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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-K



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(Mark one)

|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 24, 2006

OR



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from to

Commission File Number 333-123682



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H-LINES FINANCE HOLDING CORP

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 35-2242993                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                       |  |           
|------------------------------------------------------ |  | ----------
|4064 Colony Road, Suite 200, Charlotte, North Carolina |  | 28211     
|(Address of principal executive offices)               |  | (Zip Code)

(704) 973-7000

(Registrants telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act: None



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the
Act.    Yes ̈No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such a period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes ̈No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405) of this chapter) is not contained
herein, and will not be contained, the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large
accelerated filer ̈Accelerated filer ̈Non-accelerated filer x

Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

State the aggregate market value of voting and non-voting common equity held by non-affiliates, computed by
reference to the closing price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter. N/A

As of February 28, 2007, 1,000 shares of common stock, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required in Part III of this Form 10-K is incorporated by reference to Horizon Lines, Inc.s definitive proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2007



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##### Table of Contents

H-Lines Finance Holding Corp.

FORM 10-K INDEX



|         |  |                                                                                                               |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                               |  | Page
|         |  | PART I                                                                                                        |  |     
|Item 1.  |  | Business                                                                                                      |  | 4   
|Item 1A. |  | Risk Factors                                                                                                  |  | 12  
|Item 1B. |  | Unresolved Staff Comments                                                                                     |  | 25  
|Item 2.  |  | Properties                                                                                                    |  | 26  
|Item 3.  |  | Legal Proceedings                                                                                             |  | 26  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                           |  | 27  
|         |  |                                                                                                              
|         |  | PART II                                                                                                       |  |     
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |  | 28  
|Item 6.  |  | Selected Financial Data                                                                                       |  | 28  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 32  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                    |  | 49  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                   |  | 50  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | 50  
|Item 9A. |  | Controls and Procedures                                                                                       |  | 50  
|Item 9B. |  | Other Information                                                                                             |  | 50  
|         |  |                                                                                                              
|         |  | PART III                                                                                                      |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                            |  | 51  
|Item 11. |  | Executive Compensation                                                                                        |  | 51  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                |  | 51  
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                     |  | 51  
|Item 14. |  | Principal Accountant Fees and Services                                                                        |  | 51  
|         |  |                                                                                                              
|         |  | PART IV                                                                                                       |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                    |  | 52  



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Safe Harbor Statement

This Form 10-K (including the exhibits hereto) contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict,
forecast, indicate or imply future results, performance, achievements or events. Words such as, but not limited to, believe, expect, anticipate, estimate, intend, plan,
targets, projects, likely, will, would, could and similar expressions or phrases identify forward-looking statements.

All forward-looking statements involve risks and uncertainties. The occurrence of the events described, and the achievement of the expected results,
depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results.

Factors that may cause actual results to differ from expected results include: our substantial debt; restrictive covenants under our debt agreements; decreases in shipping volumes; our failure to renew our commercial agreements with Maersk;
rising fuel prices; labor interruptions or strikes; job related claims, liability under multi-employer pension plans; compliance with safety and environmental protection and other governmental requirements; new statutory and regulatory directives in
the United States addressing homeland security concerns; the successful start-up of any Jones-Act competitor; delayed delivery or non-delivery of one or more of our new vessels; increased inspection procedures and tighter import and export controls;
restrictions on foreign ownership of our vessels; repeal or substantial amendment of the coastwise laws of the United States, also known as the Jones Act; escalation of insurance costs, catastrophic losses and other liabilities; the arrest of our
vessels by maritime claimants; severe weather and natural disasters; our inability to exercise our purchase options for our chartered vessels; the aging of our vessels; unexpected substantial drydocking costs for our vessels; the loss of our key
management personnel; actions by our stockholders; changes in tax laws or in their interpretation or application, adverse tax audits and other tax matters; and legal or other proceedings to which we are or may become subject.

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-K (including the
exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

See the section entitled Risk Factors, beginning on page 12 of this Form 10-K, for a more complete discussion of these risks and
uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this Form 10-K are not necessarily all of the important factors that could cause actual results or developments to differ materially from
those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.



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Part I.



|Item 1. | Business
|------- | --------

Our Company

On December 6, 2004, H-Lines Finance Holding Corp. (the Company) was formed by Horizon Lines, Inc. (the Parent), as a vehicle
to issue 11% senior discount notes due 2013 (the 11% senior discount notes) with an original $160.0 million aggregate principal amount at maturity. The Company is a wholly-owned subsidiary of Horizon Lines, Inc. (the Parent).
The Company is the direct parent of Horizon Lines Holding Corp. (HLHC), a Delaware corporation, which operates as a holding company for Horizon Lines, LLC (HL or Horizon Lines), a Delaware limited liability
company and indirect wholly-owned subsidiary, and Horizon Lines of Puerto Rico, Inc. (HLPR), a Delaware corporation and indirect wholly-owned subsidiary of the Company. HL operates a domestic liner business with primary service to ports
within the continental United States, Puerto Rico, Alaska, Hawaii, and Guam. HL also offers terminal services and ground transportation services. HLPR operates as an agent for HL and also provides terminal services in Puerto Rico. The Parent was
formed on July 7, 2004 at the direction of Castle Harlan Partners I.V. L.P., (CHP IV) a private equity investment fund managed by Castle Harlan, Inc. (Castle Harlan), as an acquisition vehicle to acquire the equity
interest in HLHC. The foregoing transactions included a merger, whereby HLHC became a wholly-owned subsidiary of the Parent. On December 6, 2004, the Parent contributed all of its shares of the capital stock of HLHC to the Company. As a result,
HLHC became a wholly-owned subsidiary of the Company and an indirect wholly-owned subsidiary of the Parent. During 2006, the Parent completed three secondary offerings, including a secondary offering (pursuant to a shelf registration) whereby CHP IV
and other affiliated private equity investment funds managed by Castle Harlan divested their ownership in the Parent.

