##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934.
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934.
 For the period from          to
 Commission file number: 001-32343
 Arlington Tankers Ltd.
 (Exact name of Registrant as specified in its charter)
 Bermuda
    
    98-0460376(Jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 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
 Former name, former address and former fiscal year, if changes since last report: None
 þ o
  o þ
  o þ
 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASSES OF COMMON STOCK, AS OF November 7,
2005:




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ARLINGTON TANKERS LTD. AND SUBSIDIARIES
INDEX
 PART I:
    
    FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations (unaudited) and Comprehensive Income (unaudited) for the three months and nine months ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statement of Shareholders Equity (unaudited) for the nine months ended September 30, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2005 and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    7ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    14ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    32ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    32PART II:
    
    OTHER INFORMATION
    
    
    33ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    33ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    33ITEM 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    34SIGNATURES
    
    
    35Ex-10.2 Change in Control Agreement (Arthur L. Regan)Ex-10.3 Change in Control Agreement (Edward Terino)Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEO & CFO
  2




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##### Table of Contents



Item 1.
  ARLINGTON TANKERS LTD. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 SEPTEMBER 30,
    
    
    DECEMBER 31,2005
    
    
    2004(UNAUDITED)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    12,005
    
    
    $
    5,960Due from charterers, net
    
    
    706
    
    
    
    2,102Prepaid expenses and other current assets
    
    
    74
    
    
    
    1,346Fair value of interest rate swap
    
    
    3,828
    
    
    
    1,214Total current assets
    
    
    16,613
    
    
    
    10,622NONCURRENT ASSETS:Vessels, net
    
    
    272,133
    
    
    
    281,441Deferred financing costs, net
    
    
    665
    
    
    
    787Total noncurrent assets
    
    
    272,798
    
    
    
    282,228TOTAL ASSETS
    
    $
    289,411
    
    
    $
    292,850LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accrued expenses
    
    $
    399
    
    
    $
    1,323Deferred charter revenues
    
    
    4,242
    
    
    
    2,040Total current liabilities
    
    
    4,641
    
    
    
    3,363NONCURRENT LIABILITIES:Long-term debt
    
    
    135,000
    
    
    
    135,000TOTAL LIABILITIES
    
    
    139,641
    
    
    
    138,363SHAREHOLDERS EQUITY:Common stock, $0.01 par value per share;
authorized 60,000,000 shares at September 30, 2005 and 20,000,000 at December 31,
2004; issued and outstanding 15, 500,000
and 15,500,000 shares at September 30,
2005 and December 31, 2004, respectively
    
    
    155
    
    
    
    155Preference shares, $0.01 par value per
share, authorized 4,000,000, none issued
or outstanding at September 30, 2005 and
December 31, 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    141,031
    
    
    
    148,828Accumulated other comprehensive income
    
    
    3,828
    
    
    
    1,214Retained earnings
    
    
    4,756
    
    
    
    4,290Total shareholders equity
    
    
    149,770
    
    
    
    154,487TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    289,411
    
    
    $
    292,850
  3




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ARLINGTON TANKERS LTD. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (IN THOUSANDS, EXCEPT SHARE DATA)
 (UNAUDITED)
 FOR THE THREE MONTHS
    
    
    FOR THE NINE MONTHSENDED SEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2005
    
    
    2004
    
    
    
    2005
    
    
    2004REVENUES:Charter revenues
    
    $
    13,323
    
    
    $
    17,078
    
    
    $
    41,153
    
    
    $
    41,340Commissions to Stena
    
    
    
    
    
    
    (176
    )
    
    
    
    
    
    
    (422
    )Commission to others
    
    
    
    
    
    
    (284
    )
    
    
    
    
    
    
    (796
    )TOTAL REVENUES
    
    
    13,323
    
    
    
    16,618
    
    
    
    41,153
    
    
    
    40,122OPERATING EXPENSES:Vessel operating expenses
    
    
    3,413
    
    
    
    5,483
    
    
    
    10,128
    
    
    
    10,549Vessel operating expenses, Stena
    
    
    
