax consequences to    U.S. shareholders***     A foreign corporation will be treated as a “passive foreigninvestment company,” or PFIC, for U.S. federal incometax purposes if either (1) at least 75% of its gross incomefor any taxable year consists of certain types of “passiveincome” or (2) at least 50% of the average value ofthe corporation’s assets produce or are held for theproduction of those types of “passive income.” Forpurposes of these tests, “passive income” includesdividends, interest, and gains from the sale or exchange ofinvestment property and rents and royalties other than rents androyalties which are received from unrelated parties inconnection with the active conduct of a trade or business. Forpurposes of these tests, income derived from the performance ofservices does not constitute “passive income.”U.S. shareholders of a PFIC are subject to adisadvantageous U.S. federal income tax regime with respectto the income derived by the PFIC, the distributions theyreceive from the PFIC and the gain, if any, they derive from thesale or other disposition of their shares in the PFIC.     Based on our method of operation, we do not believe that we werea PFIC for our most recent taxable year or that we will become aPFIC with respect to any future taxable year. In this regard, wetreat the gross income we derive or are deemed to derive fromour time chartering activities as services income, rather thanrental income. Accordingly, we believe that our income from ourtime chartering activities does not constitute “passiveincome,” and the assets that we own and operate inconnection with the production of that income do not constitutepassive assets.     There is, however, no direct legal authority under the PFICrules addressing our method of operation. Accordingly, noassurance can be given that the U.S. Internal RevenueService, or IRS, or a court of law will accept our position, andthere is a risk that the IRS or a court of law could determinethat we are a PFIC. Moreover, no assurance can be given that wewould not constitute a PFIC for any future taxable year if therewere to be changes in the nature and extent of our operations.     If the IRS were to find that we are or have been a PFIC for anytaxable year, our U.S. shareholders would face adverseU.S. tax consequences. Under the PFIC rules, unless thoseshareholders make an election available under the InternalRevenue Code of 1986, as amended, such shareholders would beliable to pay U.S. federal income tax at the thenprevailing income tax rates on ordinary income plus interestupon certain distributions and upon any gain from thedisposition of our common shares, as if the distribution or gainhad been recognized ratably over the shareholder’s holdingperiod of our common shares. In addition, astep-up in the taxbasis of our shares may not be available upon the death of anindividual shareholder, and the preferential U.S. federalincome tax rates currently applicable to qualified dividendincome of certain U.S. investors would not apply.***Our operating income could fail to qualify for an    exemption from U.S. federal income taxation, which will    reduce our cash flow***     Unless exempt from U.S. federal income taxation, a foreigncorporation is subject to U.S. federal income taxation at arate of 4% on its U.S. source shipping income, including50% of its shipping income that is attributable totransportation that begins or ends in the United States.Shipping income will be exempt from U.S. federal incometaxation if, with respect to each specified category of shippingincome, including time chartering income: (1) the foreigncorporation generating the income is organized in a foreigncountry that grants an “equivalent exemption” toU.S. corporations and (2) either (A) our commonshares are “primarily and regularly traded on anestablished securities market,” as determined under complexapplicable U.S. Treasury regulations, in that same foreigncountry, in the United States or in another country that grantsan “equivalent exemption” to U.S. corporations or(B) more than 50% of the value of our shares is treated asowned, directly or indirectly, for at least half of the numberof days in the taxable year by one or more “qualifiedshareholders,” as defined under applicableU.S. Treasury regulations.     Bermuda, our country of organization, is a foreign country thatgrants an “equivalent exemption” toU.S. corporations with respect to time chartering income.In addition, our common shares are currently “primarily andregularly traded” on the New York Stock Exchange, which isan established securities market in the United States.Therefore, we believe that our time chartering income qualifiesfor the exemption from
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U.S. federal income taxation. Our qualification for theexemption, however, is based upon certain complex factualdeterminations that are not completely within our control and,therefore, there can be no assurance that we will qualify forthe exemption either now or in the future. If we were not toqualify for the exemption, our cash available for distributionsto shareholders would be correspondingly reduced.***U.S. investors who own our common shares may have    more difficulty in protecting their interests than    U.S. investors who own shares of a Delaware    corporation***     The Companies Act 1981 of Bermuda, which applies to us, differsin certain material respects from laws generally applicable toU.S. corporations and their shareholders. Set forth belowis a summary of certain significant provisions of the CompaniesAct which differ in certain respects from provisions of Delawarecorporate law. Because the following statements are summaries,they do not discuss all aspects of Bermuda law that may berelevant to us and our shareholders.     *Interested Directors.* Bermuda law and our bye-lawsprovide that if a director has an interest in a materialcontract or proposed material contract with us or any of oursubsidiaries or has a material interest in any person that is aparty to such a contract, the director must disclose the natureof that interest at the first opportunity either at a meeting ofdirectors or in writing to the directors. Our bye-laws providethat, after a director has made such a declaration of interest,he is allowed to be counted for purposes of determining whethera quorum is present and to vote on a transaction in which he hasan interest, unless disqualified from doing so by the chairmanof the relevant board meeting. Under Delaware law suchtransaction would not be voidable if: •     the material facts as to such interested director’s    relationship or interests were disclosed or were known to the    board of directors and the board had in good faith authorized    the transaction by the affirmative vote of a majority of the    disinterested directors;  •     such material facts were disclosed or were known to the    stockholders entitled to vote on such transaction and the    transaction was specifically approved in good faith by vote of    the majority of shares entitled to vote thereon; or  •     the transaction was fair as to the corporation as of the time it    was authorized, approved or ratified.     Under Delaware law, the interested director could be held liablefor a transaction in which the director derived an improperpersonal benefit.     *Shareholders’ Suits.* Class actions andderivative actions are generally not available to shareholdersunder Bermuda law. The Bermuda courts, however, would ordinarilybe expected to permit a shareholder to commence an action in thename of a company to remedy a wrong to the company where the actcomplained of is alleged to be beyond the corporate power of thecompany or illegal, or would result in the violation of thecompany’s memorandum of association or bye-laws.Furthermore, consideration would be given by a Bermuda court toacts that are alleged to constitute a fraud against the minorityshareholders or, for instance, where an act requires theapproval of a greater percentage of the company’sshareholders than that which actually approved it.     When the affairs of a company are being conducted in a mannerwhich is oppressive or prejudicial to the interests of some partof the shareholders, one or more shareholders may apply to theSupreme Court of Bermuda, which may make such order as it seesfit, including an order regulating the conduct of thecompany’s affairs in the future or ordering the purchase ofthe shares of any shareholders by other shareholders or by thecompany.     Our bye-laws contain a provision by virtue of which ourshareholders waive any claim or right of action that they have,both individually and on our behalf, against any director orofficer in relation to any action or failure to take action bysuch director or officer, except in respect of any fraud ordishonesty of such director or officer.     Class actions and derivative actions generally are available tostockholders under Delaware law for, among other things, breachof fiduciary duty, corporate waste and actions not taken inaccordance with
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applicable law. In such actions, the court has discretion topermit the winning party to recover attorneys’ feesincurred in connection with such action.     *Indemnification of Directors.* Section 98 ofthe Companies Act provides generally that a Bermuda company mayindemnify its directors, officers and auditors against anyliability which by virtue of any rule of law would otherwise beimposed on them in respect of any negligence, default, breach ofduty or breach of trust, except in cases where such liabilityarises from fraud or dishonesty of which such director, officeror auditor may be guilty in relation to the company.Section 98 further provides that a Bermuda company mayindemnify its directors, officers and auditors against anyliability incurred by them in defending any proceedings, whethercivil or criminal, in which judgment is awarded in their favoror in which they are acquitted or granted relief by the SupremeCourt of Bermuda pursuant to section 281 of the CompaniesAct.     We have adopted provisions in our bye-laws that provide that weshall indemnify our officers and directors in respect of theiractions and omissions, except in respect of their fraud ordishonesty. Our bye-laws provide that the shareholders waive allclaims or rights of action that they might have, individually orin right of the company, against any of the company’sdirectors or officers for any act or failure to act in theperformance of such director’s or officer’s duties,except in respect of any fraud or dishonesty of such director orofficer. Section 98A of the Companies Act permits us topurchase and maintain insurance for the benefit of any officeror director in respect of any loss or liability attaching to himin respect of any negligence, default, breach of duty or breachof trust, whether or not we may otherwise indemnify such officeror director. We have purchased and maintain a directors’and officers’ liability policy for such a purpose.     Under Delaware law, a corporation may indemnify a director orofficer of the corporation against expenses (includingattorneys’ fees), judgments, fines and amounts paid insettlement actually and reasonably incurred in defense of anaction, suit or proceeding by reason of such position if suchdirector or officer acted in good faith and in a manner he orshe reasonably believed to be in or not be opposed to the bestinterests of the corporation and, with respect to any criminalaction or proceeding, such director or officer had no reasonablecause to believe his or her conduct was unlawful.***Bermuda law and our bye-laws permit our board of directors    to establish preference shares having terms which could reduce    or eliminate dividends payable to our common shareholders***     Bermuda law and our bye-laws permit our board of directors toissue preference shares with dividend rates, relative votingrights, conversion or exchange rights, redemption rights,liquidation rights and other relative participation, optional orother special rights, qualifications, limitations orrestrictions as may be determined by resolution of the boardwithout shareholder approval. Such preference shares could haveterms that provide for the payment of dividends prior to thepayment of dividends in respect of the common shares. As aresult, the issuance of these preference shares could reduce oreliminate dividends payable to common shareholders.***Our bye-laws restrict shareholders from bringing certain    legal action against our officers and directors***     Our bye-laws contain a broad waiver by our shareholders of anyclaim or right of action, both individually and on our behalf,against any of our officers or directors. The waiver applies toany action taken by an officer or director, or the failure of anofficer or director to take any action, in the performance ofhis or her duties, except with respect to any matter involvingany fraud or dishonesty on the part of the officer or director.This waiver limits the right of shareholders to assert claimsagainst our officers and directors unless the act or failure toact involves fraud or dishonesty.
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***We have anti-takeover provisions in our bye-laws that may    discourage a change of control***     Our bye-laws contain provisions that could make it moredifficult for a third party to acquire us without the consent ofour board of directors. These provisions provide for: •     a classified board of directors with staggered three-year terms,    elected without cumulative voting;  •     directors only to be removed for cause and only with the    affirmative vote of holders of at least 80% of the common shares    issued and outstanding;  •     advance notice for nominations of directors by shareholders and    for shareholders to include matters to be considered at annual    meetings;  •     our board of directors to determine the powers, preferences and    rights of our preference shares and to issue the preference    shares without shareholder approval; and  •     a requirement that amalgamations, sales of assets and certain    other transactions with persons owning 15% or more of our voting    securities, which we refer to as interested shareholders, be    approved by holders of at least 66% of our issued and    outstanding voting shares not owned by the interested    shareholder, subject to certain exceptions.     These provisions could make it more difficult for a third partyto acquire us, even if the third party’s offer may beconsidered beneficial by many shareholders. As a result,shareholders may be limited in their ability to obtain a premiumfor their shares.**Industry Specific Risk Factors*****The highly cyclical nature of the tanker industry may lead    to volatile changes in charter rates and vessel values which may    adversely affect our earnings***     If the tanker industry, which has been highly cyclical, isdepressed in the future when our Charters expire or at a timewhen we may want to sell a vessel, our earnings and availablecash flow may decrease. Our ability to recharter our vessels onthe expiration or termination of the Charters and the charterrates that we may receive under any renewal or replacementcharters will depend upon, among other things, economicconditions in the tanker market at that time.     Fluctuations in charter rates and vessel values result fromchanges in the supply and demand for tanker capacity and changesin the supply and demand for oil and oil products. For example,charter rates and vessel values were at a high level during2004. Charter rates declined from that high level during thefirst quarter of 2005, and have subsequently further declined.There can be no assurance that charter rates and vessel valueswill not decline from current levels.     Our vessels are operated under time charters with theCharterers. We receive a fixed minimum daily base charter rateand may receive Additional Hire under the Charters. AdditionalHire, if any, is paid quarterly in arrears. The amount ofAdditional Hire is subject to variation depending on thecharterhire received by the Charterers under time charters, spotcharters and on general tanker market conditions. The amount ofAdditional Hire that we may earn is based on a formula forassumed voyage routes and expenses that we agreed to with theCharterers. The payment of Additional Hire, if any, has nocorrelation to our potential future time charter equivalentearnings. If a vessel is off-hire, that vessel is not eligibleto earn Additional Hire during the off-hire period. We cannotassure you that we will receive Additional Hire for any quarterother than in the case of the Charters for the V-MAX tankerswhich are currently sub-chartered to Sun International untilJune 2007 and September 2007.
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***Factors beyond our control may adversely affect the value    of our vessels***     The factors affecting the supply and demand for tanker vesselsare outside of our control, and the nature, timing and degree ofchanges in industry conditions are unpredictable and mayadversely affect the value of our vessels. The factors thatinfluence the demand for tanker capacity include: •     demand for oil and oil products, which affect the need for    tanker capacity;  •     global and regional economic and political conditions which    among other things, could impact the supply of oil as well as    trading patterns and the demand for various types of vessels;  •     changes in the production of crude oil, particularly by OPEC and    other key producers, which impact the need for tanker capacity;  •     developments in international trade;  •     changes in seaborne and other transportation patterns, including    changes in the distances that cargoes are transported;  •     environmental concerns and regulations;  •     weather; and  •     competition from alternative sources of energy.     The factors that influence the supply of tanker capacity include: •     the number of newbuilding deliveries;  •     the scrapping rate of older vessels; and  •     the number of vessels that are out of service.***An over supply of new vessels may adversely affect charter    rates and vessel values***     If the number of new ships delivered exceeds the number oftankers being scrapped and lost, tanker capacity will increase.In addition, according to Clarkson Research Studies Ltd., thetotal newbuilding order book for vessels with capacity of 20,000dwt or more scheduled to enter the fleet through 2009 currentlyequals 24% of the existing fleet and we cannot assure you thatthe order book will not increase further in proportion to theexisting fleet. If the supply of tanker capacity increases andthe demand for tanker capacity does not increasecorrespondingly, charter rates could materially decline and thevalue of our vessels could be adversely affected.***Terrorist attacks and international hostilities can affect    the tanker industry, which could adversely affect our    business***     Additional attacks like those of September 11, 2001 orlonger-lasting war or international hostilities, including thosecurrently underway in Iraq and the Middle East, could damage theworld economy, adversely affect the availability of and demandfor crude oil and petroleum products and adversely affect ourability to recharter our vessels on the expiration ortermination of the Charters and the charter rates payable underany renewal or replacement charters. We conduct our operationsoutside the United States, and our business, financial conditionand results of operations may be adversely affected by changingeconomic, political and government conditions in the countriesand regions where our vessels are employed. Moreover, we operatein a sector of the economy that is likely to be adverselyimpacted by the effects of political instability, terrorist orother attacks, war or international hostilities.***The value of our vessels may fluctuate and adversely    affect our liquidity and may result in breaches under our credit    facility***     Tanker values have generally experienced high volatility.Investors can expect the fair market value of our tankers tofluctuate, depending on general economic and market conditionsaffecting the tanker industry and
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competition from other shipping companies, types and sizes ofvessels and other modes of transportation. In addition, althoughour Panamax and Product tankers were built in 2004 and our V-MAXtankers were built in 2001, as vessels grow older, theygenerally decline in value. These factors will affect the valueof our vessels at the termination of their Charters or earlierat the time of any sale, which during the term of the Charterswill require the consent of the Charterer and the lenders underour credit facility. Borrowings under our term loan agreementbear interest at a floating rate of LIBOR plus a 75 basispoints margin, which would increase to 85 basis points ifthe ratio of the value of our vessels to the amount outstandingunder the loan facility falls below 2.0. The increased interestmargin is equivalent to approximately $229,500 per year inincreased interest costs in the event the ratio falls below 2.0.In the event of the sale or loss of a vessel, we might berequired to repay a percentage of the loan earlier than weplanned or increase our payments under the facility, which couldaffect our financial condition and ability to make payments toour shareholders. Declining tanker values could adversely affectour ability to refinance our credit facility at its maturity inJanuary 2011 and thereby adversely impact our business andoperations and liquidity. Due to the cyclical nature of thetanker market, if for any reason we sell tankers at a time whentanker prices have fallen, the sale may be at less than thetanker’s carrying amount on our financial statements, withthe result that we would also incur a loss and a reduction inearnings.***We operate in the highly competitive international tanker    market which could affect our position if the Charterers do not    renew our Charters***     The operation of tanker vessels and transportation of crude oiland petroleum products are extremely competitive. Competitionarises primarily from other tanker owners, including major oilcompanies, as well as independent tanker companies, some ofwhich have substantially larger fleets and substantially greaterresources than we do. Competition for the transportation of oiland oil products can be intense and depends on price, location,size, age, condition and the acceptability of the tanker and itsoperators to the charterers. During the term of our Charterswith the Charterers we are not exposed to the risk associatedwith this competition. However, if the Charterers do notexercise their options to renew the Charters, we will have tocompete with other tanker owners, including major oil companiesand independent tanker companies for charterers. Due in part tothe fragmented tanker market, competitors with greater resourcescould enter and operate larger fleets through acquisitions orconsolidations and may be able to offer better prices and fleetsthan us, which could result in our achieving lower revenues fromour vessels.***Compliance with environmental laws or regulations may    adversely affect our business***     The shipping industry is affected by numerous regulations in theform of international conventions, national, state and locallaws and national and international regulations in force in thejurisdictions in which such tankers operate, as well as in thecountry or countries in which such tankers are registered. Theseregulations include the U.S. Oil Pollution Act of 1990, orOPA, the International Convention on Civil Liability for OilPollution Damage of 1969, International Convention for thePrevention of Pollution from Ships, the IMO InternationalConvention for the Safety of Life at Sea of 1974, or SOLAS, theInternational Convention on Load Lines of 1966 and theU.S. Marine Transportation Security Act of 2002. Inaddition, vessel classification societies also imposesignificant safety and other requirements on our vessels. Webelieve our tankers, four of which were built in 2004 and two ofwhich were built in 2001, are maintained in compliance withpresent regulatory and class requirements relevant to areas inwhich they operate, and are operated in compliance withapplicable safety and environmental laws and regulations.However, regulation of tankers, particularly in the areas ofsafety and environmental impact, may change in the future andrequire significant capital expenditures be incurred on ourvessels to keep them in compliance. Although the Charterers willbe responsible for all capital expenditures required due tochanges in law, classification society or regulatoryrequirements in an amount less than $100,000 per year pervessel, all other required capital expenditures during thecharter period will be split between us and the applicableCharterer based on the remaining charter period and theremaining depreciation period of the vessel, which is calculatedas 25 years from the year the vessel was built.