Our long operating
history dates back to 1956, when Sea-Land Service, Inc. (Sea-Land) pioneered the marine container shipping industry and established our business. In 1958 we introduced container shipping to the Puerto Rico market, and in 1964 we
pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing container shipping services between the U.S. west coast and Hawaii and Guam through our acquisition from an existing carrier of
all of its vessels and certain other assets that were already serving that market. In December 1999, HLHCs former parent, CSX Corporation sold the international marine container operations of Sea-Land to the A.P. Møller Maersk Group
(Maersk) and HLHC continued to be owned and operated as CSX Lines, LLC, a subsidiary of CSX Corporation. On February 27, 2003, HLHC (which at the time was indirectly majority-owned by Carlyle-Horizon Partners, L.P.) acquired from
CSX Corporation, which was the successor to Sea-Land, 84.5% of CSX Lines, LLC (Predecessor A), and 100% of CSX Lines of Puerto Rico, Inc., which together constitute our business today. CSX Lines, LLC is now known as Horizon Lines, LLC
and CSX Lines of Puerto Rico, Inc. is now known as Horizon Lines of Puerto Rico, Inc. Today, as the only Jones Act vessel operator with one integrated organization serving Alaska, Hawaii and Puerto Rico, we are uniquely positioned to serve customers
requiring shipping and logistics services in more than one of these markets.

We believe that we are the nations leading Jones Act
container shipping and integrated logistics company, accounting for approximately 36% of total U.S. marine container shipments from the continental U.S. to the three non-contiguous Jones Act markets, Alaska, Hawaii and Puerto Rico, and to Guam. With
17 vessels and approximately 23,300 cargo containers, we operate the largest Jones Act containership fleet, providing comprehensive shipping and sophisticated logistics services in our markets. We have long-term access to terminal facilities in each
of our ports, operating our own terminals in Alaska, Hawaii, and Puerto Rico and contracting for terminal services in our seven ports in the continental U.S. and in our ports in Guam, Hong Kong and Taiwan. We also offer inland cargo trucking and
logistics for our customers through our own trucking operations on the U.S. west coast and our relationships with third-party truckers, railroads, and barge operators in our markets.

We ship a wide spectrum of consumer and industrial items used everyday in our markets, ranging from foodstuffs (refrigerated and non-refrigerated) to
household goods and auto parts to building materials and various materials used in manufacturing. Many of these cargos are consumer goods vital to the expanding populations in our markets, thereby providing us with a stable base of growing demand
for our shipping and logistics services. We have many long-standing customer relationships with large consumer and industrial products companies, such as Costco Wholesale Corporation, Johnson & Johnson, Lowes Companies, Inc., Safeway,
Inc., Toyota Motor Corporation and Wal-Mart Stores, Inc. We also serve several agencies of the U.S. government, including the Department of Defense and the U.S. Postal Service. Our customer base is broad and diversified, with our top ten customers
accounting for approximately 37% of revenue and our largest customer accounting for approximately 8% of revenue.

2006 Developments

On December 14, 2006 the Company made a $25 million voluntary prepayment of its term loan under its senior credit facility.



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On December 12, 2006, the senior credit facility under which Horizon Lines Holding and Horizon Lines
are co-borrowers, and their respective subsidiaries are guarantors, was amended (as so amended, the senior credit facility). The primary components of this amendment included: 1) increasing the revolving credit facility to $75 million;
2) increasing the additional term loan borrowing availability to $75 million; 3) raising the annual capital spending limit to $40 million, exclusive of vessel and equipment lease buyouts; 4) allowing for 100% carryover of unutilized permitted annual
capital spending; 5) increasing maximum restricted payments on a rolling four quarters basis to $36 million; 6) providing 100% credit for voluntary loan prepayments on the required annual excess cash flow sweep now commencing in 2007; and 7)
increasing permitted acquisitions to $120 million annually and to $200 million over the life of the facility. The pre-amendment senior credit facility consisted of a $250 million term loan and a $50 million revolving credit facility.

On December 1, 2006, we announced the renewal and extension of all of our principal commercial and operating arrangements with Maersk. In connection
therewith, each of the following material agreements was amended (the Amendments): (i) the TP1 Space Charter and Transportation Service Contract, dated May 9, 2004 between A.P. Møller-Maersk A/S and Horizon Lines, LLC,
(ii) the Container Interchange Agreement, dated April 1, 2002, between A.P. Møller-Maersk A/S, Horizon Lines, LLC, Horizon Lines of Puerto Rico, Inc. and Horizon Lines of Alaska, LLC and (iii) the Stevedoring and Terminal
Services Agreement, dated May 9, 2004, between APM Terminals, North America, Inc., Horizon Lines, LLC and Horizon Lines of Alaska, LLC. The Amendments, among other things, (i) extend the term of each of these agreements until
December 10, 2010 and (ii) extend the scope of the services provided pursuant to these agreements to take into account our expanded service between the U.S. west coast and Asia and Guam, which service is expected to begin in the first
quarter of 2007 with the deployment of the five new vessels.

On November 30, 2006, we took delivery of the Horizon Hunter from the
Hyundai Mipo shipyard in South Korea. The Horizon Hunter is the first of five new, U.S.-flag, foreign built, sister vessels (new vessels) that we are chartering from subsidiaries of Ship Finance International Limited (collectively,
SFL) under definitive long-term charters and related agreements finalized on April 11, 2006 (the new fleet enhancement initiative). Each vessel has gross tonnage of 28,592 tons and a capacity of 2,824 TEUs, and is
capable of a service speed of 23 knots. The new vessels will be deployed in our Transpacific (TP1) service linking the U.S. west coast with Guam and Asia commencing in the first half of 2007. The Horizon Hunter is being sub-chartered to
international container ship operators until its deployment in our TP1 service. The redeployment is expected to provide additional Jones Act capacity to meet seasonal and dry dock needs, as well as to respond to potential new revenue opportunities
such as coastwise container services. Upon the delivery of these five vessels by the end of the first half of 2007, the average age of our active vessels will be reduced from 31 years to 20 years.