    
    
    
    392
    
    
    
    
    
    
    
    1,168Vessel operating expenses, Concordia
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    213Depreciation
    
    
    3,112
    
    
    
    2993
    
    
    
    9,308
    
    
    
    8,164General and administrative expenses
    
    
    412
    
    
    
    64
    
    
    
    1,386
    
    
    
    565TOTAL OPERATING EXPENSES
    
    
    6,937
    
    
    
    8,947
    
    
    
    20,822
    
    
    
    20,659OPERATING INCOME
    
    
    6,386
    
    
    
    7,671
    
    
    
    20,331
    
    
    
    19,463OTHER EXPENSE:Interest expense, net
    
    
    (1,695
    )
    
    
    (1,295
    )
    
    
    (5,034
    )
    
    
    (2,877
    )Interest expense, Stena
    
    
    
    
    
    
    (210
    )
    
    
    
    
    
    
    (1,663
    )Interest expense, Concordia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (654
    )Interest expense, Fram
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (114
    )Interest income
    
    
    65
    
    
    
    13
    
    
    
    158
    
    
    
    28Other financial items
    
    
    
    
    
    
    230
    
    
    
    
    
    
    
    (17
    )NET OTHER EXPENSE
    
    
    (1,630
    )
    
    
    (1,304
    )
    
    
    (4,876
    )
    
    
    (5,297
    )NET INCOME
    
    $
    4,756
    
    
    $
    6,367
    
    
    $
    15,455
    
    
    $
    14,166OTHER COMPREHENSIVE INCOME:Net unrealized gain on derivative instrument
    
    
    2,348
    
    
    
    
    
    
    
    2,614
    
    
    
    COMPREHENSIVE INCOME
    
    
    7,104
    
    
    
    6,367
    
    
    
    18,069
    
    
    
    14,166Earnings per common share, basic and diluted
    
    $
    0.31
    
    
    
    N/A
    
    
    $
    1.00
    
    
    
    N/AWeighted average shares outstanding, basic and diluted
    
    
    15,500,000
    
    
    
    N/A
    
    
    
    15,500,000
    
    
    
    N/A
   4




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ARLINGTON TANKERS LTD. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (UNAUDITED)
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
 (IN THOUSANDS)
 AccumulatedOtherCommon
    
    
    Paid-in
    
    
    Retained
    
    
    ComprehensiveStock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    TotalBalance as of January 1, 2005
    
    $
    155
    
    
    $
    148,828
    
    
    $
    4,290
    
    
    $
    1,214
    
    
    $
    154,487Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    15,455
    
    
    
    
    
    
    
    15,455Unrealized derivative gains on cash flow
hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,614
    
    
    
    2,614Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,069Cash dividend paid
    
    
    
    
    
    
    (7,797
    )
    
    
    (14,989
    )
    
    
    
    
    
    
    (22,786
    )Balance at September 30, 2005 (unaudited)
    
    $
    155
    
    
    $
    141,031
    
    
    $
    4,756
    
    
    $
    3,828
    
    
    $
    149,770
  5




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ARLINGTON TANKERS LTD. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 FOR THE NINE MONTHSENDED SEPTEMBER 30,2005
    
    
    2004CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income
    
    $
    15,455
    
    
    $
    14,166Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    9,308
    
    
    
    8,164Amortization of debt issuance costs
    
    
    122
    
    
    
    189CHANGE IN OPERATING ASSETS AND LIABILITIES:(Increase) decrease in accounts receivables
    
    
    1,396
    
    
    
    (2,493
    )(Increase) decrease in prepaid expenses and accrued income
    
    
    1,272
    
    
    
    (209
    )Increase (decrease) in accrued expenses and other current liabilities
    
    
    (924
    )
    
    
    2,079Increase in deferred charter revenues
    
    
    2,202
    
    
    
    Net cash provided by operating activities
    
    
    28,831
    
    
    
    21,896CASH FLOWS USED BY INVESTING ACTIVITIES:Capital expenditures on vessels
    
    
    