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***The shipping industry has inherent operational risks,    which may not be adequately covered by insurance***     Our tankers and their cargoes are at risk of being damaged orlost because of events such as marine disasters, bad weather,mechanical failures, human error, war, terrorism, piracy andother circumstances or events. In addition, transporting crudeoil across a wide variety of international jurisdictions createsa risk of business interruptions due to political circumstancesin foreign countries, hostilities, labor strikes and boycotts,the potential for changes in tax rates or policies, and thepotential for government expropriation of our vessels. Any ofthese events may result in loss of revenues, increased costs anddecreased cash flows to the Charterer, which could impair itsability to make payments to us under our Charters.     In the event of a casualty to a vessel or other catastrophicevent, we will rely on our insurance to pay the insured value ofthe vessel or the damages incurred. Under our ship managementagreements, Northern Marine is responsible for obtaininginsurance for our fleet against those risks that we believe theshipping industry commonly insures against. These insurancesinclude marine hull and machinery insurance, protection andindemnity insurance, which includes pollution risks and crewinsurances and war risk insurance. Northern Marine has alsoobtained off hire insurance in respect of each of our vessels.Currently, the amount of coverage for liability for pollution,spillage and leakage available to us on commercially reasonableterms through protection and indemnity associations andproviders of excess coverage is $1 billion per vessel peroccurrence. We cannot assure you that we will be adequatelyinsured against all risks. Under the ship management agreements,Northern Marine performs all technical management, includingcrewing and providing insurance for a fixed management fee.However, we may not be able to obtain adequate insurancecoverage at reasonable rates for our fleet in the future in theevent our existing Charters are not renewed at the expiration oftheir terms. Additionally, our insurers may refuse to payparticular claims. Any significant loss or liability for whichwe are not insured could have a material adverse effect on ourfinancial condition. In addition, the loss of a vessel wouldadversely affect our cash flows and results of operations.***Maritime claimants could arrest our tankers, which could    interrupt the Charterers’ or our cash flow***     Crew members, suppliers of goods and services to a vessel,shippers of cargo and other parties may be entitled to amaritime lien against that vessel for unsatisfied debts, claimsor damages. In many jurisdictions, a maritime lien holder mayenforce its lien by arresting a vessel through foreclosureproceedings. The arrest or attachment of one or more of ourvessels could interrupt the Charterers’ or our cash flowand require us to pay a significant amount of money to have thearrest lifted. In addition, in some jurisdictions, such as SouthAfrica, under the “sister ship” theory of liability, aclaimant may arrest both the vessel which is subject to theclaimant’s maritime lien and any “associated”vessel, which is any vessel owned or controlled by the sameowner. Claimants could try to assert “sister ship”liability against one vessel in our fleet for claims relating toanother vessel in our fleet.***Governments could requisition our vessels during a period    of war or emergency without adequate compensation***     The government of the United Kingdom, the country under whichour Bermuda flagged vessels would fall, could requisition orseize our vessels. Under requisition for title, a governmenttakes control of a vessel and becomes its owner. Underrequisition for hire, a government takes control of a vessel andeffectively becomes its charterer at dictated charter rates.Generally, requisitions occur during periods of war oremergency. Although we would be entitled to compensation in theevent of a requisition, the amount and timing of payment wouldbe uncertain.***Rising or high oil prices may affect demand for oil, and    subsequently demand for oil tankers may fall.***     Crude oil and oil products are commodities that experience pricevolatility. Prices for these commodities are set in an openmarket. We are an independent transporter of cargoes of crudeoil and oil products and have no control over the price of thecargoes that we carry. We depend on circumstances where thereare suitable cargoes available for our vessels to transport. Ina rising or high oil price environment, demand for crude oil
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and oil products may be reduced, which could reduce demand forour tanker vessels. Such a reduction in demand for our tankervessels could adversely affect our results of operations,possibly materially.**Risks Related To Our Common Shares*****If a significant number of our common shares are sold in    the market, the market price of our common shares could    significantly decline, even if our business is doing well***     The market price of our common shares could decline due to salesof a large number of shares in the market including sales ofshares by our large shareholders, or the perception that thesesales could occur. These sales or the perception that thesesales could occur could also make it more difficult orimpossible for us to sell equity securities in the future at atime and price that we deem appropriate.     Concordia, Stena and Fram Shipping Ltd., which we refer to asFram, were not eligible to sell their remaining shares untiltheir lock-upagreements expired on August 1, 2005. We have entered intoregistration rights agreements with them that entitle them tohave all or a portion of their remaining shares registered forsale in the public market following thatlock-up period. Inaddition, these shares became eligible for sale into the publicmarket pursuant to Rule 144 under the Securities Act onNovember 10, 2005. Any sales under Rule 144 would besubject to certain volume and manner of sale limitationsprescribed by the Rule.**ITEM 1B.*****UNRESOLVED STAFF COMMENTS***     Not Applicable.**ITEM 2.*****PROPERTIES***     We rent an office that contains approximately 150 squarefeet of shared office space in Hamilton, Bermuda, which weoccupied and began renting in November 2004. The rentarrangement in Bermuda is month to month. We believe ourfacilities are sufficient to meet our needs for the foreseeablefuture and, if needed, additional space will be available in thenear term at a reasonable cost to us. Our monthly rental costsin Bermuda are $500.     We also rent an office in Westport, Connecticut that containsapproximately 300 square feet of office space, which isused by our executive officers. We occupied and began rentingthe Westport office in July 2005. The rent arrangement inWestport is month to month. We believe our facilities aresufficient to meet our needs for the foreseeable future and, ifneeded, additional space will be available in the near term at areasonable cost to us. Our monthly rental costs in Westport areapproximately $3,000.**ITEM 3.*****LEGAL PROCEEDINGS***     The nature of our business, i.e., the acquisition, charteringand ownership of our vessels, exposes us to the risk of lawsuitsfor damages or penalties relating to, among other things,personal injury, property casualty and environmentalcontamination. Under rules related to maritime proceedings,certain claimants may be entitled to attach charterhire payableto us in certain circumstances. There are no actions or claimspending against us as of the date of this Annual Report onForm 10-K.**ITEM 4.*****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS***     No matters were submitted to a vote of our security holders,through solicitation of proxies or otherwise, during the lastquarter of the year ended December 31, 2005.
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**PART II****ITEM 5.*****MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED    SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY    SECURITIES*****Market Price of Arlington Tankers’ Common Shares andRelated Shareholder Matters**     Our common shares are listed on the New York Stock Exchange,under the symbol “ATB.” The following table setsforth, for the period indicated, the high and low closing salesprices of our common shares on the New York Stock Exchange.     **Fiscal Year Ended December 31, 2004** **High** **Low**         Fourth Quarter (from November 5 to December 31)     $23.75     $21.29         **Fiscal Year Ended December 31, 2005** **High** **Low**         First Quarter (from January 1 to March 31) $24.96  $21.65     Second Quarter (from April 1 to June 30) $23.42  $19.50     Third Quarter (from July 1 to September 30) $23.58  $21.77     Fourth Quarter (from October 1 to December 31) $23.77  $20.39      On February 28, 2006, we had approximately32 shareholders of record. This number does not includebeneficial owners for whom shares are held by nominees in streetname.**Dividends**     We have paid dividends on our common shares quarterly since ourincorporation in September, 2004. In January 2005, we declared adividend of $0.39 per share. That dividend was paid onJanuary 31, 2005 to our shareholders of record onJanuary 27, 2005. In April 2005, we declared a dividend of$0.55 per share. That dividend was paid on May 10,2005 to our shareholders of record on May 6, 2005. In July2005, we declared a dividend of $0.53 per share. Thatdividend was paid on August 9, 2005 to our shareholders ofrecord on August 5, 2005. In October 2005, we declared adividend of $0.50 per share. That dividend was paid onNovember 9, 2005 to shareholders of record onNovember 7, 2005.     The January 2005 dividend was based on our operating results forthe 51-day period fromthe completion of our initial public offering onNovember 10, 2004 through the end of our fiscal year onDecember 31, 2004. In that period, we earned AdditionalHire of $2.5 million, including Additional Hire of$2.1 million on vessels other than the V-MAX tankers. TheMay 2005 dividend was based on our operating results for thefirst quarter of the fiscal year ending December 31, 2005.In that period, we earned Additional Hire of $2.2 million,including Additional Hire of $1.5 million on vessels otherthan the V-MAX tankers. The August 2005 dividend was based onour operating results for the second quarter of the fiscal yearending December 31, 2005. In that period, we earnedAdditional Hire of $1.1 million, including Additional Hireof $400,000 on vessels other than the V-MAX tankers. TheNovember 2005 dividend was based on our operating results forthe third quarter of the fiscal year ending December 31,2005. In that period, we earned Additional Hire of $706,000,including Additional Hire of $13,000 on vessels other than theV-MAX tankers.     On January 26, 2006, we declared a dividend of $8,215,000or $0.53 per share, and paid that dividend onFebruary 9, 2006 to shareholders of record as ofFebruary 7, 2006. In that period, we earned an AdditionalHire of $1.6 million, including Additional Hire of $946,000on vessels other than V-MAX tankers.     We intend to continue to pay quarterly cash dividendsdenominated in U.S. dollars to the holders of our commonshares in amounts substantially equal to the charterhirereceived by us under the Charters, less cash expenses and anycash reserves established by our board of directors. We intendto declare those dividends in January, April, July and Octoberof each year and pay those dividends in the subsequent month.Distributions to shareholders are applied first to retainedearnings. When retained earnings are not sufficient,distributions are applied to additional paid-in capital.
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     There are restrictions that limit our ability to declaredividends, including those established under Bermuda law andunder our secured term loan agreement. Please see“Item 1A. Risk Factors — We cannot assureyou that we will pay any dividends” and — We maynot be able to recharter our vessels profitably after theyexpire, unless they are extended at the option of theCharterers” and the discussion in “Item 7.Management’s Discussion and Analysis of Financial Conditionand Results of Operations — Dividend Policy”.**Recent Sales of Unregistered Securities; Uses of ProceedsFrom Registered Securities**     Not applicable.**ITEM 6.*****SELECTED FINANCIAL DATA***     The following selected financial and other data summarizes ourhistorical financial and other information. We have derived theselected statement of operations data set forth below for theyears ended December 31, 2005, 2004 and 2003 and theselected balance sheet data as of December 31, 2005 and2004 from the audited consolidated financial statements includedin this Annual Report onForm 10-K. We havederived the selected financial data for prior periods fromaudited financial statements that are not included in thisreport. For the year ended December 31, 2004, our auditedconsolidated financial statements include the predecessorcombined carve-out financial statements of Concordia Maritime AB(publ), or Concordia, and Stena AB (publ), or Stena, for theperiod January 1, 2004 through November 9, 2004 andthe results of operations of Arlington Tankers and its whollyowned subsidiaries for the 51 days from November 10,2004 through December 31, 2004. For the years endedDecember 31, 2003, 2002, and 2001 the consolidatedfinancial statements represent the predecessor combinedcarve-out financial statements. The selected carve-out financialdata presented below is not indicative of the results we wouldhave achieved had we operated as an independent public companyfor any period presented. Furthermore, our historical resultsfor any prior period are not necessarily indicative of resultsto be expected for any future period and our historical resultsfor any interim period are not indicative of results to beexpected for a full fiscal year. This information should be readin conjunction with our “Item 1A. Risk Factors,”“Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and ourconsolidated financial statements and the notes thereto includedin “Item 8. Financial Statements and SupplementaryData” set forth in this report.                       **Year Ended December 31,**     **2005** **2004** **2003** **2002** **2001**               **(In thousands of $, except per share data)****Selected statement of operations data:**                        Total operating revenues, net $55,455  $57,958  $28,838  $26,504  $18,513     Total operating expenses  (28,904)  (30,672)  (14,405)  (14,058)  (11,316)    Operating income  26,551   27,286   14,433   12,446   7,197     Net income  21,913   20,351   5,913   5,769   1,832     Earnings per common share — basic and diluted $1.41  $0.28(1)  —   —    —     Cash dividend per share earned during the year $2.11  $0.39(1)  —   —    —     Cash dividend per share declared during the year $1.97   —   —   —   — **Selected balance sheet data (at end of period):**                        Cash and cash equivalents  11,839   5,960   1,194   590   6,371     Newbuildings  —   —   36,185   —   —     Vessels, net  269,031   281,441   154,465   161,034   167,662     Total assets  286,447   292,850   192,416   162,200   174,951     Amount due to Concordia, current  —   —   45,899   41,861   48,869     Long term liabilities  137,160   135,000   130,317   109,008   119,863     Combined predecessor equity  —   —   15,710   9,773   3,980     Shareholders’ equity  144,651   154,487   —   —   — 
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                       **Year Ended December 31,**     **2005** **2004** **2003** **2002** **2001**               **(In thousands of $, except per share data)****Selected cash flow data:**                        Net cash provided by operating activities  35,314   31,820   15,375   13,011   6,598     Net cash used in investing activities  (2,500)  (102,212)  (36,488)  (244)  (66,596)    Net cash provided by (used in) financing activities  (26,935)  75,158   21,717   (18,548)  66,369 **Selected fleet data (end of period):**                        Number of tankers owned  6   6   2   2   2  (1)     The earnings per share and dividend per share earned during the    year 2004 represent the period from November 10, 2004    through December 31, 2004.**ITEM 7.*****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL    CONDITION AND RESULTS OF OPERATIONS***     The following discussion of our financial condition and resultsof operations should be read in conjunction with ourconsolidated financial statements, and the related notes, andthe other financial and other information included elsewhere inthis Annual Report onForm 10-K. Thisdiscussion contains forward-looking statements based onassumptions about our future business. Our actual results willlikely differ from those contained in the forward-lookingstatements and such differences may be material.**Overview**     We are an international seaborne transporter of crude oil andpetroleum products. We were incorporated in September 2004 underthe laws of Bermuda. We were originally a jointly ownedsubsidiary of Stena AB (publ), or Stena, and Concordia MaritimeAB (publ), or Concordia.     On November 10, 2004, we completed our initial publicoffering and acquired our original fleet of six tankers,consisting of two V-MAX tankers, two Panamax tankers and twoProduct tankers. The total purchase price for these vesselsequaled approximately $426.5 million, consisting of$345.5 million in cash and 4,050,000 common shares that weissued to subsidiaries of Concordia and Stena and two companiesowned by Stena and Fram. We financed the cash portion of thepurchase price through our initial public offering andborrowings under a secured credit facility. The4,050,000 shares issued to the sellers were valued at$81 million, based on the initial public offering price of$20.00 per share. An aggregate of 1,717,500 of the sharesissued to the vessel sellers were sold in our initial publicoffering in connection with the underwriters’ exercise oftheir over-allotment option. We did not receive any proceedsfrom the sale of these shares.     Effective November 10, 2004, we chartered our initial sixvessels to subsidiaries of Stena and Concordia under fixed ratecharters, which we refer to as the Charters. We refer to thesubsidiaries of Stena and Concordia to which we have charteredour vessels as the Charterers. Under the Charters, we receivefixed basic hire in amounts that increase annually at a rateequal to the annual increase in the fees payable under our shipmanagement agreements described below. Furthermore, in additionto the fixed rate basic hire, each of our vessels has thepossibility of receiving additional hire from the Charterersthrough profit sharing arrangements related to the performanceof the tanker markets on specified geographic routes, or fromactual time charter rates. Additional hire is not guaranteed,and correlates to weighted average historical voyage rates forthe specified routes. The Charters contain options on the partof the Charterers to extend the terms of the Charters. Stena andConcordia have each agreed to guarantee the obligations of theirrespective subsidiaries under the Charters.     Effective November 10, 2004, we have also entered into shipmanagement agreements with Northern Marine Management Ltd., awholly owned subsidiary of Stena, which we refer to as NorthernMarine. The ship management agreements provide for the technicalmanagement of our vessels. Under the ship management agreements,we have agreed to pay Northern Marine a flat fee per day pervessel, which increases 5% every year.