On November 15, 2006, the Parent filed an automatic shelf registration statement on Form S-3. The shelf registration statement, which became
effective upon filing with the U.S. Securities and Exchange Commission, registered for resale (and other dispositions) 2,678,894 outstanding shares of the Parents common stock. All of these shares were held by CHP IV and its co-investor
Stockwell Fund, L.P. and their respective affiliates and associates (the existing selling stockholders). The Parent has not received (and will not receive) any proceeds from any resales or other dispositions under this shelf registration
statement. The existing selling stockholders priced and sold a registered public secondary offering of 2,355,083 shares of the Parents common stock pursuant to the shelf registration statement.

In September and June 2006, the Parent completed secondary offerings of 5,300,000 shares and 5,750,000 shares, respectively, of its common stock, all of
which were sold by stockholders of the Parent. In addition, the stockholders of the Parent completed the sale of a further 795,000 shares and 862,500 shares, respectively, of common stock to the underwriters of these secondary offerings pursuant to
the exercise in full of the underwriters option to purchase additional shares. The Parent did not receive any proceeds from the sale of stock under these secondary offerings.

In September 2006, the Parent elected the application of an elective alternative tax on qualifying shipping activities (tonnage tax) instead
of the federal corporate income tax on income from its qualifying shipping activities. Qualifying shipping activities are defined as operations of a U.S. flag vessel in U.S. foreign trade. This 2006 election of the tonnage tax was made in connection
with the filing of the Parents 2005 federal corporate income tax return. The impact of the tonnage tax election resulted in a decrease in income tax expense of approximately $44.1 million during 2006. Approximately $11.4 million and $18.8
million relate to the 2005 reduction in income tax expense and to the revaluation of deferred taxes related to the qualifying activities, respectively.

In 2006, we formed a dedicated team of employees to develop and implement a program (Horizon Edge) over the next two and a half years, with the combined goals of reducing operating costs and enhancing
customer focus and service efficiency. With the assistance of outside advisors, we are targeting improvements in maintenance management, marine productivity, supply chain management and information technology.



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The Jones Act

Over 90% of our revenue is generated from our shipping and logistics services in markets where the marine trade is subject to the coastwise laws of the United States, also known as the Jones Act, or other U.S. maritime cabotage laws.

The Jones Act is a long-standing cornerstone of U.S. maritime policy. Under the Jones Act, all vessels transporting cargo between covered
U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens.
U.S.-flagged vessels are generally required to be maintained at higher standards than foreign-flagged vessels and are supervised by, as well as subject to rigorous inspections by, or on behalf of the U.S. Coast Guard, which requires appropriate
certifications and background checks of the crew members. Our trade routes between Alaska, Hawaii and Puerto Rico and the continental U.S. represent the three non-contiguous Jones Act markets. Vessels operating on these trade routes are required to
be fully qualified Jones Act vessels. Other U.S. maritime laws require vessels operating on the trade routes between Guam, a U.S. territory, and U.S. ports to be U.S.-flagged and predominantly U.S.-crewed, but not U.S.-built.

Cabotage laws, which reserve the right to ship cargo between domestic ports to domestic vessels, are not unique to the United States; similar laws are
common around the world and exist in over 40 countries. In general, all interstate and intrastate marine commerce within the U.S. falls under the Jones Act, which is a cabotage law. The Jones Act enjoys broad support from both major political
parties. During the 2004 presidential election, both major political parties supported the retention of the Jones Act as currently in effect. In addition, the Jones Act has enjoyed strong congressional support. We believe that the ongoing war on
terrorism has further solidified political support for the Jones Act, as a vital and dedicated U.S. merchant marine is a cornerstone for a strong homeland defense, as well as a critical source of trained U.S. mariners for wartime support.

Market Overview and Competition

The
Jones Act distinguishes the U.S. domestic shipping market from international shipping markets. Given the limited number of existing Jones Act qualified vessels, the high capital investment and long delivery lead times associated with building a new
containership in the U.S., the substantial investment required in infrastructure and the need to develop a broad base of customer relationships, the markets in which we operate have been less vulnerable to over capacity and volatility than
international shipping markets.

Although the U.S. container shipping industry is affected by general economic conditions, the industry
does not tend to be as cyclical as other sectors within the shipping industry. Specifically, most of the cargos shipped via container vessels consist of a wide range of consumer and industrial items as well as military and postal loads. Since many
of these types of cargos are consumer goods vital to the expanding populations in our markets, they provide us with a stable base of growing demand for our shipping and logistics services.

The Jones Act markets are not as fragmented as international shipping markets. We are one of only two major container shipping operators currently
serving the Alaska market, each accounting for approximately 40% of total container loads traveling from the continental U.S. to Alaska. Horizon Lines and TOTE serve the Alaska market. We are also only one of two container shipping companies
currently serving the Hawaii and Guam markets with an approximate 36% share of total domestic marine container shipments from the continental U.S. to these markets. This percentage reflects 35% and 52% shares of total domestic marine container
shipments from the continental U.S. to Hawaii and Guam markets, respectively. Horizon Lines and Matson Navigation Co (Matson) serve the Hawaii and Guam market. In Puerto Rico, we are the largest provider of marine container shipping,
accounting for approximately 35% of Puerto Ricos total container loads from the continental U.S. The Puerto Rico market is currently served by two containership companies, Horizon Lines and Sea Star Lines (Sea Star). Sea Star is an
independently operated company majority-owned by an affiliate of TOTE. Two barge operators, Crowley and Trailer Bridge, Inc., also currently serve this market.

The U.S. container shipping industry as a whole is experiencing rising customer expectations for real-time shipment status information and the on-time pick-up and delivery of cargo, as customers seek to optimize
efficiency through greater management of the delivery process of their products. Commercial and governmental customers are increasingly requiring the tracking of the location and status of their shipments at all times and have developed a strong
preference to retrieve information and communicate using the Internet. We recently established a fully-functional intermodal active radio frequency identification (RFID) solution providing customers real-time shipment visibility during
all phases of transit. The active RFID-based real-time tracking system, when matched with Horizons industry-leading web-based event management system, offers shipment visibility and supply chain efficiencies by providing real-time detailed
shipment information throughout the containers transit from origin loading facility through to final destination. A broad range of domestic and foreign governmental agencies are also increasingly requiring access to shipping information in
automated formats for customs oversight and security purposes.