    
    
    
    (101,674
    )Increase in debt issuance costs
    
    
    
    
    
    
    (1,063
    )Net cash used by investing activities
    
    
    
    
    
    
    (102,737
    )CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES:Cash dividend payments
    
    
    (22,786
    )
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    104,666Repayment of long-term debt
    
    
    
    
    
    
    (10,000
    )(Decrease) in amounts due from Stena and Concordia
    
    
    
    
    
    
    (46,182
    )(Decrease) in amounts due from Fram
    
    
    
    
    
    
    (3,976
    )Predecessor paid-in capital
    
    
    
    
    
    
    38,001Net cash (used) provided by financing activities
    
    
    (22,786
    )
    
    
    82,509Net increase in cash
    
    
    6,045
    
    
    
    1,668Cash and cash equivalents, beginning of period
    
    
    5,960
    
    
    
    1,194Cash and cash equivalents, end of period
    
    $
    12,005
    
    
    $
    2,862
  6




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ARLINGTON TANKERS LTD. AND SUBSIDIARIES
 
 Notes to the Condensed Consolidated Financial Statements
 (Unaudited)
 1. GENERAL
     Deadweight CargoCountry of
    
    
    
    CapacityName
    
    Vessel
    
    Incorporation
    
    First Day of Service
    
    (Metric Tones)Vision Ltd.
    
    Stena Vision
    
    Bermuda
    
    April 24, 2001
    
    
    314,000Victory Ltd.
    
    Stena Victory
    
    Bermuda
    
    June 29, 2001
    
    
    314,000Companion Ltd.
    
    Stena Companion
    
    Bermuda
    
    January 18, 2004
    
    
    72,000Compatriot Ltd.
    
    Stena Compatriot
    
    Bermuda
    
    April 15, 2004
    
    
    72,000Concord Ltd.
    
    Stena Concord
    
    Bermuda
    
    February 26, 2004
    
    
    47,400Consul Ltd.
    
    Stena Consul
    
    Bermuda
    
    March 26, 2004
    
    
    47,400
    7




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Charter Year
    
    V-MAX
    
    Panamax
    
    Product1
    
    $
    35,700
    
    
    $
    17,400
    
    
    $
    15,5002
    
    $
    36,075
    
    
    $
    17,688
    
    
    $
    15,7653
    
    $
    36,469
    
    
    $
    17,989
    
    
    $
    16,0434
    
    $
    36,882
    
    
    $
    18,306
    
    
    $
    16,3355
    
    $
    37,316
    
    
    $
    18,639
    
    
    $
    16,642Option year 1
    
    $
    37,772
    
    
    $
    18,989
    
    
    $
    16,964Option year 2
    
    $
    38,251
    
    
    $
    19,356
    
    
    $
    17,303Option year 3
    
    $
    38,753
    
    
    $
    19,741
    
    
    $
    17,658
   
    
    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.
    Charter Year
    
    V-MAX
    
    Panamax
    
    Product1
    
    $
    7,500
    
    
    $
    5,750
    
    
    $
    5,3002
    
    $
    7,875
    
    
    $
    6,038
    
    
    $
    5,5653
    
    $
    8,269
    
    
    $
    6,339
    
    
    $
    5,8434
    
    $
    8,682
    
    
    $
    6,656
    
    
    $
    6,1355
    
    $
    9,116
    
    
    $
    6,989
    
    
    $
    6,442Option Year 1
    
    $
    9,572
    
    
    $
    7,339
    
    
    $
    6,764Option Year 2
    
    $
    10,051
    
    
    $
    7,706
    
    
    $
    7,103Option Year 3
    
    $
    10,553
    
    
    $
    8,091
    
    
    $
    7,458
  8




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2. ACCOUNTING POLICIES
 Basis of accounting and presentation
     Cash and cash equivalents
  Estimates and concentrations
  9




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Fair value of financial instruments
 .
 Earnings per share
  Distributions to shareholders
  3. RECENTLY ISSUED ACCOUNTING STANDARDS
   4. CHARTER REVENUES
  10