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     As a result of our entering into the Charters, our revenuessince November 10, 2004 have been generated primarily fromcharter payments made to us by the Charterers. As a result ofour entering into the ship management agreements, our vesseloperating expenses for the vessels are fixed, increasing 5%annually. These arrangements are designed to provide us withstable and generally predictable cash flow and reduce ourexposure to volatility in the spot markets for the vessels.     On December 12, 2005, we entered into a five-year term loanagreement with The Royal Bank of Scotland plc. The term loanagreement provides for a term loan facility of up to$229,500,000. The purpose of the term loan agreement was to(1) refinance the indebtedness under our $135 milliondebt facility with a group of banks for which Fortis Bank(Nederland) N.V. was acting as agent, (2) finance thepurchase price of two new Product tankers from the Stena Groupand (3) general corporate purposes. We completed therefinancing of our previous debt facility in December 2005 andcompleted the vessel acquisitions in January 2006. The new termloan agreement matures on January 5, 2011. All amountsoutstanding under the term loan agreement must be repaid on thatmaturity date. There is no principal amortization prior tomaturity. Borrowings under the term loan agreement bear interestat a floating rate of LIBOR plus a margin of 75 basispoints. The margin would increase to 85 basis points if theratio of the value of our vessels to the amount outstandingunder the loan facility falls below 2.0. The increased interestmargin is equivalent to approximately $229,500 per year inincreased interest costs in the event the ratio falls below 2.0.In connection with the term loan agreement, we entered into aninterest rate swap agreement with the Royal Bank of Scotland. Asa result of this swap, we have fixed the interest rate on theterm loan agreement at 5.7325%. The annual cash interest costswill approximate 5.38% due to the benefit that we received fromthe termination of an existing swap with Fortis Bank of$4.8 million that has been designated by our Board ofDirectors to offset the higher interest costs of the new$229.5 million term loan facility.     On January 5, 2006, we entered into a series of agreements,which we refer to as the Transaction Documents, with Stena Bulk,Northern Marine and Stena Maritime, which we refer to as theStena Parties, pursuant to which we, through wholly ownedsubsidiaries, completed the purchase from subsidiaries of StenaMaritime two Product tankers, or the Vessels, known as the*Stena Concept*and the *Stena Contest*for a purchaseprice per Vessel of $46,000,000. In connection with theacquisition of the Vessels, the Stena Parties and we alsoentered into certain related agreements and amended certain ofthe agreements related to our previously-acquired six vessels.At the closing of the acquisition, our subsidiaries thatpurchased the Vessels and Stena Bulk entered into the TimeCharter Parties. Under the Time Charter Parties, which aresubstantially similar to the Time Charter Parties that oursubsidiaries have entered into for our previously-acquired sixvessels, our subsidiaries that purchased the Vessels timechartered the Vessels to Stena Bulk for an initial period ofthree years at the fixed daily basic hire. At the end of theinitial three-year period, both we and Stena Bulk have theoption to extend the time charters on a vessel-by-vessel basisfor an additional 30 months, at the fixed daily basic hire.If Stena Bulk exercises this option, there will be an additionalhire provision during the30-month period. If weexercise this option, there will be no additional hirearrangement. Furthermore, if Stena Bulk exercises the30-month option, therewill be two additional one-year options, exercisable by StenaBulk, at the fixed daily basic hire set forth below, but withoutan additional hire provision.     At the closing of the acquisition, the Time Charter Parties forour existing Product tankers and Panamax tankers were amended.These amendments modified the charter periods for ourpreviously-acquired Product tankers and Panamax tankers andprovided certain changes to the calculation of additional hireunder these Time Charter Parties. The amendments to the terms ofthe charters provided that (1) the five-year fixed term forone of the Product tankers (*Stena Consul*) and one of thePanamax tankers (*Stena Compatriot*) was extended toNovember 2010, followed by three one-year options exercisable byStena Bulk and (2) the five-year fixed term for one of theProduct tankers (*Stena Concord*) and one of the Panamaxtankers (*Stena Companion*) was reduced to a November 2008,followed by three one-year options exercisable by Stena Bulk.The term of the charters for the V-MAX tankers were not amended.The amendments to the additional hire provisions provided forcertain favorable adjustments to fuel consumption metrics usedin the calculation of additional hire for the Product tankersand Panamax tankers.
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     At the closing of the acquisition, the Ship ManagementAgreements for our existing vessels were also amended. Theseamendments modified the provisions relating to drydocking of thevessels. Specifically, the amendments provided that alldrydockings during the term of the Ship Management Agreementsare to be at the sole cost and expense of Northern Marine. Inaddition, Northern Marine agreed to conduct at least onemid-period drydocking for each Product tanker and Panamax tankerprior to redelivery of such vessels. Furthermore, uponredelivery of the existing vessels to us at the expiration ofthe Ship Management Agreements, Northern Marine has agreed topay to us a drydocking provision for each day from thecompletion of the last special survey drydocking during the termof the applicable Ship Management Agreement (or if no specialsurvey occurs during the term of such agreement, from the dateof commencement of such agreement), to date of redelivery at thedaily rates specified in the Ship Management Agreements.**Factors Affecting Our Results of Operations and CashAvailable for Dividends**     The principal factors that have affected our results ofoperations, financial position and cash available for dividendssince November 10, 2004, and that we expect to affect ourfuture results of operations, financial position and cashavailable for dividends include: •     the basic hire paid to us under our charters;  •     the amount of additional hire, if any, that we receive under our    charters;  •     fees under the ship management agreements;  •     depreciation;  •     administrative and other expenses;  •     interest expense;  •     any loss of any vessel;  •     required capital expenditures;  •     any cash reserves established by our board of directors;  •     any change in our dividend policy; and  •     increased borrowings or future issuances of securities.     We derive our revenues from our long term fixed rate timecharters with the Charterers. Our vessels are time chartered tothe Charterers under the Charters. Under a time charter, thecharterer pays substantially all of the voyage expenses, but thevessel owner pays the vessel operating expenses. In the case ofa spot market charter, the vessel owner pays both the voyageexpenses and the vessel operating expenses. Vessel operatingexpenses are the direct costs associated with running a vesseland include crew costs, vessel supplies, repairs andmaintenance, drydockings, lubricating oils and insurance. Voyageexpenses are fuel costs and port charges. See “Item 1.Business — Charter Arrangements” for moreinformation regarding the charters.     Our ability to earn additional hire under our charters willdepend on whether the charterers operate the vessels under timecharters or in the spot market and the relative freight rates ineach market. We will earn additional hire under our V-MAX tankercharters because those vessels are currently sub-chartered bysubsidiaries of Concordia to Sun International. With respect toour other vessels, our ability to earn additional hire willdepend on market conditions in the tanker industry, which hashistorically been highly cyclical, experiencing volatility inprofitability, vessel values and freight rates. In particular,freight and charter rates are strongly influenced by the supplyof tankers and the demand for oil transportation services. Ourexpenses consist primarily of fees under our ship managementagreements, depreciation, administrative expenses and interestexpense.     Our vessel owning subsidiaries have entered into ship managementagreements with Northern Marine under which Northern Marine isresponsible for all technical management of the vessels,including crewing,
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maintenance, repair, drydockings, vessel taxes, insurance andother vessel operating and voyage expenses. Under theseagreements we pay a fixed daily fee for each vessel whichincreases 5% annually. See “Item 1.Business — Ship Management Agreements” for moreinformation regarding our ship management agreements.     Depreciation is the periodic cost charged to our income for thereduction in usefulness and long term value of our vessels. Nocharge is made for depreciation of vessels under constructionuntil they are delivered. We depreciate the cost of our vesselsover 25 years on a straight-line basis. Includingdepreciation on the two new Product tankers that we purchased onJanuary 5, 2006, we estimate that depreciation will beapproximately $16.2 million per year.     Administrative expenses include salaries and other employeerelated costs, office rents, legal and professional fees andother general administrative expenses. In 2005, these costsincluded $500,000 in expenses associated with the purchase ofour two new Product tankers on January 5, 2006. Excludingthe additional expenses of approximately $300,000 associatedwith this purchase, based on our current activities we estimatethat our administrative expenses will be approximately $2.2 to$2.4 million in 2006.     Our interest expense prior to December 21, 2005 representedinterest expense under our old credit facility. Subsequent toDecember 21, 2005, we began to incur interest expense underour new $229.5 million term loan facility, which matures inJanuary 2011. By entering into an interest rate swap agreement,we have effectively fixed the interest rate under the facilityat approximately 5.7325% per year. In December 2005 as aresult of terminating an interest rate swap and debt facilitywith a group of banks led by Fortis Bank N.V., we realized a netgain on the termination of the swap and debt facility of$4.055 million. The cash proceeds from the termination ofthe swap was $4.8 million. The Company’s Board hasdesignated the $4.8 million benefit from the Fortis swap asan offset to the interest costs of the new secured term loanfacility. Accordingly, we estimate that interest expense underthe new secured term loan facility will be approximately$13.2 million per year, and that approximately$1 million per year of interest expense will be offset bythe benefit from the termination of the Fortis swap.     The charterers pay us basic hire monthly in advance andadditional hire, if any, quarterly in arrears. We pay NorthernMarine the ship management fees monthly in advance. We payinterest under our credit agreement quarterly in arrears.     Although inflation has had a moderate impact on our vesseloperating expenses and corporate overhead, our management doesnot consider inflation to be a significant risk in the currentand foreseeable economic environment. Because substantially allof our revenues and expenses are denominated inU.S. dollars, we do not expect foreign exchangefluctuations to have a significant effect on our future resultsof operations.**Our Predecessor Combined Carve-Out Results of Operations**     As a result of our entering into the charters and shipmanagement agreements, our operations since November 10,2004 have differed, and our future operations will differ,significantly from the historical predecessor combined carve-outresults of operations of the vessels by Concordia and Stena,upon which some of the historical financial information in thisreport is based. In particular, the financial statementspresented in this report for the year ended December 31,2003 have been carved out of the consolidated financialstatements of Concordia and Stena. In addition, the financialstatements for the year ended December 31, 2004 reflect,for the period January 1, 2004 through November 9,2004, this predecessor combined carve-out financial information.The financial position, results of operations and cash flowsreflected in the carve-out financial statements are notindicative of those that would have been achieved had weoperated as an independent separate entity for all periodspresented or of future results.     The predecessor combined carve-out financial statements assumethat our business was operated as an independent entity prior toits inception. We were incorporated in September 2004 and beganour vessel operations on November 10, 2004. Prior tobeginning our vessel operations, our business was operated aspart of the shipping business of Concordia and Stena. Thepredecessor combined carve-out financial statements have beenprepared to reflect the combination of certain of the operationsof two of Concordia’s subsidiaries
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which owned and operated the two V-MAX tankers, two companiesowned by Stena and Fram which owned and operated the two Panamaxtankers and two subsidiaries of Stena which owned and operatedthe two Product tankers. We refer to the companies that ownedthese vessels collectively as the predecessor vesselsubsidiaries and we refer to the interests in these vesselscollectively as the predecessor vessel interests.     To the extent the Concordia, Stena and Fram assets, liabilities,revenues and expenses relate to the predecessor vesselinterests, these have been identified and carved out forinclusion in the predecessor combined carve-out financialstatements. Concordia, Stena and Fram’s shipping interestsand other assets, liabilities, revenues and expenses that do notrelate to the predecessor vessel interests are not included inthe carve-out financial statements. In addition, the preparationof the carve-out financial statements required the allocation ofcertain assets, liabilities and expenses where these items werenot identifiable as related to a predecessor vessel interest asset forth below. Our management believes that these allocationsare reasonable to present the carve-out financial position,results of operations and cash flows.     For purposes of preparing the predecessor combined carve-outfinancial statements, all assets, liabilities, revenues andexpenses are derived directly from the predecessor vesselinterests or have been made in connection with the followingallocations:          ***Long term liabilities.*** Long term liabilities    includes an allocated portion of amounts outstanding under a    revolving credit facility with Concordia’s subsidiaries,    guaranteed by Concordia, which have been allocated to the two    Concordia predecessor vessel subsidiaries. This allocation is    based on the number of vessels in Concordia’s fleet and the    number of vessels owned by the Concordia predecessor vessel    subsidiaries during the periods presented. After    January 19, 2004 and through November 9, 2004, long    term debt also included amounts outstanding under a    $58 million secured loan facility with two of the Stena    predecessor vessel subsidiaries. This facility was guaranteed by    Stena and Fram in proportion to their ownership of these two    Stena predecessor vessel subsidiaries. After June 11, 2004    and through November 9, 2004, long term debt also included    amounts outstanding under a $53 million secured loan    facility with another two of the Stena predecessor vessel    subsidiaries which was guaranteed by Stena. The amount of    interest expense reflected in the carve-out financial statements    was determined by the amount of loans and advances outstanding    from time to time and prevailing interest rates.           ***Administrative expense.*** Prior to November 10,    2004, administrative expense represents an allocation of    Concordia’s administrative expenses, salaries and other    employee related costs, office rents, legal and professional    fees and other general administrative expenses based on the    number of vessels in Concordia’s fleet and the number of    vessels owned by the Concordia predecessor vessel subsidiaries    and certain other legal, tax and auditing costs incurred    directly by the Concordia predecessor vessel subsidiaries. After    January 1, 2004, as a result of the commencement of    operations of several of the vessels owned by the Stena    predecessor vessel subsidiaries during the first six months of    2004, these costs also include an allocation of Stena’s    administrative expenses, salaries and other employee related    costs, office rents, legal and professional fees and other    general administrative expenses based on the number of vessels    in Stena’s fleet and the number of vessels owned by the    Stena predecessor vessel subsidiaries and certain other legal,    tax and auditing costs incurred directly by the Stena    predecessor vessel subsidiaries.**Critical Accounting Policies and Estimates**     Our accounting policies are more fully described in Note 2to the Notes to Consolidated Financial Statements includedelsewhere in this report. As disclosed in Note 2 to theNotes to Consolidated Financial Statements, the preparation offinancial statements in conformity with accounting principlesgenerally accepted in the United States requires management tomake estimates and assumptions about future events that affectthe amounts reported in the financial statements andaccompanying notes. Future events and their effects cannot bedetermined with absolute certainty. Therefore, the determinationof estimates requires the exercise of judgment. The process ofdetermining significant estimates is fact specific and takesinto account factors such as historical experience, current andexpected economic and industry conditions, present and expectedconditions in the financial markets, and in some cases, thecredit worthiness of counterparties to contracts. We regularlyreevaluate these significant factors and make adjustments wherefacts and circum-
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stances dictate. The following is a discussion of the accountingpolicies that we apply and that we consider to involve a higherdegree of judgment in their application.***Basis of Accounting***     For the period from January 1, 2004 throughNovember 9, 2004 and for years ended December 31, 2003and prior, the financial information presented in this reporthas been carved out of the predecessor combined financialstatements of Concordia and Stena and include the predecessorvessel interests.     Stena and Concordia are affiliates. Stena is wholly owned bymembers of the Sten A. Olsson family. Members of the Sten A.Olsson family also own, as of December 31, 2004,approximately 52% of the share capital of Concordia whichrepresents approximately 73% of the voting rights of Concordia.Stena and Concordia are under common control. Because, prior tothe completion of our initial public offering, we were a jointlyowned subsidiary of Stena and Concordia, we were under commoncontrol of these entities. Subsequent to the completion of theinitial public offering, Stena and Concordia continued to own24.9% of the common shares.     Concordia and Stena are shipping companies with activities thatinclude, among others, the ownership and operation of tankers.The predecessor combined carve-out financial position, resultsof operations and cash flows presented in this report are notindicative of the results we would have achieved had we operatedas an independent entity under our current ship chartering andother arrangements for the periods presented or for futureperiods. As of December 31, 2005, Stena and Concordia owned4.5% and 9.9% respectively, of the common shares.*Revenue Recognition*     Revenues are generated from time charters and the spot market.Charter revenues are earned over the term of the charter as theservice is provided. Probable losses on voyages are provided forin full at the time such losses can be estimated.*Vessels, Depreciation and Impairment*     Our vessels represent our most significant assets and we statethem at cost less accumulated depreciation. Depreciation of ourvessels is computed using the straight-line method over theirestimated useful lives of 25 years. This is a common lifeexpectancy applied in the shipping industry. Significant vesselimprovement costs are capitalized as additions to the vesselrather than being expensed as a repair and maintenance activity.Should certain factors or circumstances cause us to revise ourestimate of vessel service lives, depreciation expense could bematerially lower or higher. If circumstances cause us to changeour assumptions in making determinations as to whether vesselimprovements should be capitalized, the amounts we expense eachyear as repairs and maintenance costs could increase, partiallyoffset by a decrease in depreciation expense.     We review long lived assets used in our business on an annualbasis for impairment, or whenever events or changes incircumstances indicate that the carrying amount of an asset or agroup of assets may not be recoverable. We assess recoverabilityof the carrying value of the asset by estimating the future netcash flows expected to result from the asset, including eventualdisposition. If the future undiscounted net cash flows are lessthan the carrying value of the asset, an impairment loss isrecorded equal to the difference between the asset’scarrying value and its fair value. We estimate fair value basedon independent appraisals, sales price negotiations, activemarkets, if available, and projected future cash flowsdiscounted at a rate determined by management to be commensuratewith our business risk. The estimation of fair value using thesemethods is subject to numerous uncertainties which require oursignificant judgment when making assumptions of revenues,operating costs, selling and administrative expenses, interestrates and general economic business conditions, among otherfactors.