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To ensure on-time pick-up and delivery of cargo, shipping companies must maintain strict vessel schedules
and efficient terminal operations for expediting the movement of containers in and out of terminal facilities. The departure and arrival of vessels on schedule is heavily influenced by both vessel maintenance standards (i.e., minimizing mechanical
breakdowns) and terminal operating discipline. Marine terminal gate and yard efficiency can be enhanced by efficient yard layout, high-quality information systems, and streamlined gate processes.

Sales and Marketing

We manage a sales and marketing
team of 114 employees strategically located in our various ports, as well as in seven regional offices across the continental U.S., from our headquarters in Charlotte, North Carolina. Senior sales and marketing professionals in Charlotte are
responsible for developing sales and marketing strategies and are closely involved in servicing our largest customers. All pricing activities are also centrally coordinated from Charlotte and from Renton, Washington, enabling us to manage our
customer relationships. The marketing team located in Charlotte is responsible for providing appropriate market intelligence and direction to the Puerto Rico sales organization. The marketing team located in Renton is responsible for providing
appropriate market intelligence and direction to the members of the team who focus on the Hawaii, Guam and Alaska markets.

Our regional
sales and marketing presence ensures close and direct interaction with customers on a daily basis. Many of our regional sales professionals have been servicing the same customers for over ten years. We believe that we have the largest sales force of
all container shipping and logistics companies active in the major non-contiguous Jones Act markets. Unlike our competitors, our sales force cross-sells our shipping and logistics services across all of these markets. We believe that the breadth and
depth of our relationships with our customers is the principal driver of repeat business from our customers. We further believe that our long-standing customer relationships and our cross-selling efforts enable us to forge customer relationships
which provide us with a distinct competitive advantage.

Customers

We serve a diverse base of long-standing, established customers consisting of many of the worlds largest consumer and industrial products companies. Such customers include Costco Wholesale Corporation,
Johnson & Johnson, Lowes Companies, Inc., Safeway, Inc., Toyota Motor Corporation and Wal-Mart Stores, Inc. In addition, we serve several agencies of the U.S. government, including the Department of Defense and the U. S. Postal
Service.

We believe that we are uniquely positioned to serve these and other large national customers due to our position as the only
shipping and logistics company serving all three non-contiguous Jones Act markets and Guam. Approximately 59% of our transportation revenue in 2006 was derived from customers shipping with us in more than one of our markets with approximately 36% of
our transportation revenue in 2006 being derived from customers shipping with us in all three markets.

We generate most of our revenue
through non-exclusive customer contracts with pre-specified rates and volumes and with durations ranging from one to six years, providing stable revenue streams. In addition, our relationships with our customers extend far beyond the length of any
given contract. For example, some of our customer relationships extend back over 40 years and our top ten customer relationships average 29 years.

We serve customers in numerous industries and carry a wide variety of cargos, mitigating our dependence upon any single customer or single type of cargo. Our customer base is broad with no significant concentration by customer or type of
cargo shipped. For 2006, our top ten largest customers represented approximately 31% of transportation revenue, with the largest customer accounting for approximately 7% of transportation revenue. During 2006, our top ten largest customers comprised
approximately 37% of total revenue, with our largest customer accounting for approximately 8% of total revenue. Total revenue includes transportation, non-transportation and other revenue.

Industry and market data used throughout this Form 10-K, including information relating to our relative position in the shipping and logistics industry
are approximations based on the good faith estimates of our management, which are generally based on internal surveys and sources, and other publicly available information, including local port information. Unless otherwise noted, financial data and
industry and market data presented herein are for a period ending in 2006.

Operations Overview

We oversee our operations in all three non-contiguous Jones Act markets and Guam from our headquarters in Charlotte, North Carolina. Our operations in
these markets share corporate and administrative functions such as finance, information technology and sales and marketing. Centralized functions are performed primarily at our headquarters and at our administrative facility in Dallas, Texas.



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We book and monitor all of our shipping and logistics services with our customers through the Horizon
Information Technology System (HITS). HITS, our proprietary ocean shipping and logistics information technology system, provides a platform to accomplish a shipping transaction from start to finish in a cost-effective, streamlined
manner. HITS provides an extensive database of information relevant to the shipment of containerized cargo and captures all critical aspects of every shipment booked with us. In a typical transaction, our customers go on-line to make a booking or
call, fax or e-mail our customer service department. Once applicable shipping information is input into the booking system, a booking number is generated. The booking information then downloads into other systems used by our dispatch team, terminal
personnel, vessel planners, documentation team, logistics team and other teams and personnel who work together to produce a seamless transaction for our customers.

Our dispatch team coordinates truck and/or rail shipping from inland locations to the port on intermodal bookings. We currently purchase rail services directly from the railroads involved through confidential
transportation service contracts, except for services from CSX Transportation which are obtained through our contract with CSX Intermodal, an affiliate of CSX Transportation. Our terminal personnel schedule equipment availability for containers
picked up at the port. Our vessel planners develop stowage plans and our documentation teams process the cargo bill. Our logistics team reviews space availability and informs our other teams and personnel when additional bookings are needed and when
bookings need to be changed or pushed to the next vessel. After containers arrive at the port of loading, they are loaded on board the vessel. Once the containers are loaded and are at sea, our destination terminal staff initiates their process of
receiving and releasing containers to our customers. Customers accessing HITS via our internet portal have the option to receive e-mail alerts as specific events take place throughout this process. All of our customers have the option to call our
customer service department or to access HITS via our internet portal, 24 hours a day, seven days a week, to track and trace shipments. Customers may also view their payment histories and make payments on-line.

Insurance

We maintain insurance policies to cover
risks related to physical damage to our vessels and vessel equipment, other equipment (including containers, chassis, terminal equipment and trucks) and property, as well as with respect to third-party liabilities arising from the carriage of goods,
the operation of vessels and shoreside equipment, and general liabilities which may arise through the course of our normal business operations. We also maintain workers compensation insurance, business interruption insurance, and directors and
officers insurance providing indemnification for our directors, officers, and certain employees for some liabilities.