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5. DUE FROM CHARTERERS, NET
 September 30,
    
    
    December 31,2005
    
    
    2004(In thousands of $)$
    706
    
    
    $
    2,102$
    706
    
    
    $
    2,102
  6. VESSELS, NET
 September 30,
    
    
    December 31,2005
    
    
    2004(In thousands of $)VesselsCost
    
    $
    310,426
    
    
    $
    310,426Accumulated depreciation
    
    
    (38,293
    )
    
    
    (28,985
    )Net book value at end of year
    
    
    272,133
    
    
    
    281,441Spare parts
    
    
    
    
    
    
    Vessels, net
    
    $
    272,133
    
    
    $
    281,441
   7. DEFERRED DEBT ISSUANCE COST
   September 30,
    
    
    December 31,2005
    
    
    2004(In thousands of $)Debt arrangement fees
    
    $
    810
    
    
    $
    810Accumulated amortization
    
    
    (145
    )
    
    
    (23
    )Deferred debt issuance cost
    
    $
    665
    
    
    $
    787
 8. DEBT
 September 30,
    
    
    December 31,2005
    
    
    2004(In thousands of $)Secured credit facility
    
    $
    135,000
    
    
    $
    135,000Total debt
    
    $
    135,000
    
    
    $
    135,000
   11




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9. FINANCIAL INSTRUMENTS
 Derivative instruments and hedging activities
         12




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10. SHARE CAPITAL
    11. COMMITMENTS AND CONTINGENCIES
 September 30,
    
    December 31,2005
    
    2004(In thousands of $)Ship mortgages
    
    $
    135,000
    
    
    $
    135,000
      13




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12. RELATED PARTY TRANSACTIONS
     13. SUBSEQUENT EVENTS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OP OPERATION
   
    
    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 credit facility at maturity, to obtain additional
financing and to obtain replacement charters for our vessels.
  14




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##### Table of Contents



Deadweight CargoCountry of
    
    
    
    CapacityName
    
    Vessel
    
    Incorporation
    
    First Day of Service
    
    (Metric Tones)Vision Ltd.
    
    Stena Vision
    
    Bermuda
    
    April 24, 2001
    
    
    314,000Victory Ltd.
    
    Stena Victory
    
    Bermuda
    
    June 29, 2001
    
    
    314,000Companion Ltd.
    
    Stena Companion
    
    Bermuda
    
    January 18, 2004
    
    
    72,000Compatriot Ltd.
    
    Stena Compatriot
    
    Bermuda
    
    April 15, 2004
    
    
    72,000Concord Ltd.
    
    Stena Concord
    
    Bermuda
    
    February 26, 2004
    
    
    47,400Consul Ltd.
    