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**Results of Operations**     The discussion below compares our results of operations for theyear ended December 31, 2005 to the year endedDecember 31, 2004 and for the year ended December 31,2004 to the year ended December 31, 2003. For the periodfrom January 1, 2005 through December 31, 2005, thefinancial information presented below reflects our results ofoperations as an independent company. For the period fromJanuary 1, 2004 through November 9, 2004 and for theyear ended December 31, 2003, the predecessor combinedfinancial information presented below has been carved out of thefinancial statements of Concordia and Stena and includes thepredecessor vessel interests. For the51-day period beginningNovember 10, 2004 and ending December 31, 2004, thefinancial information presented below reflects our results ofoperations following the completion of our initial publicoffering during which we operated as an independent company.***Year Ended December 31, 2005 Compared To Year Ended    December 31, 2004****Total operating revenues, net*     Total operating revenues were $55.5 million in 2005compared to $58 million in 2004. The 2005 revenuesconsisted of $52.6 million in basic hire and guaranteedadditional hire related to the V-MAX vessels and$2.9 million of additional hire revenues related to profitsharing arrangements with the charterers. The 2005 revenues werelower than 2004 for two reasons. First, revenues during theperiod from January 1, 2004 through November 9, 2004reflect revenues that Stena and Concordia earned from the timecharter of the vessels operated on the spot market where rateswere higher than the fixed rates that the Company earned in 2005under our long term fixed rate charter arrangements. Second,during the 51-dayperiod from November 10, 2004 through December 31,2004, the tanker spot rates were higher than in 2005, resultingin a greater Additional Hire payments to the Company than forthe fourth quarter of 2005. We expect that revenues related tobasic hire and guaranteed additional hire related to the V-MAXvessels will increase in 2006 to approximately $67 milliondue to the incremental charter revenues from the two vesselspurchased on January 5, 2006.     The vessels were off hire for a combined total of 30 daysin 2005, which is the same as the number of off hire days in2004.*Total vessel operating expenses*     Total vessel operating expenses were $14.0 million in 2005compared to $17.6 million in 2004. The decrease in vesseloperating expenses in 2005 reflects the lower fixed vesselmanagement fees related to our vessel management agreements withNorthern Marine. We expect vessel operating expenses to increasein 2006 to approximately $18.2 million principally due tothe addition of two new Product tankers in January 2006 and a 5%annual contractual increase in vessel operating expenses.*Depreciation*     Depreciation was $12.4 million in 2005 and$11.4 million in 2004. The increase in depreciation isattributed to the six vessels being in service for all of 2005compared to 2004 when several of the vessels went into operationduring the year. We estimate that depreciation in 2006 will beapproximately $16.2 due to the two new vessels purchased inJanuary 2006 at a book value of $46 million eachdepreciated on a straight-line basis with a useful life of25 years.*Administrative expenses*     Administrative expenses were $2.5 million in 2005 comparedto $1.7 million in 2004. The increase in administrativeexpenses is primarily attributed to costs of $500,000 for legalfees, bank fees and administrative costs associated with thepurchase of two new vessels and the Company’s new$229.5 million secured term loan facility. In addition, weexperienced higher administrative expenses associated withoperating as a U.S. domestic reporting company andassociated SEC reporting and Sarbanes-Oxley costs. We estimatethat
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administrative expenses for 2006 will be approximately$2.5 — $2.7 million in 2006 which includesapproximately $300,000 associated with the purchase of the twonew vessels in January 2006.*Other expenses, net*     Other expenses, net represents interest expense, net of interestincome and other financial items, including the net gain on thetermination of an interest rate swap, as well as the unrealizedloss on the fair value of an interest rate swap for our$229.5 million secured term loan facility. Other expenses,net were $4.6 million in 2005 compared to $6.9 millionin 2004. The 2005 amount includes interest expense of$6.8 million and an unrealized loss of the fair value of aninterest rate swap on our new $229.5 million term loancredit facility of $2.2 million, offset by a net gain onthe termination of an interest rate swap and debt facility of$4.1 million, and interest income of $233,000. The net gainon the termination of the interest rate swap and debt facilityincludes a payment of $4.8 million for the value of theinterest rate swap at termination less $700,000 in deferredfinancing costs incurred at the inception of the debt facilityand associated legal expenses to terminate the interest rateswap and debt facility. With respect to our new $229.5 term loancredit facility, by entering into an interest rate swapagreement, we have fixed the interest rate under the facility at5.7325% for the five-year term. We estimate that interestexpense under the new facility will be approximately$13.2 million per year. Our Board of Directors hasdesignated the $4.8 million cash benefit from thetermination of interest rate swap to offset the interest costsunder the new credit facility. We expect to offset the higherinterest costs each quarter through our cash dividenddistribution of a pro rata portion of the $4.8 million(approximately $240,000 per quarter) benefit from theinterest rate swap. As a result of the prorated benefit from thetermination of the interest rate swap, we expect our cashinterest costs per year to approximate $12.3 million.Because substantially all of our revenues and expenses aredenominated in U.S. dollars, we do not expect foreignexchange fluctuations to have a significant effect on our futureresults of operations.***Year Ended December 31, 2004 Compared To Year Ended    December 31, 2003****Total operating revenues, net*     Total operating revenues, net of commission expenses, were$58.0 million in 2004 compared to $28.8 million in2003. These revenues consisted of $48.5 million in revenuesduring the period from January 1, 2004 throughNovember 9, 2004 and $9.5 million during the51-day period followingour initial public offering during which our vessels wereoperated under our current charters and ship managementagreements. Our revenues for this51-day period consistedof $7.0 million in basic hire and $2.5 million inadditional hire. During the51-day period, thecharterers operated our Panamax tankers and Product tankers inthe spot market, resulting in payment to us of $2.1 millionof additional hire. These four vessels benefited from theexceptionally high tanker spot rates during November andDecember 2004. In addition, the two V-MAX tankers that aresub-chartered to Sun International generated $0.4 millionof additional hire.     Revenues during the period from January 1, 2004 throughNovember 9, 2004 reflect revenues that Stena and Concordiaearned from the time charter of the vessels. The two V-MAXtankers were operated during all of 2003 and the entire periodfrom January 1, 2004 through November 9, 2004. The twoPanamax tankers were delivered in January and April, 2004. Thetwo Product tankers were delivered in February and March 2004.     The vessels were off hire for a combined total of 30 daysin 2004, compared to 4.3 days off hire for 2003. Thevessels were off hire for 3.3 days during the51-day period followingour initial public offering from November 10, 2004 throughDecember 31, 2004.*Total vessel operating expenses*     Total vessel operating expenses were $17.6 million in 2004compared to $6.6 million in 2003. Vessel operating expensesfor the period from November 9, 2004 throughDecember 31, 2004 were $1.9 million, reflecting thefixed amounts payable under our ship management agreements. Theincrease in vessel operating
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expenses in the period in 2004 prior to our initial publicoffering compared to 2003 reflect the delivery to Stena andConcordia of four new vessels during 2004.*Depreciation*     Depreciation was $11.4 million in 2004 and$6.9 million in 2003. During the51-day period fromNovember 10, 2004 to December 31, 2004, depreciationwas $1.7 million.*Administrative expenses*     Administrative expenses were $1.7 million in 2004 comparedto $0.9 million in 2003. Administrative expenses in the51-day period followingour initial public offering were $0.7 million.*Other expenses, net*     Other expenses, net represents interest expense, net of interestincome and other financial items. Other expenses, net were$6.9 million in 2004 and $4.7 million in 2003. The2004 amount reflects primarily interest expense of$6.7 million, which included interest expense of$0.9 million for the51-day period followingour initial public offering. Subsequent to our initial publicoffering, our interest expense reflects interest payable underour $135 million secured term loan facility, which werefinanced in December 2005. By entering into an interest rateswap agreement, we have effectively fixed the interest rateunder the facility at approximately 4.8% per year. Interestexpense prior to November 10, 2004 reflects interest onlong term debt of Stena and Concordia that was allocated to thepredecessor vessel interests. Other expenses, net in 2004 alsoincluded interest income of $49,000. Because substantially allof our revenues and expenses are now denominated inU.S. dollars, we do not expect foreign exchangefluctuations to have a significant effect on our future resultsof operations.**Liquidity and Capital Resources**     We operate in a capital intensive industry. Our liquidityrequirements relate to our operating expenses, includingpayments under our ship management agreements, quarterlypayments of interest and the payment of principal at maturityunder our $229.5 million secured term loan facility andmaintaining cash reserves to provide for contingencies.     Our financial statements prior to the November 10, 2004completion of our initial public offering represent theoperations of our vessels by the predecessor vessel subsidiariesprior to our acquisition of the vessels. The acquisition of thevessels by the predecessor vessel subsidiaries and theiroperations were funded by bank debt provided by Concordia andadvances from Stena and Concordia and, in the case of two of theStena predecessor vessel subsidiaries, a loan from Fram. As aresult, our financial statements for the period prior to thecompletion of our initial public offering are not indicative ofthe financial position, results of operations or cash flows thatwe would have achieved had we operated as an independent entityduring these periods or of future results.     On December 12, 2005, we entered into a five-year term loanagreement with The Royal Bank of Scotland plc. The term loanagreement provides for a term loan facility of up to$229,500,000. The purpose of the term loan agreement was to(1) refinance our existing indebtedness under its$135 million debt facility with a group of banks for whichFortis Bank (Nederland) N.V. is acting as agent,(2) finance the purchase price of two new Product tankersfrom the Stena Group and (3) general corporate purposes.Arlington completed the refinancing of its existing indebtednessin December 2005 and completed the vessel acquisitions inJanuary 2006. The term loan agreement matures on January 5,2011. All amounts outstanding under the term loan agreement mustbe repaid on that maturity date. There is no principalamortization prior to maturity. Borrowings under the term loanagreement bear interest at a floating rate of LIBOR plus amargin of 75 basis points. The margin would increase to85 basis points if the ratio of the value of our vessels tothe amount outstanding under the loan facility falls below 2.0.The increased interest margin is equivalent to approximately$229,500 per year in increased interest costs in the eventthe ratio falls below 2.0. In connection with the term loanagreement, Arlington has entered into an interest rate swapagreement with the Royal Bank
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of Scotland. As a result of this swap, we fixed the interestrate on the term loan agreement at 5.7325%. The annual cashinterest costs will approximate 5.38% due to the benefit thatthe Company received from the termination of its existing swapwith Fortis Bank of $4.8 million that has been designatedby the Board of Directors to offset the higher interest costs ofthe new $229.5 million term loan facility. The term loanagreement provides that if at any time the aggregate marketvalue of Arlington’s vessels that secure the obligationsunder the Loan Agreement is less than 125% of the loan amount,Arlington must either provide additional security or prepay aportion of the loan to reinstate such percentage. The term loanagreement also contains financial covenants requiring that atthe end of each financial quarter (1) the Company’stotal assets (adjusted to give effect to the market value of thevessels) less total liabilities is equal to or greater than 30%of such total assets and (2) the Company has positiveworking capital.     We had outstanding long term debt of $135 million as ofDecember 31, 2005. This amount reflects outstandingborrowings under our secured term loan facility, which maturesin January 2011. By entering into an interest rate swapagreement, we have effectively fixed the interest rate under thefacility at approximately 5.7325% per year. Our long termdebt outstanding as of December 31, 2004 was$135 million representing borrowings under our prior creditfacility that were used to purchase our initial six vessels inconjunction with the Company’s initial public offering. See“Our Secured Term Loan Facility” below for moreinformation regarding our secured term loan facility.     As of December 31, 2005, we had cash and cash equivalentsof $11.8 million. Net cash provided by operating activitiesin 2005 was $35.3 million.     Net cash used in investing activities in 2005 was$2.5 million. This amount relates to the purchase ofmarketable securities in the fourth quarter with a maturitygreater than 90 days.     Net cash used by financing activities in 2005 was$26.9 million, which principally consisted of dividendpayments made in 2005.     We collect our basic hire monthly in advance and pay our shipmanagement fees monthly in advance. We receive additional hirepayable quarterly in arrears. We expect charter revenues will besufficient to cover our ship management fees, interest payments,administrative expenses and other costs and to continue to payquarterly dividends as described below in under the captionDividend Policy.**Dividend Policy**     We have paid dividends on our common shares quarterly since ourincorporation in September, 2004, as discussed above under thecaption “Item 5. Market for Registrant’s CommonEquity, Related Shareholder Matters and Issuer Purchaser ofEquity Securities — Dividends”.     The January 2005 dividend was based on our operating results forthe 51-day period fromthe completion of our initial public offering onNovember 10, 2004 through the end of our fiscal year onDecember 31, 2004. In that period, we earned AdditionalHire of $2.5 million, including Additional Hire of$2.1 million on vessels other than the V-MAX tankers. TheMay 2005 dividend was based on our operating results for thefirst quarter of the fiscal year ending December 31, 2005.In that period, we earned Additional Hire of $2.2 million,including Additional Hire of $1.5 million on vessels otherthan the V-MAX tankers. The August 2005 dividend was based onour operating results for the second quarter of the fiscal yearending December 31, 2005. In that period, we earnedAdditional Hire of $1.1 million, including Additional Hireof $400,000 on vessels other than the V-MAX tankers. TheNovember 2005 dividend was based on our operating results forthe third quarter of the fiscal year ending December 31,2005. In that period, we earned Additional Hire of $706,000,including Additional Hire of $13,000 on vessels other than theV-MAX tankers.     We intend to continue to pay quarterly cash dividendsdenominated in U.S. dollars to the holders of our commonshares in amounts substantially equal to the charterhirereceived by us under the Charters, less cash expenses and anycash reserves established by our board of directors. We intendto declare those dividends in January, April, July and Octoberof each year and pay those dividends in the subsequent month.Distributions to shareholders are applied first to retainedearnings. When retained earnings are not sufficient,distributions are applied to additional paid-in capital.
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     There are restrictions that limit our ability to declaredividends, including those established under Bermuda law andunder our secured term loan agreement. In addition to thediscussion below, please see “Item 1A. RiskFactors — We cannot assure you that we will pay anydividends” and “— We may not be able torecharter our vessels profitably after they expire, unless theyare extended at the option of the Charterers.”     Under Bermuda law a company may not declare or pay dividends ifthere are reasonable grounds for believing either that thecompany is, or would after the payment be, unable to pay itsliabilities as they become due, or that the realizable value ofits assets would thereby be less than the sum of its liabilitiesand its issued share capital (par value) and share premiumaccounts (share premium being the amount of consideration paidfor the subscription of shares in excess of the par value ofthose shares). As a result, in future years, if the realizablevalue of our assets decreases, our ability to pay dividends mayrequire our shareholders to approve resolutions reducing ourshare premium account by transferring an amount to ourcontributed surplus account.     The declaration and payment of any dividends must be approved byour board of directors. Under the terms of our credit facility,we may not declare or pay any dividends if we are in defaultunder the credit facility.     There can be no assurance that we will not have other cashexpenses, including extraordinary expenses, which could includethe costs of claims and related litigation expenses. There canbe no assurance that we will not have additional expenses orliabilities, that the amounts currently anticipated for theitems set forth above will not increase, that we will not haveto fund any required capital expenditures for our vessels orthat our board of directors will not determine to establish cashreserves. Other than the fees under our ship managementagreements, none of our fees or expenses are fixed.     The table below sets forth amounts that would be available to usfor the payment of dividends for each of the fiscal years setforth below assuming that: •     the Basic Hire is paid on all of our tankers and all of our    tankers are on hipppre for 360 days per fiscal year;  •     no Additional Hire is paid other than the Additional Hire based    on the current sub-charters with Sun International;  •     we have no cash expenses or liabilities other than the ship    management agreements, our current directors’ fees, the    current salaries and benefits of our President and our Chief    Financial Officer, currently anticipated administrative and    other expenses and interest under our credit facility;  •     we pay no U.S. federal income taxes and minimal    U.S. state and payroll taxes or have to fund any required    capital expenditures with respect to our vessels;  •     no cash reserves are established by our board of directors;  •     we remain in compliance with our credit facility which requires,    among other things, that the market value of our vessels exceeds    140% of our borrowings under the facility (or 125% if the loan    amount at the time of such dividend all of our vessels are on    time charter for a remaining period of at least 12 months)    in order to pay dividends;  •     we do not issue any additional common shares or other securities    or borrow any additional funds; and  •     the Charterers do not exercise any options to extend the terms    of the Charters.     The table below does not reflect noncash charges that we willincur, primarily depreciation on our vessels. The timing andamount of dividend payments will be determined by our board ofdirectors and will depend on our cash earnings, financialcondition, cash requirements and availability and the provisionsof Bermuda law affecting the payment of dividends and otherfactors. The table below does not take into account any expenseswe will incur if the subsidiaries of Concordia and Stena and thetwo companies owned by Stena and Fram exercise their rights tohave us register their shares under the registration rightsagreement. For an overview of the registration rights agreement,see “Item 1A. Risk Factors — If asignificant number of our common shares are sold in the market,the market price of our common shares could significantlydecline, even if our business is doing well.”