Vessel Fleet

Our management team adheres to an effective strategy for the maintenance of our vessels. Early in our 50-year operating history, when
we pioneered Jones Act container shipping, we recognized the vital importance of maintaining our valuable Jones Act qualified vessels. Our on-shore vessel management team carefully manages all of our ongoing regular maintenance and drydocking
activity. We maintain our vessels according to our own strict maintenance procedures, which meet or exceed U.S. government requirements. All of our vessels are regulated pursuant to rigorous standards promulgated by the U.S. Coast Guard and subject
to periodic inspection and certification, for compliance with these standards, by the American Bureau of Shipping, on behalf of the U.S. Coast Guard. Our procedures protect and preserve our fleet to the highest standards in our industry and enable
us to preserve the usefulness of our ships. During each of the last four years, our vessels have been in operational condition, ready to sail, over 99% of the time when they were required to be ready to sail.



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The table below lists our vessel fleet, which is the largest containership fleet within the Jones Act
markets, as of December 24, 2006. Our vessel fleet consists of 17 vessels of varying classes and specification, 14 of which are actively deployed, two of which are spare vessels available for dry-dock relief and one of which is currently on
charter.



|                     |  |               |  |           |  |        |  |                   |  |           |  |                 |  |                  
|-------------------- |  | ------------- |  | --------- |  | ------ |  | ----------------- |  | --------- |  | --------------- |  | -----------------
|Vessel Name          |  | Market        |  | YearBuilt |  | TEU(1) |  | ReeferCapacity(2) |  | Max.Speed |  | Owned/Chartered |  | CharterExpiration
|Horizon Anchorage    |  | Alaska        |  | 1987      |  | 1,668  |  | 280               |  | 20.0 kts  |  | Chartered       |  | 2-Jan-15         
|Horizon Tacoma       |  | Alaska        |  | 1987      |  | 1,668  |  | 280               |  | 20.0 kts  |  | Chartered       |  | 2-Jan-15         
|Horizon Kodiak       |  | Alaska        |  | 1987      |  | 1,668  |  | 280               |  | 20.0 kts  |  | Chartered       |  | 2-Jan-15         
|Horizon Fairbanks(3) |  | Alaska        |  | 1973      |  | 1,476  |  | 140               |  | 22.5 kts  |  | Owned           |  |                 
|Horizon Navigator    |  | Hawaii & Guam |  | 1972      |  | 2,386  |  | 100               |  | 21.0 kts  |  | Owned           |  |                 
|Horizon Trader       |  | Hawaii & Guam |  | 1972      |  | 2,386  |  | 100               |  | 21.0 kts  |  | Owned           |  |                 
|Horizon Pacific      |  | Hawaii & Guam |  | 1980      |  | 2,407  |  | 100               |  | 21.0 kts  |  | Owned           |  |                 
|Horizon Enterprise   |  | Hawaii & Guam |  | 1980      |  | 2,407  |  | 150               |  | 21.0 kts  |  | Owned           |  |                 
|Horizon Consumer     |  | Hawaii & Guam |  | 1973      |  | 1,751  |  | 170               |  | 22.0 kts  |  | Owned           |  |                 
|Horizon Spirit       |  | Hawaii & Guam |  | 1980      |  | 2,653  |  | 100               |  | 22.0 kts  |  | Owned           |  |                 
|Horizon Reliance     |  | Hawaii & Guam |  | 1980      |  | 2,653  |  | 100               |  | 22.0 kts  |  | Owned           |  |                 
|Horizon Producer     |  | Puerto Rico   |  | 1974      |  | 1,751  |  | 170               |  | 22.0 kts  |  | Owned           |  |                 
|Horizon Challenger   |  | Puerto Rico   |  | 1968      |  | 1,424  |  | 71                |  | 21.2 kts  |  | Owned           |  |                 
|Horizon Discovery    |  | Puerto Rico   |  | 1968      |  | 1,442  |  | 70                |  | 21.2 kts  |  | Owned           |  |                 
|Horizon Crusader(4)  |  | Puerto Rico   |  | 1969      |  | 1,376  |  | 70                |  | 21.2 kts  |  | Owned           |  |                 
|Horizon Hawaii       |  | Puerto Rico   |  | 1973      |  | 1,420  |  | 170               |  | 22.5 kts  |  | Owned           |  |                 
|Horizon Hunter(5)    |  | Transpacific  |  | 2006      |  | 2,824  |  | 586               |  | 23.0 kts  |  | Chartered       |  | 30-Nov-18        

---

|(1) | Twenty-foot equivalent unit, or TEU, is a standard measure of cargo volume correlated to the volume of a
standard 20-foot dry cargo container.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Reefer capacity, or refrigerated container capacity, refers to the total number of 40-foot equivalent
units, or FEUs, which the vessel can hold. The FEU is a standard measure of refrigerated cargo volume correlated to the volume of a standard 40-foot reefer, or refrigerated cargo container.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Serves as a spare vessel available for deployment in any of our markets and also serves the Alaska trade
from June through August.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(4) | Serves as a spare vessel available for deployment primarily in the Puerto Rico trade.
|--- | -------------------------------------------------------------------------------------

|(5) | On sub-charter until expected deployment in our TP1 service in March 2007
|--- | -------------------------------------------------------------------------

On September 12, 2005, Horizon Lines acquired with available cash, for $25.2 million, the rights and beneficial interests of the sole owner
participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific, and the charters related thereto under which Horizon Lines operates such vessels. Horizon Lines repaid the $4.5 million
indebtedness assumed in connection with this acquisition in January 2007.

As discussed in 2006 Developments, in 2007, we have
charted one and will charter four new U.S. flag, foreign built vessels for 12 year terms from SFL. We will redeploy certain of our existing Jones Act vessels to other trade routes and will reserve other existing Jones Act vessels to meet seasonal
and dry-dock needs. We expect that after deployment of the new vessels and redeployment of existing vessels, that 16 of our 21 vessels will be active, and the remaining five will be available for seasonal and dry dock needs and to respond to
potential new revenue opportunities.