    Stena Consul
    
    Bermuda
    
    March 26, 2004
    
    
    47,400
    15




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Charter Year
    
    V-MAX
    
    Panamax
    
    Product1
    
    $
    35,700
    
    
    $
    17,400
    
    
    $
    15,5002
    
    $
    36,075
    
    
    $
    17,688
    
    
    $
    15,7653
    
    $
    36,469
    
    
    $
    17,989
    
    
    $
    16,0434
    
    $
    36,882
    
    
    $
    18,306
    
    
    $
    16,3355
    
    $
    37,316
    
    
    $
    18,639
    
    
    $
    16,642Option year 1
    
    $
    37,772
    
    
    $
    18,989
    
    
    $
    16,964Option year 2
    
    $
    38,251
    
    
    $
    19,356
    
    
    $
    17,303Option year 3
    
    $
    38,753
    
    
    $
    19,741
    
    
    $
    17,658
   
    
    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.
    Charter Year
    
    V-MAX
    
    Panamax
    
    Product1
    
    $
    7,500
    
    
    $
    5,750
    
    
    $
    5,3002
    
    $
    7,875
    
    
    $
    6,038
    
    
    $
    5,5653
    
    $
    8,269
    
    
    $
    6,339
    
    
    $
    5,8434
    
    $
    8,682
    
    
    $
    6,656
    
    
    $
    6,1355
    
    $
    9,116
    
    
    $
    6,989
    
    
    $
    6,442Option Year 1
    
    $
    9,572
    
    
    $
    7,339
    
    
    $
    6,764Option Year 2
    
    $
    10,051
    
    
    $
    7,706
    
    
    $
    7,103Option Year 3
    
    $
    10,553
    
    
    $
    8,091
    
    
    $
    7,458
   16




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Dividend Policy
      
    
    the basic hire is paid on all of our tankers and all of our tankers are on hire 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 and the $1.9 million of other additional hire paid to us
during the first three quarters of 2005;
    
    we have no cash expenses or liabilities other than the ship management agreements, our
current directors fees, the current salaries and benefits of our Co-Chief Executive
Officers, currently anticipated administrative and other expenses and interest under our
credit facility;
    
    we do not pay any 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 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.
  17




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We cannot assure you that our dividends will in fact be equal to the amounts set forth below.
The amount of future dividends set forth in the table below represents only an estimate of future
dividends based on our charter contracts, ship management agreements and an estimate of our other
expenses and assumes that none of our expenses increase during the periods set forth below. The
amount of future dividends, 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,
increased or unanticipated expenses, a change in our dividend policy, increased borrowings or
future issuances of securities, many of which will be beyond our control. As a result, the amount
of dividends actually paid may vary from the amounts currently estimated and such variations may be
material. There can be no assurance that any dividends will be paid. See We cannot assure you that
we will pay any dividends and Our charters expire in 2009, unless extended at the option of the
charterers, and we may not be able to recharter our vessels profitably, under the heading Risk
Factors below.
  Fiscal Year EndingDecember 31,2005
    
    
    2006
    
    
    2007(In millions of $, exceptper share amounts)Basic Hire
    
    $
    49.3
    
    
    $
    50.2
    
    
    $
    50.9V-MAX additional hire
    
    
    2.6
    
    
    
    2.4
    
    
    
    1.1Other additional hire(1)
    
    
    1.9
    
    
    
    
    
    
    
    Vessel operating expenses
    
    
    (13.6
    )
    
    
    (14.3
    )
    
    
    (15.0
    )Administrative expenses
    
    
    (2.0
    )
    
    
    (1.8
    )
    
    
    (1.8
    )Cash interest expense
    
    
    (6.4
    )
    
    
    (6.4
    )
    
    
    (6.4
    )Cash available for dividends
    
    $
    31.8
    
    
    $
    30.1
    
    
    $
    28.7Estimated dividends per share(2)
    
    $
    2.05
    
    
    $
    1.94
    
    
    $
    1.85
 
 (1)
    
    For all periods following the third quarter of 2005, additional hire for our Panamax tankers
and Product tankers is assumed to be zero for purposes of this estimate.(2)
    
    Based on 15,500,000 issued and outstanding common shares.  Results of Operations
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NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004
 Total operating revenues, net
    Total vessel operating expenses
  Depreciation
  General and administrative expenses
  Other expenses, net
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THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004
 Total operating revenues
 Stena
Victory Stena Vision
  Total vessel operating expenses
  Depreciation
  Administrative expenses
  Other expenses, net
  Liquidity and Capital Resources
    20




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Critical Accounting Policies and Estimates
  BASIS OF ACCOUNTING
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REVENUE RECOGNITION
  VESSELS, DEPRECIATION AND IMPAIRMENT
   Risk Factors
 The following important factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report or presented elsewhere by
management from time to time.
 COMPANY SPECIFIC RISK FACTORS
 We cannot assure you that we will pay any dividends
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We are highly dependent on the charterers and their guarantors, Stena and Concordia
  If we cannot refinance our loans, or in the event of a default under our secured credit facility,
we may have to sell our vessels, which may leave no additional funds for distributions to
shareholders
   Our charters expire in 2009, unless extended at the option of the charterers, and we may not be
able to recharter our vessels profitably
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Because we are a recently formed company, our historical financial and operating data may not be
representative of our future results
  Agreements between us, Stena, Concordia and their other affiliates may be less favorable than
agreements that we could obtain from unaffiliated third parties
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Stena and Concordias other business activities may create conflicts of interest
  Concordia and Stena are able to influence the Company, including the outcome of shareholder votes
  We are leveraged and subject to restrictions in our financing agreements that impose constraints
on our operating and financing flexibility
   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
  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. holders
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Our operating income could fail to qualify for an exemption from U.S. federal income taxation,
which will reduce our cash flow
   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
  Interested Directors.
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
    