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     We cannot assure you that our dividends will in fact be equal tothe amounts set forth below. The amount of future dividends setforth in the table below represents only an estimate of futuredividends based on our charter contracts, ship managementagreements and an estimate of our other expenses and assumesthat none of our expenses materially increase during the periodsset forth below. The amount of future dividends, if any, couldbe affected by various factors, including the loss of a vessel,required capital expenditures, cash reserves established by ourboard of directors, increased or unanticipated expenses, achange in our dividend policy, increased borrowings or futureissuances of securities, many of which will be beyond ourcontrol. As a result, the amount of dividends actually paid mayvary from the amounts currently estimated and such variationsmay be material. There can be no assurance that any dividendswill be paid. See “Item 1A. Risk Factors —We cannot assure you that we will pay any dividends” and“— We may not be able to recharter our vesselsprofitably after they expire, unless they are extended at theoption of the Charterers.”     Based on the assumptions and the other matters in the precedingparagraphs, we estimate that the amount of cash available fordividends for each of the fiscal years set forth below would beas follows.               **Fiscal Year Ending**  **December 31,**     **2006** **2007** **2008**         **(In millions of $, except**  **per share amounts)**    Basic Hire  64.3   65.0   65.7     V-MAX Additional Hire  2.4   1.0   —     Vessel operating expenses  (18.2)  (18.9)  (19.6)    Cash Administrative expenses(1)  (2.2)  (2.2)  (2.3)    Cash interest cost(2)  (12.3)  (12.3)  (12.3)          **Cash available for dividends**  34.0   32.6   31.5           **Estimated dividends per share(3)** $2.19  $2.10  $2.03  (1)     Cash administrative expenses exclude approximately $300,000 that    we expect to incur in 2006 related to the purchase of the two    new Product tanker and will be funded by our new    $229.5 million term loan facility. (2)     Cash interest costs reflects the benefit of approximately    $1 million per year from the 2005 termination of the    Interest Rate Swap with Fortis Bank. The interest expense for    each year will be approximately $13.2 million    ($229.5 million at 5.7325%). (3)     Based on 15,500,000 issued and outstanding common shares.     We believe that our cash flow from our Charters will besufficient to fund our interest payments under our term loanagreement and our working capital requirements for the short andmedium term. To the extent we intend to pursue vesselacquisitions, we will need to obtain additional capital. Ourlonger term liquidity requirements include repayment of theprincipal balance of our secured term loan facility in January2011. We will require new borrowings or issuances of equity orother securities to meet this repayment obligation.**Our Secured Term Loan Facility**     *The following summary of the material terms of our term loanfacility does not purport to be complete and is subject to, andqualified in its entirety by reference to, all the provisions ofthe our new Term Loan Agreement. For more complete information,you should read the entire Secured Loan Facility Agreementfiled as an exhibit to ourForm 8-K filed onDecember 16, 2005.*     On December 12, 2005, we entered into a five-year term loanagreement with The Royal Bank of Scotland plc. The term loanagreement provides for a term loan facility of up to$229,500,000. The purpose of the term loan agreement was to(1) refinance the Company’s existing indebtednessunder its debt facility with a group of banks for which FortisBank (Nederland) N.V. is acting as agent, (2) finance thepurchase price of two new Product tankers from the Stena Groupand (3) general corporate purposes. Arlington completed the
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refinancing of its existing indebtedness of $135 million inDecember 2005 and completed the vessel acquisitions in January2006. The term loan agreement matures on January 5, 2011.All amounts outstanding under the term loan agreement must berepaid on that maturity date. There is no principal amortizationprior to maturity. Borrowings under the term loan agreementbears interest at a floating rate of LIBOR plus a margin of75 basis points. The margin would increase to 85 basispoints if the ratio of the value of the Company’s vesselsto the amount outstanding under the loan facility falls below2.0. The increased interest margin is equivalent toapproximately $229,500 per year in increased interest costsin the event the ratio falls below 2.0. In connection with theterm loan agreement, Arlington has entered into an interest rateswap agreement with the Royal Bank of Scotland. As a result ofthis swap, we have fixed the interest rate on the term loanagreement at 5.7325%. The annual cash interest costs willapproximate 5.38% due to the benefit that the Company receivedfrom the termination of its interest rate swap with Fortis Bankof $4.8 million that has been designated by the Board ofDirectors to offset the higher interest costs of the new$229.5 million term loan facility.     The term loan agreement contains restrictive covenants thatprohibit Arlington and its vessel owning subsidiaries from,among other things: permitting certain liens on assets; sellingor otherwise disposing of the our vessels or selling otherassets other than in arm’s-length transactions; acquiringassets outside the ordinary course of the our business, otherthan vessels; merging, amalgamating or entering into similaragreements with other entities; entering into certain types ofvessel charters, including time charters or consecutive voyagecharters of greater than 13 months (other thanArlington’s existing vessel charters and the charters to beentered into in connection with its new vessels to be acquiredfrom Stena Group); de-activating any vessel; and payingdividends in certain circumstances.     The term loan agreement also contains financial covenantsrequiring that at the end of each financial quarter (1) theCompany’s total assets (adjusted to give effect to themarket value of the vessels) less total liabilities is equal toor greater than 30% of such total assets and (2) theCompany has positive working capital. In addition, the LoanAgreement contains covenants with respect to providing financialinformation to the lender and the maintenance of insurance onthe Company’s vessels.     Events of default under the term loan agreement include, amongothers, cross defaults to other indebtedness in excel of$1 million, certain change control of Arlington or itsvessel owning subsidiaries and certain payment breaches underthe Charters. The term loan agreement provides that upon theoccurrence of an event of default, the lender may require thatall amounts outstanding be repaid immediately and terminate theCompany’s ability to borrow under the term loan agreementand foreclose on the mortgages over the vessels and the relatedcollateral.**Long Term Financial Obligations and Other CommercialObligations**     Our long term financial obligations and other commercialobligations as of December 31, 2005 are as follows:                       **Payments Due by Period**       **One Year** **2-3** **4-5** **More Than****Commercial and Contractual Obligations** **Total** **or Less** **Years** **Years** **5 Years**             **(In thousands of $)**    Long term debt, including current maturities(1) $135,000   —   —   —  $135,000     Interest Payments(2)  38,910   7,739   15,478   15,478   215     Purchase obligations(3)  59,338   14,318   30,861   14,159   —     Total $233,248   22,057   46,339   29,637  $135,215  (1)     Refers to our expected interest payments over the term of our    secured term loan facility after entering into swap arrangements    at a fixed rate of 5.7325%. On January 5, 2006, as a result    of our increase in long term debt to $229.5 million, our    interest payment obligation increased to approximately    $13.2 million annually.
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(2)     Refers to our expected interest payments over the term of our    secured term loan facility after entering into swap arrangements    that swap LIBOR for a fixed rate of 4.9825% plus a margin of    75 basis points, or 5.7325%. On January 5, 2006, as a    result of our increase in long term debt to $229.5 million,    our interest payment obligation increased to approximately    $13.2 million annually. (3)     Refers to our fixed daily operating costs for our vessels under    our ship management agreements with Northern Marine, which    increase 5% annually. These costs are payable by us monthly in    advance. On January 5, 2006, as a result of our purchase of    two new Product tankers for $92 million, our purchase    obligations increased by approximately $4 million per year.**ITEM 7A.*****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET    RISK***     We are exposed to market risk arising from changes in interestrates, primarily resulting from the floating rate of ourborrowings. We use interest rate swaps to manage such interestrate risk. We have not entered into any financial instrumentsfor speculative or trading purposes.     The borrowings under our $229.5 million secured term loanfacility bear interest at a floating rate of LIBOR (resetquarterly) plus a margin of 0.75%. We have entered into aninterest rate swap agreement that has effectively fixed theinterest rate under the facility at approximately5.7325% per year. Periodic cash settlements under the swapagreements occur quarterly corresponding with interest paymentsunder the secured term loan facility. The unrealized loss on thefair value of the interest rate swap agreement as ofDecember 31, 2005 was $2.2 million.     At December 31, 2004, we had a $135 million debtfacility with a group of banks led by Fortis Bank N.V. Weentered into an interest rate swap agreement at the inception ofthe debt facility that effectively fixed the interest rate underthe debt facility at 4.76%. The fair value of our Fortisinterest rate swap at December 31, 2004 was1.2 million. In December 2005 we terminated the Fortis debtfacility and the corresponding interest rate swap agreement. Werealized a net gain of $4.1 million on the termination ofthe interest rate swap and debt facility.
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**ITEM 8.*****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA*****ARLINGTON TANKERS LTD.****Index to Consolidated Financial Statements**          Report of Independent Registered Public    Accounting Firm on the Consolidated Financial    Statements — KPMG LLP  48      Report of Independent Registered Public    Accounting Firm on the Consolidated Financial    Statements — KPMG Bermuda  49      Report of Independent Registered Public    Accounting Firm on the Consolidated Financial    Statements — KPMG Bohlins AB  50      Consolidated Balance Sheets as of    December 31, 2005 and 2004  51      Consolidated Statements of Operations and    Comprehensive Income for the years ended December 31, 2005,    2004 and 2003  52      Consolidated Statements of Changes in    Combined Predecessor Equity and Shareholders’ Equity for    the years ended December 31, 2005, 2004 and 2003  53      Consolidated Statements of Cash Flows for    the years ended December 31, 2005, 2004 and 2003  54      Notes to the Consolidated Financial    Statements  55 
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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**The Board of Directors and ShareholdersArlington Tankers Ltd.     We have audited the accompanying consolidated balance sheet ofArlington Tankers Ltd. and its subsidiaries (“theCompany”) as of December 31, 2005 and the relatedconsolidated statements of operations and comprehensive income,shareholders’ equity and cash flows for the year thenended. These consolidated financial statements are theresponsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidatedfinancial statements based on our audit.     We conducted our audit in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financialstatement presentation. We believe that our audit provides areasonable basis for our opinion.     In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the financialposition of Arlington Tankers Ltd. and its subsidiaries as ofDecember 31, 2005 and the results of their operations andtheir cash flows for the year then ended in conformity withU.S. generally accepted accounting principles.     We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, based on thecriteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our reportdated March 10, 2006 expressed an unqualified opinion onmanagement’s assessment of, and an adverse opinion on theeffective operation of, internal control over financialreporting.KPMG LLPStamford, ConnecticutMarch 10, 2006
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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**The Board of Directors and ShareholdersArlington Tankers Ltd.     We have audited the accompanying consolidated balance sheet ofArlington Tankers Ltd. and its subsidiaries (“theCompany”) as of December 31, 2004 and the relatedconsolidated statements of operations and comprehensive income,changes in combined predecessor equity and shareholders’equity and cash flows for the year then ended. Theseconsolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express anopinion on these consolidated financial statements based on ouraudit.     We conducted our audit in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financialstatement presentation. We believe that our audit provides areasonable basis for our opinion.     In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the financialposition of Arlington Tankers Ltd. and its subsidiaries as ofDecember 31, 2004 and the results of their operations andtheir cash flows for the year then ended in conformity withUnited States generally accepted accounting principles.KPMGChartered AccountantsHamilton, BermudaMay 12, 2005
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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**The Board of Directors and ShareholdersArlington Tankers Ltd.     We have audited the accompanying predecessor combined carve-outstatements of operations, changes in combined predecessorequity, and cash flows of the predecessor to Arlington TankersLtd. and its subsidiaries (“the Company”) for the yearended December 31, 2003. These predecessor combinedcarve-out financial statements are the responsibility of theCompany’s management. Our responsibility is to express anopinion on these combined financial statements based on ouraudit.     We conducted our audit in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financialstatement presentation. We believe that our audit provides areasonable basis for our opinion.     In our opinion, the aforementioned predecessor combinedcarve-out financial statements present fairly, in all materialrespects, the results of operations and cash flows of thepredecessor to the Company for the year ended December 31,2003, in conformity with United States generally acceptedaccounting principles.KPMG Bohlins ABStockholm, SwedenOctober 20, 2004    /s/ Cronie Wallquist       Cronie Wallquist     Partner 
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**ARLINGTON TANKERS LTD.****Consolidated Balance Sheets as of****December 31, 2005 and 2004**             **December 31,** **December 31,**  **2005** **2004**       **(In thousands of $, except**  **share and per share amounts)****ASSETS****Current assets**             Cash and cash equivalents $11,839  $5,960      Short-term investments  2,500   —      Prepaid expenses and accrued income  283   1,346      Other receivables  1,601   2,102          **Total current assets**  16,223   9,408      Vessels, net  269,031   281,441      Deferred debt issuance cost  1,193   787      Interest rate swap agreement at fair value  —   1,214          **Total assets** $286,447  $292,850         **LIABILITIES AND SHAREHOLDERS’ EQUITY****Current liabilities**             Accrued expenses $2,399  $1,323      Unearned charter revenue  2,237   2,040          **Total current liabilities**  4,636   3,363 **Long term liabilities**             Interest rate swap agreement at fair value  2,160   —      Long term debt  135,000   135,000          **Total liabilities**  141,796   138,363        **Shareholders’ equity**            Common shares, par value $0.01 per share, authorized    60,000,000 shares at December 31, 2005 and 20,000,000    December 31, 2004, issued and outstanding 15,500,000 and    15,500,000 shares as of December 31, 2005 and 2004,    respectively  155   155      Preference shares, par value $0.01 per share,    4,000,000 shares authorized, none issued or outstanding  —   —      Additional paid-in capital  138,038   148,828      Accumulated other comprehensive income  —   1,214      Retained earnings  6,458   4,290          **Total shareholders’ equity**  144,651   154,487          **Total liabilities and shareholders’ equity** $286,447  $292,850        See accompanying notes to these Consolidated FinancialStatements.
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**ARLINGTON TANKERS LTD.****Consolidated Statements of Operations and ComprehensiveIncome for the years ended****December 31, 2005, 2004 and 2003**                 **Year Ended December 31,**     **2005** **2004** **2003**         **(In thousands of $, except share**  **and per share amounts)****Operating revenues**                 Charter revenues $55,455  $59,602  $29,963      Commission to Stena  —   (501)  (375)     Commission to others  —   (1,143)  (750)           **Total operating revenues, net**  55,455   57,958   28,838 **Operating expenses**                 Vessel operating expenses, other  13,999   15,988   5,995      Vessel operating expenses, Stena  —   1,374   191      Vessel operating expenses, Concordia  —   213   420      Depreciation  12,411   11,421   6,872      Administrative expenses  2,494   1,676   927             **Total operating expenses**  28,904   30,672   14,405           **Operating income**  26,551   27,286   14,433           **Other income (expenses)**                 Interest income  233   49   —      Interest expense, Concordia  —   (654)  (2,250)     Interest expense, Stena  —   (1,836)  —      Interest expense, Fram  —   (133)  —      Interest expense, other  (6,766)  (4,088)  (2,442)     Unrealized (loss) on interest rate swap  (2,160)  —   —      Net gain on termination of interest rate swap and debt facility  4,055   —   —      Foreign currency exchange loss  —   —   (3,654)     Other financial items  —   (273)  (174)           **Other income (expenses), net**  (4,638)  (6,935)  (8,520)          **Net income**  21,913   20,351   5,913           **Other comprehensive (loss) income**                Net unrealized gain on derivative instrument during the year  (1,214)  1,214   —            **Total other comprehensive (loss) income**  (1,214)  1,214   —            **Comprehensive income** $20,699  $21,565  $5,913               Earnings per common share — basic and diluted $1.41  $0.28(1)  N/A               Weighted average number of shares outstanding — basic    and diluted  15,500,000   15,500,000(1)  N/A            (1)     As described further in Note 1, the Company completed its    initial public offering on November 10, 2004. As a result,    the weighted average number of shares outstanding reflects the    period November 10, 2004 through December 31, 2004. In    addition, the earnings per common share is also presented for    the period November 10, 2004 through December 31,    2004, as the earnings for the period January 1, 2004    through November 9, 2004 accrued to the benefit of the    predecessor shareholders.See accompanying notes to these Consolidated FinancialStatements.
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**ARLINGTON TANKERS LTD.****Consolidated Statements of Combined****Predecessor Equity and Shareholders’ Equity****for the years ended December 31, 2005, 2004 and 2003**                 **Year Ended December 31,**     **2005** **2004** **2003**         **(In thousands of $)****COMBINED PREDECESSOR EQUITY**                Balance at the beginning of the year $—  $15,710  $9,773     Net income attributable to predecessor shareholders  —   16,061   5,913     Shares issued  —   —   24     Contribution by predecessor shareholders  —   38,001   —     Distribution to predecessor shareholders  —   (69,772)  —            **Total combined predecessor equity** $—   —  $15,710           **SHAREHOLDERS’ EQUITY**            **COMMON SHARES**                Balance at the beginning of the year $155  $—         Shares issued  —   167         Repurchase of founder shares  —   (12)               **Balance at the end of the year**  155   155               **ADDITIONAL PAID-IN CAPITAL**                Balance at the beginning of the year  148,828   —         Contribution by shareholders*      292,198         Dividend paid in excess of retained earnings  (10,790)            Deemed distribution to predecessor shareholders  —   (143,370)               **Balance at the end of the year**  138,038   148,828               **ACCUMULATED OTHER COMPREHENSIVE INCOME**                Balance at the beginning of the year  1,214   —                   Reclassification to earnings  (4,076)  152         Current period net changes in hedging transactions  2,862   1,062                     Other comprehensive income/(loss)  (1,214)  1,214                **Balance at the end of the year**  —   1,214               **RETAINED EARNINGS**                Balance at the beginning of the year  4,290   —         Net income for 2005 and the period from November 10, 2004    through December 31, 2004  21,913   4,290         Dividends paid  (19,745)                   **Balance at the end of the year**  6,458   4,290                **Total shareholders’ equity** $144,651  $154,487                *     For 2004 the contribution by shareholders is shown net of    underwriting discounts and commissions of $15.2 million and    initial public offering expenses of $2.5 million.See accompanying notes to these Consolidated FinancialStatements.