Our Vessel Charters

Four of our vessels are leased, or chartered, by certain of our subsidiaries pursuant to charters with termination dates for three of our vessels on January 2, 2015 and on November 30, 2018 for the remaining
vessel. Under the charter for each chartered vessel, these subsidiaries generally have the following options in connection with the expiration of the charter: (i) purchase the vessel for its fair market value, (ii) extend the charter for
an agreed upon period of time at a fair market value charter rate or, (iii) return the vessel to its owner.

The obligations of the
subsidiaries under the existing charters for our chartered vessels are guaranteed by our former parent, CSX Corporation, and certain of its affiliates. In turn, certain of our subsidiaries are parties to the Amended and Restated Guarantee and
Indemnity Agreement, referred to herein as the GIA, with CSX Corporation and certain of its affiliates, pursuant to which these subsidiaries have agreed to indemnify these CSX entities if any of them should be called upon by any owner of the
chartered vessels to make payments to such owner under the guarantees referred to above.



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Our Container Fleet

As summarized in the table below, our container fleet consists of owned and leased containers of different types and sizes as of December 24, 2006:



|                        |  |       |  |        |  |         
|----------------------- |  | ----- |  | ------ |  | --------
|Container Type          |  | Owned |  | Leased |  | Combined
|20 Standard Dry        |  | 44    |  | 667    |  | 711     
|20 Flat Rack           |  | 2     |  |       |  | 2       
|20 Miscellaneous       |  | 52    |  |       |  | 52      
|20 Tank                |  | 1     |  |       |  | 1       
|40 Standard Dry        |  | 150   |  | 1,682  |  | 1,832   
|40 Flat Rack           |  | 364   |  | 312    |  | 676     
|40 High-Cube Dry       |  | 1,317 |  | 6,886  |  | 8,203   
|40 Standard Insulated  |  | 26    |  |       |  | 26      
|40 High-Cube Insulated |  | 406   |  |       |  | 406     
|40 Standard Opentop    |  |      |  | 100    |  | 100     
|40 Miscellaneous       |  | 63    |  |       |  | 63      
|40 Tank                |  | 3     |  |       |  | 3       
|40 Car Carrier         |  | 165   |  |       |  | 165     
|40 Standard Reefer     |  | 4     |  |       |  | 4       
|40 High-Cube Reefer    |  | 1,628 |  | 4,023  |  | 5,651   
|45 High-Cube Dry       |  | 1,459 |  | 3,240  |  | 4,699   
|45 High-Cube Insulated |  | 474   |  |       |  | 474     
|45 High-Cube Reefer    |  |      |  | 202    |  | 202     
|                        |  |       |  |        |  |         
|Total                   |  | 6,158 |  | 17,112 |  | 23,270  
|                        |  |       |  |        |  |         

All of our container leases are operating leases.

Maersk Arrangements

In connection with the sale of
the international marine container operations of Sea-Land by our former parent, CSX Corporation, to Maersk, in December 1999, our predecessor, CSX Lines, LLC and certain of its subsidiaries entered into a number of commercial agreements with Maersk
that encompass terminal services, equipment sharing, sales agency services, trucking services, cargo space charters, and transportation services. These agreements, which were renewed and amended in December 2006, generally are now scheduled to
expire at the end of 2010. Maersk is our terminal service provider in the continental U.S., at our ports in Elizabeth, New Jersey, Jacksonville, Florida, Houston, Texas, Tacoma, Washington, and Oakland and Los Angeles, California. We are
Maersks terminal operator in Hawaii, Guam, Alaska and Puerto Rico. We share containers with Maersk and also pool chassis and generator sets with Maersk. We are Maersks sales agent in Alaska and Puerto Rico, and Maersk serves as our sales
agent in Canada. On the U.S. west coast, we provide trucking services for Maersk.

Under our cargo space charter and transportation service
agreements with Maersk, we currently operate five Jones Act vessels that sail from the U.S. west coast to Hawaii, continuing from Hawaii on to Guam, and then from Guam on to Hong Kong and Kaohsiung, with a return trip to Tacoma, Washington, and
Oakland, California. We utilize Maersk containers to carry a portion of our cargo westbound to Hawaii and Guam, where the contents of these containers are then unloaded. We then ship the empty Maersk containers onwards to the two ports in Asia. When
these vessels arrive in Asia, Maersk unloads these empty containers and replaces them with loaded containers on our vessels for the return trip to the U.S. west coast. We use Maersk equipment on our service to Hawaii from our U.S. west coast ports
as well as from select U.S. inland locations. We achieve significantly greater vessel capacity utilization and revenue on this route as a result of this arrangement. In 2007, we will replace these five US-built vessels with the five new
foreign-built vessels we are acquiring, or have acquired, via operating leases and will redeploy the five US-built vessels.

Security

Heightened awareness of maritime security needs, brought about by the events of September 11, 2001 and several maritime attacks around the globe,
have caused the United Nations through its International Maritime Organization (IMO), the U.S. Department of Homeland Security, through its Coast Guard arm, and the states and local ports to adopt a more stringent set of security
procedures relating to the interface between port facilities and vessels. In addition, the U.S. Congress and the current administration have enacted legislation requiring the implementation of Coast Guard approved vessel and facility security plans.



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Certain aspects of our security plans require our investing in infrastructure upgrades to ensure
compliance. We have applied in the past and will continue to apply going forward for federal grants to offset the incremental expense of these security investments. While we were successful through two early rounds of funding to secure substantial
grants for specific security projects, the current grant award criteria favor the largest ports and stakeholder consortia applications, limiting the available funds for stand alone private maritime industry stakeholders. In addition, the current
administration is continuously reviewing the criteria for awarding such grants. Such changes could have a negative impact on our ability to win grant funding in the future. Security surcharges are evaluated regularly and we may at times incorporate
these surcharges into the base transportation rates that we charge.