    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.
  Shareholders Suits.
  Indemnification of Directors.
 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
  Our bye-laws restrict shareholders from bringing certain legal action against our officers and
directors
  27




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We have anti-takeover provisions in our bye-laws that may discourage a change of control
  
    
    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.
  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
    Factors beyond our control may adversely affect the value of our vessels
  
    
    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;
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
    
    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 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
  Terrorist attacks and international hostilities can affect the tanker industry, which could
adversely affect our business
  The value of our vessels may fluctuate and adversely affect our liquidity and may result in
breaches under our credit facility
  We operate in the highly competitive international tanker market which could affect our position
if the charterers do not renew our charters
  29




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Compliance with environmental laws or regulations may adversely affect our business
  The shipping industry has inherent operational risks, which may not be adequately covered by
insurance
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Maritime claimants could arrest our tankers, which could interrupt the charterers or our cash
flow
  Governments could requisition our vessels during a period of war or emergency without adequate
compensation
  Rising or high oil prices may affect demand for oil, and subsequently demand for oil tankers may
fall.
  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
   31




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
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PART II: OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Proposal I Election of Stephen O. Jaeger as a Class III Director
  FOR
    
    AGAINST
    
    ABSTAIN
    
    TOTAL13,627,751
    
    
    0
    
    
    
    34,658
    
    
    
    13,662,409
 Proposal II: Appointment of KPMG as Independent Auditor
  FOR
    
    AGAINST
    
    ABSTAIN
    
    TOTAL13,604,264
    
    
    31,645
    
    
    
    26,500
    
    
    
    13,662,409
 Proposal III: Increase of Authorised Share Capital
  FOR
    
    AGAINST
    
    ABSTAIN
    
    TOTAL13,279,727
    
    
    330,804
    
    
    
    51,878
    
    
    
    13,662,409
 Proposal IV: Reduction of Share Premium for Bermuda
  FOR
    
    AGAINST
    
    ABSTAIN
    
    TOTAL13,546,183
    
    
    48,886
    
    
    
    67,340
    
    
    
    13,662,409
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ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description of Exhibit(1)10.1
    
    Letter Agreement, dated July 1, 2005, between the Company and Tara L. Railton (2)10.2
    
    Change In Control Agreement, dated as of October 24, 2005, between the Company and Arthur L. Regan.10.3
    
    Change In Control Agreement, dated as of October 24, 2005, between the Company and Edward Terino.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193432.1
    
    Certification of Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adapted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
 
 (1)
    
    Unless otherwise noted, each exhibit is filed herewith.(2)
    
    Incorporated by reference to Arlington Tankers Ltd. Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 8, 2005. 34




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SIGNATURES
  ARLINGTON TANKERS LTD.By:
    
    /s/ Edward TerinoName: Edward TerinoTitle: Co-Chief Executive Officer and Chief Financial Officer
  35




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ExhibitNumber
    
    Description of Exhibit(1)10.1
    
    Letter Agreement, dated July 1, 2005, between the Company and Tara L. Railton (2)10.2
    
    Change In Control Agreement, dated as of October 24, 2005, between the Company and Arthur L. Regan.10.3
    
    Change In Control Agreement, dated as of October 24, 2005, between the Company and Edward Terino.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193432.1
    
    Certification of Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adapted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
 
 (1)
    
    Unless otherwise noted, each exhibit is filed herewith.(2)
    
    Incorporated by reference to Arlington Tankers Ltd. Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 8, 2005. 36