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**ARLINGTON TANKERS LTD.****Consolidated Statements of Cash Flows for the years ended****December 31, 2005, 2004 and 2003**                 **Year Ended December 31,**     **2005** **2004** **2003**         **(In thousands of $, except share**  **and per share amounts)****Operating activities**            **Net income** $21,913  $20,351  $5,913     Adjustments to reconcile net income to net cash provided by    operating activities:                 Depreciation  12,411   11,421   6,872      Realized gain from the termination of interest rate swap  (4,800)  —   —      Unrealized (loss) on interest rate swap  2,160   —   —      Unrealized exchange losses  —   —   3,654      Amortization of debt issuance costs  128   209   64      Write-off of debt issuance costs  665   —   —     Changes in operating assets and liabilities:                 Prepaid expenses and accrued income  1,063   (1,138)  140      Other receivables  501   (1,896)  (200)     Accrued expenses and other current liabilities  1,076   833   (1,068)     Unearned revenue  197   2,040   —             **Net cash provided by operating activities**  35,314   31,820   15,375           **Investing activities**                 Capital expenditure on vessels  —   102,212   36,488      Purchase of short-term investments  (2,500)  —   —             **Net cash used in investing activities**  (2,500)  (102,212)  (36,488)          **Financing activities**                 Proceeds from long term debt  135,000   239,666   —      Repayment of long term debt  (135,000)  (146,000)  (63,666)     Dividend payments from retained earnings  (19,745)  —   —      Dividend payments from paid in capital  (10,790)  —   —      Proceeds from interest rate swap  4,800   —   —      Increase in debt issuance costs  (1,200)  (838)  —      Increase (decrease) in amounts due to Stena and Concordia  —   (127,706)  78,183      Increase (decrease) in amount due to Fram  —   (7,176)  7,176      Distribution to predecessor shareholder  —   (69,772)  —      Proceeds on issues of new shares  —   211,353   —       — Deemed distribution to predecessor shareholders  —   (62,370)  —      Issue of share capital — founder shares  —   12   —      Repurchase of share capital — founder shares  —   (12)  —      Predecessor paid-in capital  —   38,001   24             **Net cash provided by (used in) financing activities**  (26,935)  75,158   21,717           **Net increase in cash**  5,879   4,766   604 **Cash and cash equivalents at beginning of year**  5,960   1,194   590            **Cash and cash equivalents at end of year** $11,839  $5,960  $1,194           **Supplemental Cash Flow Information**             **Interest paid** $6,735  $6,711  $5,905                As described in Note 1, the Company completed its initialpublic offering on November 10, 2004 by issuing and selling11,450,000 common shares, par value $0.01 per share, at aprice to the public of $20 per share, raising grossproceeds (before underwriting discounts and commissions of$15.2 million and initial public offering expenses of$2.5 million) of $229 million. Simultaneously, theCompany issued a total of 4,050,000 common shares at a price of$20 per share to Stena, Concordia and Fram, or totalconsideration of $81 million, as part of the settlement ofthe purchase price of the Vessels acquired. On acquisition ofthe Vessels, the excess of the purchase price over thehistorical book value at which the predecessor shareholderscarried the Vessels on their books was considered a deemeddistribution of $143.3 million to those predecessorshareholders.See accompanying notes to these Consolidated FinancialStatements.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated Financial Statements****December 31, 2005, 2004 and 2003****NOTE 1.****GENERAL**     Arlington Tankers Ltd. and its subsidiaries (collectively, the“Company”) were incorporated in September 2004 underthe laws of Bermuda for the purpose of acquiring six tankervessels (the “Vessels”) from subsidiaries of Stena AB(“Stena”), Concordia Maritime AB(“Concordia”) and two companies owned 75% by Stena and25% by Fram Shipping Co. Ltd (“Fram”). In November2004, the Company completed its initial public offering byissuing and selling to the public 11,450,000 common shares, parvalue $0.01 per share, at a price to the public of$20.00 per share, raising gross proceeds of$229 million before deduction of underwriting discounts,commissions and expenses of approximately $17.7 million.Simultaneously, the Company issued a total of 4,050,000 commonshares at a price of $20.00 per share to Stena, Concordiaand Fram, or total consideration of $81 million, as part ofthe settlement of the purchase price of the Vessels acquired. Onthat date the Company also raised $135 million of secureddebt (before expenses of approximately $0.8 million) aspart of the financing of the Vessels. On acquisition of theVessels, the excess of the purchase price of $426.5 millionover the historical book value of $283.2 million at whichthe predecessor shareholders carried the Vessels on their bookswas considered a deemed distribution of $143.3 million tothose predecessor shareholders. An aggregate of 1,717,500 ofthese shares were sold in the initial public offering inconnection with the underwriters’ exercise of theirover-allotment option. The Company did not receive any proceedsfrom the sale of shares by the selling shareholders. Concurrentwith the closing of this initial public offering, the Companycompleted the acquisition of two V-Max VLLC’s fromConcordia, two Product tankers from Stena, and two Panamaxtankers from companies owned jointly by Stena and Fram.     As of February 10, 2005, Stena and Concordia directly andindirectly owned an aggregate of approximately 14.4% of theoutstanding common shares.     The Vessels are currently owned by six subsidiaries of theCompany (each, a “Vessel Subsidiary”). The primaryactivity of each of the Vessel Subsidiaries is the ownership andoperation of a Vessel.     The following table sets out the details of the VesselSubsidiaries included in these consolidated financial statements:                         **Deadweight Cargo**    **Country of**   **Capacity (Metric****Name** **Vessel** **Incorporation** **First Day of Service** **Tones)**             Vision Ltd.   Stena Vision   Bermuda   April 24, 2001   314,000     Victory Ltd.   Stena Victory   Bermuda   June 29, 2001   314,000     Companion Ltd.   Stena Companion   Bermuda   January 18, 2004   72,000     Compatriot Ltd.   Stena Compatriot   Bermuda   April 15, 2004   72,000     Concord Ltd.   Stena Concord   Bermuda   February 26, 2004   47,400     Consul Ltd.   Stena Consul   Bermuda   March 26, 2004   47,400      Effective November 10, 2004, the Company has chartered theVessels to subsidiaries of Stena and Concordia (the“Charterers”) under five-year fixed rate charters,increasing annually by an amount equal to the annual increase inthe fees under the Company’s ship management agreements.Under the Charters, in addition to the fixed rate basic hire,each Vessel has the possibility of receiving additional hirefrom the Charterers through profit sharing arrangements relatedto the performance of the tanker markets on specified geographicroutes, or from actual time charter rates. Additional hire isnot guaranteed, and correlates to weighted average historicalvoyage rates for the specified routes. The Charters containthree one-year options on the part of the Charterers to extendthe terms of the Charters. Stena and Concordia have each agreedto guarantee the obligations of their respective subsidiariesunder the Charters. See Note 14 — SubsequentEvents for amendments to these agreements.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**     Effective November 10, 2004, the Company has also enteredinto ship management agreements with Northern Marine ManagementLtd., a wholly owned subsidiary of Stena. The ship managementagreements provide for the technical management of the Vessels.     The following table sets forth the daily Basic Hire forArlington Tankers’ initial six vessels.                       **Stena Vision,** **Stena** **Stena** **Stena** **Stena**  **Stena Victory** **Compatriot** **Companion** **Consul** **Concord****Period** **(V-MAX)** **(Panamax)** **(Panamax)** **(Product)** **(Product)**               Nov. 11, 2004 - Nov. 10, 2005 $35,700  $17,400  $17,400  $15,500  $15,500     Nov. 11, 2005 - Nov. 10, 2006  36,075   17,688   17,688   15,765   15,765     Nov. 11, 2006 - Nov. 10, 2007  36,469   17,989   17,989   16,043   16,043     Nov. 11, 2007 - Nov. 10, 2008  36,882   18,306   18,306   16,335   16,335     Nov. 11, 2008 - Nov. 10, 2009(1)  37,316   18,639   18,639   16,642   16,642     Nov. 11, 2009 - Nov. 10, 2010(2)  37,772   18,989   18,989   16,964   16,964     Nov. 11, 2010 - Nov. 10, 2011(3)  38,251   19,356   19,356   17,303   17,303     Nov. 11, 2011 - Nov. 10, 2012  38,753   19,741   —   17,658   —     Nov. 11, 2012 - Nov. 10, 2013  —   20,145   —   18,031   —  (1)     This period is the first for which the Charterer has the option    to extend the Charters for Stena Companion and Stena Concord.    There can be no assurance that the Charterer will exercise any    option. (2)     This period is the first for which the Charterer has the option    to extend the Charters for the V-MAX Tankers, Stena Vision and    Stena Victory. There can be no assurance that the Charterer will    exercise any option. (3)     This period is the first for which the Charterer has the option    to extend the Charters for Stena Compatriot and Stena Consul.    There can be no assurance that the Charterer will exercise any    option.     The related ship management agreement provides that NorthernMarine will reimburse the Company for any reduced hire oroff-hire if the total of the reduced hire and off-hire days asspecified in the ship management agreement exceeds five daysduring each twelve-month period following the date the vesselsare delivered to the Company to ensure that it receives a totalof 360 days of Basic Hire for each vessel during thatperiod. However, there is no obligation on the part of NorthernMarine to compensate the Company for lost Additional Hire as aresult of any off-hire periods.     In addition to the basic hire, the Charterers may pay theCompany quarterly in arrears an additional hire payment. Underthe Charters, the additional hire, if any, in respect of eachVessel, is payable on the 25th day following the end ofeach calendar quarter.     The additional hire, if any, payable in respect of a Vessel,other than the V-MAX tankers as described below, for anycalendar quarter is an amount equal to 50% of the WeightedAverage Hire, calculated as described below, for the quarterafter deduction of the basic hire in effect for that quarter.The Weighted Average Hire is a daily rate equal to the weightedaverage of the following amounts: •     a weighted average of the time charter hire per day received by    the Charterer for any periods during the Calculation Period,    determined as described below, that the Vessel is subchartered    by the Charterer under a time charter, less ship broker    commissions paid by the Charterer in an amount not to exceed    2.5% of such time charter hire and commercial management fees    paid by the Charterer in an amount not to exceed 1.25% of such    time charter hire; and  •     the time charter equivalent hire for any periods during the    Calculation Period that the vessel is not subchartered by the    Charterer under a time charter.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**     The Calculation Period is the twelve-month period ending on thelast day of each calendar quarter, except that in the case ofthe first three full calendar quarters following thecommencement of the Company’s Charters, the CalculationPeriod is the three, six and nine month periods, respectively,ending on the last day of such calendar quarter and the firstcalendar quarter also includes the period from the date of thecommencement of the Company’s Charters to the commencementof the first full calendar quarter.     In the case of the V-MAX tankers, which are currentlysub-chartered by subsidiaries of Concordia to Sun International,the Company receives additional hire equal to the differencebetween the amount paid by Sun International under its timecharters and the basic hire, less ship broker commissions paidby the Charterer in an amount not to exceed 2.5% of thecharterhire received by the Charterer and commercial managementfees paid by the Charterer in an amount not to exceed 1.25% ofthe charterhire received by the Charterer.**NOTE 2.****ACCOUNTING POLICIES****Basis of accounting**     The consolidated financial statements are prepared in accordancewith accounting principles generally accepted in the UnitedStates. The consolidated financial statements include the assetsand liabilities of the Company and its wholly ownedsubsidiaries. All intercompany balances and transactions havebeen eliminated upon consolidation.     For the year ended December 31, 2005, the consolidatedfinancial statements include the results of operations of theCompany and its wholly owned subsidiaries as an independentcompany.     For the year ended December 31, 2004, the consolidatedfinancial statements include the predecessor combined carve-outfinancial statements of Concordia and Stena for the periodJanuary 1, 2004 through November 9, 2004 and theresults of operations of the Company and its wholly ownedsubsidiaries for the 51 days from November 10, 2004through December 31, 2004 during which the Company operatedas an independent company.     For the period from January 1, 2004 throughNovember 9, 2004 and for the year ended December 31,2003, the predecessor combined carve-out financial statementspresented herein have been carved out of the financialstatements of Concordia and Stena. The predecessor combinedcarve-out financial statements include the assets andliabilities, the results of operations and cash flows related tothe Vessels for such periods. The predecessor combined carve-outfinancial statements are prepared in accordance with accountingprinciples generally accepted in the United States.     In the preparation of these predecessor combined carve-outfinancial statements, administrative expenses and certainindebtedness were not identifiable as relating solely to theVessels. Administrative expenses consisting primarily ofsalaries and other employee related costs, office rents, legaland professional fees and other general administrative expenseswere allocated based on the total number of Vessels in therespective fleets of Concordia and Stena over the periodspresented. In addition, a portion of the debt incurred byConcordia to finance the acquisition and operation by Concordiaof its Vessels has been allocated based on the size of theConcordia fleet over the periods presented. Management believesthese allocations are reasonable to present the financialposition, results of operations, and cash flows of the Company.However, the financial position, results of operations and cashflows of the Company for the periods presented are notindicative of those that would have been achieved had theCompany owned and operated the Vessels as an independent companyduring those periods. In addition, the predecessor combinedcarve-out financial statements do not purport to be indicativeof future financial position, results of operations or cashflows of the Company.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)****Revenue recognition**     Revenues are generated from time charters and the spot market.Charter revenues are earned over the term of the charter as theservice is provided. Probable losses on voyages are provided forin full at the time such losses can be estimated.**Comprehensive income**     Comprehensive income is defined as the change in theCompany’s equity during the year from transactions andother events and circumstances from nonowner sources.Comprehensive income of the Company includes not only net incomebut also unrealized gains or losses on derivative instrumentsused in cash flow hedges of future variable-rate interestpayments on the Company’s debt (see Note 9 andNote 10). Such items are reported as accumulated othercomprehensive income (loss), a separate component ofshareholders’ equity, until such time as the amounts areincluded in net income.**Commissions**     Commissions are expensed in the same period as time charterrevenues are recognized. Commissions are deducted from charterrevenues. There are no commissions associated with the timecharters to Stena and Concordia effective November 10, 2004described in Note 1.**Cash and cash equivalents and short-term investments**     The Company considers all demand and time deposits and allhighly liquid investments with an original maturity of threemonths or less as of the date of purchase to be cash and cashequivalents. The Company considers all demand and time depositsand all highly liquid investments with an original maturity ofgreater than three months as of the date of purchase to beshort-term investments. Cash and cash equivalents of$3.0 million and short-term investments of$2.5 million at December 31, 2005 and$5.2 million at December 31, 2004 are pledged asdescribed in Note 9 and are held at a single financialinstitution with a Standard & Poor’s rating of A+.The carrying value of cash and cash equivalents and short-terminvestments approximates its fair value.**Foreign currency**     The functional currency of the Company and each of the VesselSubsidiaries is the U.S. dollar.     Monetary assets and liabilities denominated in foreigncurrencies are translated at the year end exchange rates.Foreign currency revenues and expenses are translated attransaction date exchange rates. Exchange gains and losses areincluded in the determination of net income. In 2005 and 2004there were no foreign currency exchange gains and losses. In2003 there was a loss of $3.7 million on foreign currencyexchange included in other income (expenses) that wasrelated to the predecessor companies.**Income taxes**     The Company is incorporated in Bermuda. Under current Bermudalaw, the Company is not required to pay taxes in Bermuda oneither income or capital gains. The Company has received writtenassurance from the Minister of Finance in Bermuda that, in theevent of any such taxes being imposed, the Company will beexempted from taxation until the year 2016.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)****Vessels, net**     The cost of the Vessels is depreciated on a straight-line basisover their estimated useful lives of 25 years.     Spare parts are stated at cost. The cost of spare parts isexpensed at the time when the spare part is put in use.**Newbuildings**     The carrying value of Vessels under construction represents theaccumulated costs that the Company has incurred by way ofpurchase installments, other capital expenditures, capitalizedloan interest, associated finance costs and certain other costs.No charge for depreciation is made until the Vessel is put intooperation. All interest is capitalized until delivery.**Impairment of long-lived assets**     The carrying value of long-lived assets that are held and usedby the Company are reviewed on an annual basis for impairment orwhenever events or changes in circumstances indicate that thecarrying amount of the asset may no longer be appropriate. TheCompany assesses recoverability of the carrying value of theasset by estimating the future net cash flows expected to resultfrom the asset, including eventual disposition. If the futureundiscounted net cash flows are less than the carrying value ofthe asset, an impairment loss is recorded equal to thedifference between the asset’s carrying value and its fairvalue. In addition, long-lived assets to be disposed of arereported at the lower of carrying amount or fair value lessestimated costs to sell.**Deferred debt issuance cost**     Debt issuance costs, including debt arrangement fees, arecapitalized and amortized on a straight-line basis over the termof the relevant debt. Amortization of debt issuance costs isincluded in interest expense.**Drydocking provisions**     Normal Vessel repair and maintenance costs are charged toexpense when incurred.     In the case of drydocking expenses, the Company uses a methodthat capitalizes dry docking costs as incurred and amortizessuch costs as depreciation expense on a straight line basis overthe period to the next scheduled drydocking. The time betweenrequired drydockings is 5 years. Under the terms of theship management agreements, the manager is required, at itsexpense, to drydock the vessel once every 5 years. SeeNote 14 — Subsequent Events for amendments to thedrydocking provisions.**Receivables**     Receivables are recorded at their expected net realizable value.**Estimates and concentrations**     The preparation of financial statements in accordance withaccounting principles generally accepted in the United Statesrequires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities at thedate of the financial statements and reported amounts ofrevenues and expenses during the reporting period. Actualresults could differ from such best estimates.     The Company operates in the shipping industry which historicallyhas been cyclical with corresponding volatility in profitabilityand vessel values. Vessel values are strongly influenced bycharter rates which in turn are influenced by the level andpattern of global economic growth and the world-wide supply anddemand for vessels. The spot market for tankers is highlycompetitive and charter rates are subject to significant