Capital Construction Fund

The Merchant Marine Act, 1936, as amended, permits the limited deferral of U.S. federal income taxes on earnings from eligible U.S.-built and U.S.-flagged
vessels and U.S.-built containers if the earnings are deposited into a Capital Construction Fund (CCF), pursuant to an agreement with the U.S. Maritime Administration, (MARAD). The amounts on deposit in a CCF can be withdrawn
and used for the acquisition, construction or reconstruction of U.S.-built and U.S.-flagged vessels or U.S.-built containers, in both cases, for operation only on trade routes between ports in the continental U.S. and ports in Alaska, Hawaii or
Puerto Rico, on trade routes between ports in Alaska, Hawaii and Puerto Rico, on trade routes on the Great Lakes, and on trade routes between U.S. ports and foreign ports.

Horizon Lines has a CCF agreement with MARAD under which it occasionally deposits into the CCF earnings attributable to the operation of 16 of its
vessels and makes withdrawals of funds from the CCF to acquire U.S.-built and U.S.-flagged vessels and U.S.-built refrigeration units for our containers. During 2005, Horizon Lines acquired with available cash of $25.2 million and the assumption of
debt of $4.5 million, the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific, and the charters related thereto under which
Horizon Lines operates such vessels. These vessels were subject to mortgages in the aggregate amount of $4.5 million, which were paid on January 2, 2007. Four used U.S.-built and U.S.-flagged vessels (Horizon Hawaii, Horizon Fairbanks, Horizon
Navigator, and Horizon Trader) were acquired by Horizon Lines in 2003 and 2004 for a total of $25.2 million through the exercise of purchase options under the charters for these vessels.

Amounts on deposit in Horizon Lines CCF cannot be withdrawn for other than the qualified purposes specified in the CCF agreement. Any nonqualified
withdrawals are subject to federal income tax at the highest marginal rate. In addition, such tax is subject to an interest charge based upon the number of years the funds have been on deposit. If Horizon Lines CCF agreement was terminated,
funds then on deposit in the CCF would be treated as nonqualified withdrawals for that taxable year. In addition, if a vessel built, acquired, or reconstructed with CCF funds is operated in a nonqualified operation (such as the contiguous Jones Act
trade and certain foreign-to-foreign trades), the owner must repay a proportionate amount of the tax benefits as liquidated damages. These restrictions apply (i) for 20 years after delivery in the case of vessels built with CCF funds,
(ii) ten years in the case of vessels reconstructed or acquired with CCF funds more than one year after delivery from the shipyard, and (iii) ten years after the first expenditure of CCF funds in the case of vessels in regard to which
qualified withdrawals from the CCF fund have been made to pay existing indebtedness (five years if the vessels are more than 15 years old on the date the withdrawal is made). In addition, the sale or mortgage of a vessel acquired with CCF funds
requires MARADs approval. Our consolidated balance sheets at December 24, 2006 and December 25, 2005 each include liabilities of approximately $14.1 million for deferred taxes on deposits in our CCF.

Construction-Differential Subsidy

Thirteen of our
vessels were built with construction differential subsidies provided by the U.S. Department of Transportation under Title V of the Merchant Marine Act, 1936. The grant of these subsidies was subject to the imposition of certain operating
restrictions which generally limit the operation of the vessels to foreign trade routes, provided that these vessels carried cargo between U.S. ports in the course of foreign voyages if portions of the related subsidies were repaid in connection
therewith. Three of our vessels were subject to these operating restrictions during 2005. We operated these three vessels on trade routes between the U.S. west coast and Asia, with stops in Hawaii and Guam, and made subsidy repayments in respect of
the portions of these voyages between Hawaii and the U.S. west coast. The construction-differential subsidy restrictions on two of these vessels expired in 2005 and the restriction on the third vessel expired in January 2006. As such, for the year
ended December 24, 2006, we incurred $0.1 million of expense related to this construction differential subsidy program and we made a final subsidy repayment of approximately $1.2 million.



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Employees

As of December 24, 2006, we had 1,878 employees, of which approximately 1,270 were represented by seven labor unions.

The
table below sets forth the unions which represent our employees, the number of employees represented by these unions as of December 24, 2006 and the expiration dates of the related collective bargaining agreements:



|                                                                     |  |                                                  |  |                                    |    
|-------------------------------------------------------------------- |  | ------------------------------------------------ |  | ---------------------------------- | ---
|Union                                                                |  | Collective BargainingAgreement(s)Expiration Date |  | Number of Our EmployeesRepresented |    
|International Brotherhood of Teamsters                               |  | March 31, 2008                                   |  | 253                                |    
|International Brotherhood of Teamsters, Alaska                       |  | June 30, 2010                                    |  | 110                                |    
|International Longshore & Warehouse Union (ILWU)                     |  | July 1, 2008                                     |  | 36                                 |    
|International Longshore and Warehouse Union, Alaska (ILWU-Alaska)    |  | June 30, 2007                                    |  | 99                                 |    
|International Longshoremens Association, AFL-CIO (ILA)              |  | September 30, 2010                               |  |                                   | (1)
|International Longshoremens Association, AFL-CIO, Puerto Rico       |  | October 31, 2010                                 |  | 86                                 |    
|Marine Engineers Beneficial Association (MEBA)                       |  | June 15, 2012                                    |  | 143                                |    
|International Organization of Masters, Mates & Pilots, AFL-CIO (MMP) |  | June 15, 2012                                    |  | 96                                 |    
|Office & Professional Employees International Union, AFL-CIO         |  | November 9, 2007                                 |  | 66                                 |    
|Seafarers International Union (SIU)                                  |  | June 30, 2011                                    |  | 381                                |    

---

|(1) | Multi-employer arrangement representing workers in the industry, including workers who may perform
services for us but are not our employees.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

The table below provides a breakdown of headcount by non-contiguous Jones Act
market and function for our non-union employees as of December 24, 2006.