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**fluctuations. Dependence on the spot market may result in lowerutilization. Each of the aforementioned factors are importantconsiderations associated with the Company’s assessment ofwhether the carrying amount of its owned Vessels arerecoverable. The Company seeks to mitigate the effect of suchfactors by various means such as by obtaining long term chartercontracts. There is a concentration of credit risk in that allrevenues are due solely from the Charterers. See Note 4.**Fair value of financial instruments**     Statement of Financial Accounting Standards (“SFAS”)No. 107, “Disclosures about Fair Value of FinancialInstruments,” requires the disclosure of fair values forall financial instruments, both on- and off-balance-sheet, forwhich it is practicable to estimate fair value. The Companyestimates that there are no material variations between fairvalue and book value for its financial assets or liabilities asof December 31, 2005 and 2004.**Earnings per share**     Earnings per share are based on the weighted average number ofcommon shares outstanding for the period presented. For allperiods presented, the Company had no potentially dilutivesecurities outstanding and therefore basic and dilutive earningsper share are the same. The Company completed its initial publicoffering on November 10, 2004. As a result, the weightedaverage number of shares outstanding for 2004 reflects theperiod November 10, 2004 through December 31, 2004. Inaddition, the earnings per common share for 2004 is alsopresented for the period November 10, 2004 throughDecember 31, 2004, as the earnings for the periodJanuary 1, 2004 through November 9, 2004 accrued tothe benefit of the predecessor shareholders.**Distributions to shareholders (Dividend)**     The Company intends to pay a quarterly cash distributiondenominated in U.S. dollars to the holders of its commonshares in amounts substantially equal to the charter hirereceived from the Charterers, less cash expenses and less anycash reserves established by the Company’s board ofdirectors. The Company intends to declare those dividends inJanuary, April, July and October of each year and pay thosedividends in the subsequent month. Distributions to shareholdersare applied first to retained earnings at the beginning of thequarter. When retained earnings are not sufficient,distributions are applied to additional paid-in capital.**NOTE 3.****RECENTLY ISSUED ACCOUNTING STANDARDS**     In December 2004, the Financial Accounting Standards Board, orFASB, issued SFAS No. 153, “Exchanges ofNonmonetary Assets,” (SFAS No. 153).SFAS No. 153 amends Accounting Principles Board(“APB”) Opinion No. 29, “Accounting forNonmonetary Transactions,” to require exchanges ofnonmonetary assets be accounted for at fair value, rather thancarryover basis. Nonmonetary exchanges that lack commercialsubstance are exempt from this requirement. SFAS 153 iseffective for nonmonetary exchanges entered into in fiscal yearsbeginning after June 15, 2005. The Company does notroutinely enter into exchanges that could be considerednonmonetary, accordingly the Company does not expect theadoption of SFAS 153 to have a material impact on itsconsolidated financial statements.     In December 2004, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 123, (Revised2004) — Share-Based Payment(“SFAS 123R”). SFAS 123R replacesSFAS No. 123. SFAS 123R requires that thecompensation cost relating to share-based payment transactionsbe recognized in financial statements and be measured based onthe fair value of the equity or liability instruments issued.Under SEC rules, the Company is allowed to implementSFAS No. 123R in the first quarter of its 2006 fiscalyear. Since the Company does not currently have any equitycompensation plans, it does not believe that the adoption ofSFAS No. 123R will have a material impact on itsconsolidated financial statements.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**     In March 2005, The Financial Accounting Standards Boardpublished FASB Interpretation No. 47, *“Accountingfor Conditional Asset Retirement Obligation”*, toclarify that an entity must recognize a liability for the fairvalue of a conditional asset retirement obligation when incurredif the liability’s fair value can be reasonably estimated.FIN 47 also defines when an entity would have sufficientinformation to reasonably estimate the fair value of an assetretirement obligation. FIN 47 is intended to provide a moreconsistent recognition of liabilities relating to assetretirement obligations, additional information about expectedfuture cash outflows associated with these obligations, andadditional information about investments in long-lived assets,because it recognizes additional asset retirement costs as partof the assets carrying amounts. FIN 47 is effective for2005. FIN 47 has not impacted the Company in 2005.**NOTE 4.****CHARTER REVENUES**     The minimum future revenues to be received by the Company undertime charters for the six vessels in effect as ofDecember 31, 2005 is $198.7 million, which representsthe committed time charter income under the time charters ineffect between the Company and Stena that expire November 2009.Please see Note 14 — Subsequent Events forinformation related to the purchase of two new Product tankerson January 5, 2006. Below is a summary of the minimumfuture revenues by year:       **Minimum Future****Year** **Charter Revenue**     **(In thousands**  **of $)**    2006 $50,855     2007  51,570     2008  50,665     2009  45,591 **NOTE 5.****OTHER RECEIVABLES**           **December 31,** **December 31,**  **2005** **2004**       **(In thousands of $)**    Additional hire revenue due from Stena $1,601  $2,102          $1,601  $2,102             As of December 31, 2005 and December 31, 2004 otherreceivables represent amounts due under the additional hireprofit share arrangement. These amounts are calculated quarterlyin arrears.**NOTE 6.****NEWBUILDINGS**           **December 31,** **December 31,**  **2005** **2004**       **(In thousands of $)**    Opening Balance $—  $36,185     Investments  —   102,212     Vessels delivered  —   (138,397)           Closing Balance $—  $—             Investments include $1.6 million of capitalized interestand associated finance costs for the year endedDecember 31, 2004.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)****NOTE 7.****VESSELS, NET**            **December 31,** **December 31,**  **2005** **2004**       **(In thousands of $)****Vessels**             Cost $310,426  $310,426      Accumulated depreciation  (41,395)  (28,985)            Net book value at end of year  269,031   281,441      Spare parts  —   —        **Vessels, net** $269,031  $281,441             The vessels are pledged as described in Note 9.     There have been no drydocking costs capitalized throughDecember 31, 2005.**NOTE 8.****DEFERRED DEBT ISSUANCE COST**     Deferred debt issuance cost represents debt arrangement feesthat are capitalized and amortized on a straight-line basis tointerest expense over the term of the relevant debt.Amortization is included in other interest expense. As ofDecember 31, 2005 the balance relates entirely to theCompany’s $229.5 million secured term loan facility.As of December 31, 2004 the deferred charges related to theCompany’s $135 million secured credit facility with agroup of banks lead by Fortis Bank N.V. The Fortis Bank deferredcharges were written off in December 2005 in connection with theCompany’s termination of the Fortis debt facility andinterest rate swap, and the execution of a new$229.5 million term loan facility with The Royal Bank ofScotland plc. Deferred debt issuance cost is comprised of thefollowing amounts.           **December 31,** **December 31,**  **2005** **2004**       **(In thousands of $)**    Debt arrangement fees $1,200  $810     Accumulated amortization  (7)  (23)           Deferred debt issuance cost $1,193  $787             Amortization expense relating to the Fortis Bank deferred debtissuance costs during 2005 and 2004 amounted to $121,000 and$23,000, respectively.**NOTE 9.****DEBT**           **December 31,** **December 31,**  **2005** **2004**       **(In thousands of $)**    Secured credit facility $135,000  $135,000     Revolving credit facility  —   —            Total debt $135,000  $135,000             On December 12, 2005, the Company entered into a five-yearterm loan agreement with The Royal Bank of Scotland plc. Theterm loan agreement provided for a term loan facility of up to$229,500,000. The term loan agreement is secured by firstpriority mortgages over each of the six Vessels, assignment ofearnings and insurances and the Company’s rights under thetime charters for the Vessels and the ship managementagreements, a pledge of the shares of the Company’s whollyowned subsidiaries and a charge over certain of
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**the Company’s bank accounts. Arlington completed therefinancing of its existing $135 million indebtedness inDecember 2005 and completed the acquisition of two vessels inJanuary 2006. As of December 31, 2005 the Company had$135 million in debt on the new term loan facilityoutstanding. The term loan agreement matures on January 5,2011. All amounts outstanding under the term loan agreement mustbe repaid on that maturity date. There is no principalamortization prior to maturity. Borrowings under the term loanagreement bear interest at a floating rate of LIBOR plus amargin of 75 basis points. The margin would increase to85 basis points if the ratio of the fair value of theCompany’s vessels to the amount outstanding under the loanfacility falls below 2.0. The increased interest margin isequivalent to approximately $229,500 per year in increasedinterest costs in the event the ratio falls below 2.0. Inconnection with the term loan agreement, Arlington has enteredinto an interest rate swap agreement with the Royal Bank ofScotland. As a result of this swap, the Company has fixed theinterest rate on the term loan agreement at 5.7325%.     The term loan agreement provides that if at any time theaggregate fair value of Arlington’s vessels that secure theobligations under the Loan Agreement is less than 125% of theloan amount, Arlington must either provide additional securityor prepay a portion of the loan to reinstate such percentage.The term loan agreement also contains financial covenantsrequiring that at the end of each financial quarter (1) theCompany’s total assets (adjusted to give effect to themarket value of the vessels) less total liabilities is equal toor greater than 30% of such total assets and (2) theCompany has positive working capital.     In connection with the termination of the Fortis Bank debtfacility, the Company recognized termination expenses of$745,000 consisting primarily of the write-off of unamortizeddeferred debt issuance costs of $665,000. The Company alsoreceived $4.8 million in connection with the termination ofits interest rate swap agreement with Fortis Bank.     As of December 31, 2004 the Company had a secured creditfacility of $135 million with a group of banks lead byFortis Bank N.V. The secured credit facility had an interest atLIBOR plus 1.00% per annum. The Company was required toenter into an interest rate swap to manage the interest rateexposure from floating to fixed. The swap fixes the rate at3.76% per annum plus a margin of 1.00%. Interest and marginare payable quarterly in arrears. Concurrent with the expirationof the swap, the facility was scheduled to mature onNovember 9, 2009 with full repayment of the$135 million due at that time.     The carrying value of long term debt approximates the fair valuedue to the credit facility’s floating rate terms.**NOTE 10.****FINANCIAL INSTRUMENTS****Derivative instruments and hedging activities**     SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” requires that allderivative instruments be recorded on the balance sheet at theirfair value. Changes in the fair value of each derivative isrecorded each period in current earnings or other comprehensiveincome, depending on whether the derivative is designated aspart of a hedge transaction and, if it is, the type of hedgetransaction.     For all hedging relationships, the Company formally documentsthe hedging relationship and its risk-management objective andstrategy for undertaking the hedge, the hedging instrument, theitem, the nature of the risk being hedged, how the hedginginstrument’s effectiveness in offsetting the hedged riskwill be assessed, and a description of the method of measuringineffectiveness. This process includes linking all derivativesthat are designated as cash-flow hedges to specific cash flowsassociated with assets and liabilities on the balance sheet orto specific forecasted transactions.     The Company also formally assesses, both at the hedge’sinception and on an ongoing basis, whether the derivatives thatare used in hedging transactions are highly effective inoffsetting cash flows of hedged items. Changes in the fair valueof a derivative that is highly effective and that is designatedand qualifies as a cash-
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**flow hedge are recorded in other comprehensive income to theextent that the derivative is effective as a hedge, untilearnings are affected by the variability in cash flows of thedesignated hedged item. Any other change in fair value of aderivative instrument that qualifies as a cash-flow hedge isreported currently in earnings.     The Company discontinues hedge accounting prospectively when itis determined that the derivative is no longer effective inoffsetting cash flows of the hedged item, the derivative expiresor is sold, terminated, or exercised, the derivative isredesignated as not a hedging instrument because it is unlikelythat a forecasted transaction will occur, or managementdetermines that designation of the derivative as a hedginginstrument is no longer appropriate.     In all situations in which hedge accounting is discontinued, theCompany continues to carry the derivative at its fair value onthe balance sheet and recognizes any subsequent changes in itsfair value in earnings.     Interest rate swap agreements are contractual agreements betweenthe Company and other parties to exchange the net differencebetween a fixed and variable interest rate periodically over thelife of the contract without the exchange of the underlyingprincipal amount of the agreement. The interest rate swaps wereexecuted as integral elements of the Company’s financingtransactions and risk management policies to achieve specificinterest rate management objectives. At the time of obtainingits financing in 2004 and 2005, the Company entered intopay-fixed, receive-floating interest rate swap agreements tohedge its exposure to future cash flow variability resultingfrom variable interest rates on the Company’s debt. In2004, the Company designates its interest rate hedgearrangements as hedges of the cash flows under theCompany’s variable rate secured credit facility. Interestexpense on the debt is adjusted to include the payments made orreceived under such hedge arrangements.     In November, 2004, the Company had entered into two identicalinterest rate swaps to change the characteristics of interestpayments on its secured credit facility of $135 millionfrom LIBOR to a fixed rate of 3.76% plus a margin of 1%. TheCompany concluded that changes in the fair value of the twoidentical derivatives were highly effective and that thederivatives were designated and qualified as a cash-flow hedge,and were recorded in other comprehensive income. The fair valueof the swaps at December 31, 2004 was $1.2 million. InDecember 2005, the Company terminated its $135 millioncredit facility and the corresponding interest rate swaps. TheCompany received a cash payment of $4.8 million as a resultof terminating its interest rate swaps. In conjunction with thetermination of the interest rate swaps, the Company incurredcosts of approximately $745,000, primarily associated with thewrite-off of deferred debt issuance costs, resulting in a netrealized gain in the fourth quarter of 2005 related to thetermination of the interest rate swaps of $4.1 million.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**     Changes in the fair value of interest rate swaps designated ashedging instruments that effectively offset the variability ofcash flows associated with variable-rate, long-term debtobligations are reported in other comprehensive income. Theseamounts subsequently are reclassified into interest expense as ayield adjustment of the hedged interest payments in the sameperiod in which the related interest affects earnings. For theyear ended December 31, 2005 and December 31, 2004,the Company had $724,000 and $152,000, respectively ofreclassifications to increase interest expense. Thesereclassifications did not impact the Company’s obligationunder its debt facilities however, these amounts represent thenet payments made under the swap agreements that representinterest expense paid in excess of the variable interestincurred and paid under the debt facility. The following tablesummarizes interest expense incurred under the Company’sdebt facilities and interest rate swap agreements since itsinception on November 10, 2004, exclusive of amortized debtissue costs and other interest costs:           **2005** **2004**       **($ in thousands)**    Interest related to floating rate debt facility $5,861  $751     Interest related to fixed rate swap agreement  724   152            Total interest incurred under debt facility and interest rate    swap $6,585  $903             The Company received a cash settlement of $4.8 million inDecember 2005 and reclassified this gain as a component of thenet gain on the termination of the interest rate swaps and debtfacility on the statement of operations.     In December 2005, the Company entered into a new$229.5 million secured debt facility. On December 21,2005 the Company completed an initial draw down of$135 million to repay its existing credit facility. Inconjunction with the new debt facility, the Company entered intoan interest rate swap to change the characteristics of theinterest payments on its secured debt facility from LIBOR to afixed rate of 5.7325%. The interest rate swap agreement was notdesignated nor qualified as a cash flow hedge pursuant toSFAS No. 133, accordingly changes in the fair value ofthis swap are recorded in current earnings. The fair value ofthe swap at December 31, 2005 was a liability of$2.2 million. Accordingly, the Company recorded a non-cashdecrease in the fair value the interest rate swap of$2.2 million in current earnings as an unrealized loss inthe fourth quarter of 2005. The fair market value of ourinterest rate swap will generally fluctuate based on the impliedforward interest rate curve for the3-month LIBOR. If theimplied forward interest rate curve decreases, the fair marketvalue of the interest rate swap will decrease which will resultin an additional unrealized loss in current earnings. If theimplied forward interest rate curve increases, the fair marketvalue of the interest rate swap will increase which will resultin a reduction of the unrealized loss in current earnings. Ifthe implied forward interest rate curves increase above thefixed rate of 5.7325%, the fair market value of the swap willincrease and result in an unrealized gain on the swap. In eithercase, changes in the unrealized gain or loss as a result offluctuations in the fair value of the interest rate swap did notimpact the Company’s cash dividend payments.     Except for these interest rate swaps, the Company had no otheroutstanding derivative instruments as of December 31, 2005and December 31, 2004.     The Company is exposed to credit loss in the event ofnon-performance by the counter-parties to its swap contracts.The Company minimizes its credit risk on these transactions byendeavoring to only deal with credit-worthy financialinstitutions, and therefore the Company views the risk ofnon-performance by the counter-parties as low.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)****NOTE 11.****SHARE CAPITAL**     As of December 31, 2005, the Company’s authorizedshare capital is comprised of 60,000,000 common shares, parvalue $0.01 per share, and 4,000,000 undesignatedpreference shares, par value $0.01 per share. OnJuly 22, 2005 at the Company’s Annual General Meetingof Shareholders, shareholders approved an increase in the numberof authorized share capital by 40,000,000 common shares, parvalue $0.01 per share.     As of December 31, 2004, the Company’s authorizedshare capital is comprised of 20,000,000 common shares, parvalue $0.01 per share, and 4,000,000 undesignatedpreference shares, par value $0.01 per share.     As of December 31, 2005 and 2004, the Company had15,500,000 common shares issued, outstanding and fully paid.There were no preference shares issued and outstanding.     At the time of the Company’s incorporation, 6,000 foundershares, par value $1.00 per share, were issued to each ofStena and Concordia. The founder shares carried no voting rightsat any time that shares of any other class were issued andoutstanding, except as required by Bermuda law. The foundershares had no right to dividends. The founder shares wererepurchased at par value and cancelled prior toDecember 31, 2004.     As described in Note 1, the Company was incorporated inSeptember 2004 and completed an initial public offering inNovember 2004. Prior to September 2004, the Company had notcommenced operations and had no assets or liabilities. Thecombined predecessor equity as of December 31, 2003represents an allocation from Stena and Concordia.**NOTE 12.****COMMITMENTS AND CONTINGENCIES**           **December 31,** **December 31,**  **2005** **2004**       **(In thousands of $)**    Ship mortgages $135,000  $135,000      As of December 31, 2005, ship mortgages represent firstmortgages on the six Vessels as collateral for amountsoutstanding under the secured term loan facility with The RoyalBank of Scotland plc with a maturity date of January 11,2011.     As of December 31, 2004, ship mortgages represent firstmortgages on the six Vessels as collateral for amountsoutstanding under the secured credit facility with a group ofbanks lead by Fortis Bank N.V. which had a maturity date ofNovember 9, 2009, but was terminated and paid in December2005.     The minimum future Vessel operating expenses to be paid by theCompany under the ship management agreements in effect as ofDecember 31, 2005 that expire in November 2009 and whichincrease 5% per year on November 9th is$59.3 million. Below is a summary by year of the minimumfuture Vessel operating expenses:       **Minimum Future**  **Vessel Operating****Year** **Expenses**     **(In thousands**  **of $)**    2006 $14,318     2007  15,033     2008  15,828     2009  14,159      The Company has guaranteed the obligations of each of itssubsidiaries under the charters and ship management agreementsdescribed in Note 1.
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**     The Company has entered into a registration rights agreementwith subsidiaries of Concordia and Stena and the companies ownedby Stena and Fram pursuant to which the Company has agreed toregister the shares owned by such companies for sale to thepublic. The Company’s expenses under this agreement arelimited to the first $0.5 million and 50% of the expensesthereafter. As of December 31, 2005 the Company has notincurred any costs under this agreement.**NOTE 13.****RELATED PARTY TRANSACTIONS**     As described in Note 1, the Company was formed for thepurpose of acquiring six Vessels from subsidiaries of Stena,Concordia and companies owned jointly by Stena and Fram. Theacquisition was completed in November 2004 as also described inNote 1. Prior to that date, the Vessels were traded in thespot market. As explained in Note 1, the Company hasentered into time charters for the six Vessels with subsidiariesof Stena and Concordia through November 11, 2009. Therevenue received from Stena and Corcordia in 2005 and 2004 underthese contracts were $55.4 million and $9.5 million,respectively.     The Company has also entered into ship management arrangementswith a subsidiary of Stena through November 11, 2009. Theamounts charged by a Stena subsidiary under this agreement in2005 and 2004 were $14.0 million and $1.9 million,respectively.     As disclosed in Note 14 — Subsequent Events, onJanuary 5, 2006 the Company entered into a series ofagreements with Stena Bulk, Northern Marine Management, andStena Maritime in connection with the purchase of two vessels.     Stena has agreed to guarantee the payment of amounts due to theCompany by Northern Marine under the ship management agreementsas a result of off hire or reduced hire of the vessels. Inaddition, if the Company terminates its ship managementagreements with Northern Marine because Northern Marine hasfailed to perform its obligations under such agreements, Stenahas agreed to provide a replacement ship manager to perform theobligations set forth in the ship management agreements on thesame terms and for the same fixed amount payable to NorthernMarine.     In addition, the Company has entered into a registration rightsagreement with the subsidiaries of Concordia and Stena and thecompanies owned by Stena and Fram pursuant to which it hasagreed to register the shares owned by such companies for saleto the public.     Prior to the acquisition of the Vessels by the Company onNovember 10, 2004, Stena provided commercial managementservices for the two V-MAX Vessels for SEK 50,000 (SwedishKronas) per Vessel per month plus 1.25% of the time charterrevenues of each Vessel. Stena also provided insurance servicesfor the two V-MAX Vessels for $20,000 per year per Vesselup until the acquisition by the Company.     Prior to the acquisition of the Vessels by the Company onNovember 10, 2004, Concordia charged the Company a fee forvarious administrative services. This fee was $0.2 millionfor the period January 1, 2004 though November 9, 2004and $0.4 million in 2003.**NOTE 14.****SUBSEQUENT EVENTS**     On January 5, 2006, Arlington Tankers entered into a seriesof agreements (the “Transaction Documents”) with StenaBulk, Northern Marine and Stena Maritime (“StenaParties”), pursuant to which Arlington, through whollyowned subsidiaries, completed the purchase from subsidiaries ofStena Maritime two Product tankers (the “Vessels”)known as *Stena Concept* and *Stena Contest* for apurchase price per Vessel of $46,000,000. In connection with theacquisition of the Vessels, Arlington and the Stena Parties alsoentered into certain related agreements and amended certain ofthe agreements related to Arlington’s previously-acquiredsix vessels. At the closing of the acquisition, the subsidiariesof Arlington that purchased the Vessels and Stena Bulk enteredinto the Time Charter Parties. Under the Time Charter Parties,which are
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**substantially similar to the Time Charter Parties thatArlington’s subsidiaries have entered into forArlington’s previously-acquired six vessels, the Arlingtonsubsidiaries that purchased the Vessels time chartered theVessels to Stena Bulk for an initial fixed term that expires inJanuary 2009 at the fixed daily basic hire. At the end of theinitial three-year period, both Arlington and Stena Bulk havethe option to extend the time charters on a vessel-by-vesselbasis for an additional 30 months, at the fixed daily basichire. If Stena Bulk exercises this option, there will be anadditional hire provision during the30-month period. IfArlington exercises this option, there will be no additionalhire arrangement. Furthermore, if Stena Bulk exercises the30-month option, therewill be two additional one-year options, exercisable by StenaBulk, at the fixed daily basic hire set forth below, but withoutan additional hire provision.     At the closing of the acquisition, the Time Charter Parties forArlington’s existing Product tankers and Panamax tankerswere amended. These amendments modified the charter periods forArlington’s previously-acquired Product tankers and Panamaxtankers and provided certain changes to the calculation ofadditional hire under these Time Charter Parties. The amendmentsto the terms of the charters provided that (1) thefive-year fixed term for one of the Product tankers *(StenaConsul)* and one of the Panamax tankers*(Stena Compatriot)* was extended to November 2010,followed by three one-year options exercisable by Stena Bulk and(2) the five-year fixed term for one of the Product tankers*(Stena Concord)* and one of the Panamax tankers *(StenaCompanion)* was reduced to November 2008, followed by threeone-year options exercisable by Stena Bulk. The term of thecharters for the V-MAX tankers were not amended. The amendmentsto the additional hire provisions provided for certain favorableadjustments to fuel consumption metrics used in the calculationof additional hire for the Product tankers and Panamax tankers.     At the closing of the acquisition, the Ship ManagementAgreements for Arlington’s existing vessels were amended.These amendments modified the provisions relating to drydockingof the vessels. Specifically, the amendments provided that alldrydockings during the term of the Ship Management Agreementsare to be at the sole cost and expense of Northern Marine. Inaddition, Northern Marine agreed to conduct at least onemid-period drydocking for each Product tanker and Panamax tankerprior to redelivery of such vessels. Furthermore, uponredelivery of the existing vessels to Arlington at theexpiration of the Ship Management Agreements, Northern Marinehas agreed to pay to Arlington a drydocking provision for eachday from the completion of the last special survey drydockingduring the term of the applicable Ship Management Agreement (orif no special survey occurs during the term of such agreement,from the date of commencement of such agreement), to date ofredelivery at the daily rates specified in the Ship ManagementAgreements.     On January 26, 2006, the Company declared a dividend of$8,215,000 or $0.53 per share, and paid that dividend onFebruary 9, 2006 to shareholders of record as ofFebruary 7, 2006.**NOTE 15.****QUARTERLY FINANCIAL DATA (Unaudited)**     Quarterly financial data for fiscal year 2005 were as follows:                   **Quarterly Financial Data**     **March 31, 2005** **June 30, 2005** **Sept. 30, 2005** **Dec. 31, 2005**           **(Unaudited)**  **($ in thousands, except per share data)**    Revenues $14,292  $13,538  $13,322  $14,302     Operating expenses  6,857   7,027   6,937   8,081     Other income (expense), net  (1,623)  (1,623)  (1,630)  238     Net income  5,812   4,888   4,755   6,459     EPS basic and diluted $0.38  $0.32  $0.31  $0.42     Dividend declared per share $0.39  $0.55  $0.53  $0.50 
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**ARLINGTON TANKERS LTD.****Notes to the Consolidated FinancialStatements — (Continued)**     As described in the Company’s accounting policy, thedividend declared per share is the amount of dividend declaredby the Company in the respective quarter and is calculated basedon the previous quarters’ earnings.     For the year ended December 31, 2004, the Company’sunaudited quarterly financial data includes the predecessorcombined carve-out financial statements of Concordia Maritime AB(publ), or Concordia, and Stena AB (publ), or Stena, for theperiod January 1, 2004 through November 9, 2004 andthe results of operations of Arlington Tankers and its whollyowned subsidiaries for the 51 days from November 10,2004 through December 31, 2004.     Quarterly financial data for fiscal year 2004 were as follows:                   **Quarterly Financial Data**     **March 31, 2004** **June 30, 2004** **Sept. 30, 2004** **Dec. 31, 2004**           **(Unaudited)**  **($ in thousands, except per share data)**    Revenues $9,327  $14,177  $16,618  $17,836     Operating expenses  4,785   6,927   8,947   10,013     Other income (expense), net  (1,627)  (2,366)  (1,304)  (1,638)    Net income  2,915   4,884   6,367   6,185     EPS basic and diluted  N/A   N/A   N/A  $0.28     Dividend declared per share  N/A   N/A   N/A   N/A 
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**ITEM 9.*****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON    ACCOUNTING AND FINANCIAL DISCLOSURE***     There have been no disagreements with our independent auditorson accounting and financial disclosure matters.**ITEM 9A.*****CONTROLS AND PROCEDURES*****(a)****Conclusion Regarding the Effectiveness of Disclosure Controls    and Procedures**     Our management, with the participation of our co-chief executiveofficers and chief financial officer, evaluated theeffectiveness of our disclosure controls and procedures as ofDecember 31, 2005. The term “disclosure controls andprocedures,” as defined inRules 13a-15(e)and 15d-15(e) under theExchange Act, means controls and other procedures of a companythat are designed to ensure that information required to bedisclosed by a company in the reports that it files or submitsunder the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’srules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensurethat information required to be disclosed by a company in thereports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management,including its principal executive and principal financialofficers, as appropriate to allow timely decisions regardingrequired disclosure. Our management recognizes that any controlsand procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving their objectivesand management necessarily applies its judgment in evaluatingthe cost-benefit relationship of possible controls andprocedures. Based on the evaluation of our disclosure controlsand procedures as of December 31, 2005, our co-chiefexecutive officers and chief financial officer concluded that,as of such date, the Company’s disclosure controls andprocedures were not effective because of a material weaknessdescribed below in Management’s Report on Internal ControlOver Financial Reporting, (Item 9(a)(b), as defined inRules 13a-15(f)and 15d-15(f) under theExchange Act).**(b)****Management’s Report on Internal Control Over Financial    Reporting**     The management of Arlington Tankers is responsible forestablishing and maintaining adequate internal control overfinancial reporting for the company. Management conducted anevaluation of the effectiveness of the internal control overfinancial reporting as of December 31, 2005 using thecriteria established in *Internal Control —Integrated Framework* Issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Internalcontrol over financial reporting is defined inRule 13a-15(f) or15d-15(f) promulgatedunder the Securities Exchange Act of 1934 as a process designedby, or under the supervision of, the company’s principalexecutive and principal financial officers and effected by thecompany’s board of directors, management and otherpersonnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation offinancial statements for external purposes in accordance withgenerally accepted accounting principles and includes thosepolicies and procedures that: •     Pertain to the maintenance of records that in reasonable detail    accurately and fairly reflect the transactions and dispositions    of the assets of the company;  •     Provide reasonable assurance that transactions are recorded as    necessary to permit preparation of financial statements in    accordance with generally accepted accounting principles, and    that receipts and expenditures of the company are being made    only in accordance with authorizations of management and    directors of the company; and  •     Provide reasonable assurance regarding prevention or timely    detection of unauthorized acquisition, use or disposition of the    company’s assets that could have a material effect on the    financial statements.     Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to futureperiods are subject to the risks that controls may becomeinadequate because of changes in conditions, or that the degreeof compliance with policies and procedures may deteriorate.
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     A material weakness is a significant deficiency (as defined inPCAOB Auditing Standard No. 2), or combination ofsignificant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.     Our management assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2005,which identified the following material weakness in thecompany’s internal control over financial reporting:          The Company did not have personnel possessing sufficient    technical expertise related to the application of the provisions    of generally accepted accounting principles to derivative    instruments, or with sufficient understanding of derivative    instruments. As a result, a material misstatement was identified    in the Company’s unrealized loss on interest rate swap that    was corrected prior to the issuance of the 2005 consolidated    financial statements.     Because of the material weakness described above, managementconcluded that the Company’s internal control overfinancial reporting was not effective as of December 31,2005.     The company’s independent registered public accountingfirm, KPMG LLP, has issued an audit report on our assessment ofthe company’s internal control over financial reporting,included as “Item 9A(d)”.**(c)****Changes in Internal Control Over Financial Reporting**     No change in the Company’s internal control over financialreporting occurred during the fiscal quarter endedDecember 31, 2005 that has materially affected, or isreasonably likely to materially affect, the Company’sinternal control over financial reporting.*Remediation efforts and/or plans for the    remediation*     The Company entered into a new derivative instrument in December2005. The derivative was a five-year interest rate swapagreement to fix the Company’s interest rate on its newfive-year floating rate debt facility. This transaction and itscorresponding accounting led to the material misstatement in theunrealized loss on interest rate swap. The Company plans toremediate this material control weakness by adding theappropriate technical resources, either through permanent staff,or a third party consultant.**(d)****Report of Independent Registered Public Accounting Firm on    Internal Control over Financial Reporting**The Board of Directors and ShareholdersArlington Tankers Ltd.     We have audited management’s assessment, included in theaccompanying Management’s Report on Internal Control OverFinancial Reporting “(Item 9A.(b))”, thatArlington Tankers Ltd. and its subsidiaries did not maintaineffective internal control over financial reporting as ofDecember 31, 2005, because of the effect of a materialweakness identified in management’s assessment, based oncriteria established in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). Arlington Tankers Ltd.’smanagement is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting basedon our audit.     We conducted our audit in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal controlover financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding ofinternal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the designand operating effectiveness of internal control, and performingsuch other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonablebasis for our opinion.
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     A company’s internal control over financial reporting is aprocess designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation offinancial statements for external purposes in accordance withgenerally accepted accounting principles. A company’sinternal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the companyare being made only in accordance with authorizations ofmanagement and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on thefinancial statements.     Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.     A material weakness is a control deficiency, or combination ofcontrol deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. Thefollowing material weakness has been identified and included inmanagement’s assessment as of December 31, 2005:          The Company did not have personnel possessing sufficient    technical expertise related to the application of the provisions    of generally accepted accounting principles to derivative    instruments, or with sufficient understanding of derivative    instruments. As a result, a material misstatement was identified    in the Company’s unrealized loss on interest rate swap.     We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), theconsolidated balance sheet of Arlington Tankers, Ltd. and itssubsidiaries as of December 31, 2005 and the relatedconsolidated statement of operations and comprehensive income,shareholders’ equity, and cash flows the year then ended.The aforementioned material weakness was considered indetermining the nature, timing, and extent of audit testsapplied in our audit of the 2005 consolidated financialstatements, and this report does not affect our report datedMarch 10, 2006, which expressed an unqualified opinion onthose consolidated financial statements.     In our opinion, management’s assessment that ArlingtonTankers Ltd. and its subsidiaries did not maintain effectiveinternal control over financial reporting as ofDecember 31, 2005, is fairly stated, in all materialrespects, based on criteria established in *InternalControl — Integrated Framework* issued by COSO.Also, in our opinion, because of the effect of the materialweakness described above on the achievement of the objectives ofthe control criteria, Arlington Tankers, Ltd. has not maintainedeffective internal control over financial reporting as ofDecember 31, 2005, based on criteria established in*Internal Control — Integrated Framework* issuedby COSO./s/ KPMG LLP Stamford, ConnecticutMarch 10, 2006
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**ITEM 9B.*****OTHER INFORMATION***     Not applicable.**PART III**     Certain information required by Part III is omitted fromthis Annual Report onForm 10-K andincorporated herein by reference to the definitive proxystatement for our 2006 Annual General Meeting, which we willfile with the Securities and Exchange Commission not later than120 days after the end of the fiscal year covered by thisReport.**ITEM 10.*****DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*****Directors and Executive Officers**     Certain information required by this Item is contained under theheading “Executive Officers of the Registrant” inPart I of this Annual Report onForm 10-K. Otherinformation required by this Item will appear under the headings“Proposal 1 — Election of Director”,“Corporate Governance” and “ExecutiveCompensation” in the proxy statement for our 2006 AnnualGeneral Meeting, which sections are incorporated herein byreference.**Code of Ethics**     We have a code of ethics that sets forth our commitment toethical business practices. Our code of ethics applies to ourPresident and Chief Financial Officer, or persons performingsimilar functions. Our code of ethics is available on ourwebsite, *www.arlingtontankers.com*, and in print from uswithout charge upon request. We intend to post amendments to andwaivers of our code of ethics on our website.**ITEM 11.*****EXECUTIVE COMPENSATION***     The information required to be disclosed by this Item pursuantto Item 402 ofRegulation S-Kwill be contained in the proxy statement for our 2006 AnnualGeneral Meeting under the captions “CorporateGovernance — Compensation of Directors,” and“Executive Compensation,” and is incorporated in thisAnnual Report onForm 10-K byreference.**ITEM 12.*****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND    MANAGEMENT AND RELATED SHAREHOLDER MATTERS***     The information required to be disclosed by this Item will becontained in the proxy statement for our 2006 Annual GeneralMeeting under the caption “Executive Compensation,”and is incorporated in this Annual Report onForm 10-K byreference.**ITEM 13.*****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS***     The information required to be disclosed by this Item will becontained in the proxy statement for our 2006 Annual GeneralMeeting under the caption “Certain Relationships andRelated Transactions,” and is incorporated in this AnnualReport onForm 10-K byreference.**ITEM 14.*****PRINCIPAL ACCOUNTANT FEES AND SERVICES***     The information required to be disclosed by this Item will becontained in the proxy statement for our 2006 Annual GeneralMeeting under the caption “Independent Registered PublicAccounting Firm’s Fees and Other Matters” and isincorporated in this Annual Report onForm 10-K byreference.
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**PART IV****ITEM 15.*****EXHIBITS AND FINANCIAL STATEMENT SCHEDULES***     (a)(1) *Financial Statements.*     For a list of the financial information included herein, see“Index to Financial Statements” on page 45 ofthis report.     (a)(2) *Financial Statement Schedules.*     All schedules are omitted because they are not applicable or therequired information is shown in the Financial Statements orNotes thereto.     (a)(3) *List of Exhibits.*     The list of Exhibits filed as a part of this annual report onForm 10-K are setforth on the Exhibit Index immediately preceding suchExhibits, and is incorporated herein by this reference.
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**SIGNATURES**     Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned,thereunto duly authorized, on March 10, 2006.     ARLINGTON TANKERS LTD. By:     /s/ Edward Terino       Name:        Edward    Terino Title:    Co-Chief Executive Officer and     Chief Financial OfficerDate: March 10, 2006     Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following personson behalf of the registrant and in the capacities and on thedates indicated.       **Signature** **Capacity** **Date**          /s/ Arthur L. Regan