|                    |  |              |  |                     |  |                   |  |              |  |      
|------------------- |  | ------------ |  | ------------------- |  | ----------------- |  | ------------ |  | -----
|                    |  | AlaskaMarket |  | HawaiiandGuamMarket |  | Puerto RicoMarket |  | Corporate(a) |  | Total
|Senior Management   |  | 1            |  | 2                   |  | 1                 |  | 14           |  | 18   
|Operations          |  | 35           |  | 80                  |  | 55                |  | 65           |  | 235  
|Sales and Marketing |  | 21           |  | 30                  |  | 53                |  | 10           |  | 114  
|Administration(b)   |  | 7            |  | 33                  |  | 8                 |  | 193          |  | 241  
|                    |  |              |  |                     |  |                   |  |              |  |      
|Total Headcount     |  | 64           |  | 145                 |  | 117               |  | 282          |  | 608  
|                    |  |              |  |                     |  |                   |  |              |  |      

---

|(a) | Corporate headcount includes employees in both Charlotte, North Carolina (headquarters) and in Dallas,
Texas and other locations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(b) | Administration headcount includes customer service and documentation personnel.
|--- | -------------------------------------------------------------------------------

Available Financial Information

The mailing address of the Companys Executive Office is 4064 Colony Road, Suite 200, Charlotte, North Carolina 28211 and the telephone number at that location is (704) 973-7000. The Companys most
recent SEC filings can be found on the SECs website, www.sec.gov, and on the Parents website. The Parents 2006 annual report on Form 10-K will be available on the Parents website as soon as reasonably practicable. All
such filings are available free of charge. The contents of the Parents website are not incorporated by reference into this Form 10-K.



|Item 1A. | Risk Factors
|-------- | ------------

If we are unable to implement
our business strategy, our future results could be adversely affected.

Our future results of operations will depend in significant
part on the extent to which we can implement our business strategy successfully. Our business strategy includes continuing to organically grow our revenue, providing complete shipping and logistics services, leveraging our capabilities to serve a
broad range of customers, leveraging our brand, maintaining industry-leading information technology, and reducing operating costs. Our strategy is subject to business, economic and competitive uncertainties and contingencies, many of which are
beyond our control. As a consequence, we may not be able to fully implement our strategy or realize the anticipated results of our strategy.



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Repeal, substantial amendment, or waiver of the Jones Act or its application could have a material
adverse effect on our business.

If the Jones Act were to be repealed, substantially amended, or waived and, as a consequence,
competitors with lower operating costs were to enter any of our Jones Act markets, our business would be materially adversely affected. In addition, our advantage as a U.S.-citizen operator of Jones Act vessels could be eroded by periodic efforts
and attempts by foreign interests to circumvent certain aspects of the Jones Act. If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade
agreements, or if the restrictions contained in the Jones Act were otherwise altered, the shipping of maritime cargo between U.S. ports could be opened to foreign-flag or foreign-built vessels.

In September 2005, the Department of Homeland Security issued limited temporary waivers of the Jones Act solely to permit the transport of petroleum and
refined petroleum products in the United States in response to the damage caused to the nations oil and gas production facilities and pipelines by Hurricanes Katrina and Rita. There can be no assurance as to the timing of any future waivers of
the Jones Act or that any such waivers will be limited to the transport of petroleum and refined petroleum products.

A decrease in
shipping volume in our markets will adversely affect our business.

Demand for our shipping services depends on levels of shipping
in our Jones Act markets and in the Guam market, as well as on economic and trade growth and logistics. Cyclical or other recessions in the continental U.S. or in these markets can negatively affect our operating results as customers may ship fewer
containers or may ship containers only at reduced rates. We cannot predict whether or when such downturns will occur.

Our failure to
renew our commercial agreements with Maersk in the future could have a material adverse effect on our business.

We have several
commercial agreements with Maersk, an international shipping company, that encompass terminal services, equipment sharing, cargo space charters, sales agency services, trucking services, and transportation services. For example, under these
agreements, Maersk provides us with terminal services at six ports located in the continental U.S. (Elizabeth, New Jersey; Jacksonville, Florida; Houston, Texas; Los Angeles and Oakland, California; and Tacoma, Washington). In general, these
agreements, which were renewed and amended in December 2006, are currently scheduled to expire at the end of 2010. If we fail to renew these agreements in the future, the requirements of our business will necessitate that we enter into substitute
commercial agreements with third parties for at least some portion of the services contemplated under our existing commercial agreements with Maersk, such as terminal services at our ports located in the continental U.S. There can be no assurance
that, if we fail to renew our commercial agreements with Maersk, we will be successful in negotiating and entering into substitute commercial agreements with third parties and, even if we succeed in doing so, the terms and conditions of these new
agreements, individually or in the aggregate, may be significantly less favorable to us than the terms and conditions of our existing agreements with Maersk or others. Furthermore, if we do enter into substitute commercial agreements with third
parties, changes in our operations to comply with the requirements of these new agreements (such as our use of other terminals in our existing ports in the continental U.S. or our use of other ports in the continental U.S.) may cause disruptions to
our business, which could be significant, and may result in additional costs and expenses and possible losses of revenue.

In addition, as
stated in our commercial agreements with Maersk, if we do not achieve full deployment of all of the new vessels (or equivalent substitute vessels) by July 1, 2007, Maersk may at any time after July 1, 2007 cancel the agreements. If
cancellation were to occur, the current agreement dated May 9, 2004 would remain effective until its termination on December 10, 2007.

Rising fuel prices may adversely affect our profits.

Fuel is a significant operating expense for our shipping
operations. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in
oil producing countries and regions, regional production patterns and environmental concerns. As a result, increases in the price of fuel, such as we are currently experiencing, may adversely affect profitability. There can be no assurance that our
customers will agree to bear such fuel price increases via fuel surcharges without a reduction in their volumes of business with us nor any assurance that our future fuel hedging efforts, if any, will be successful.



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Our industry is unionized and strikes by our union employees or others in the industry may disrupt
our services and adversely affect our operations.

As of December 24, 2006, we had 1,878 employees, of which 1,270 were
unionized employees represented by seven different labor unions. Our industry is susceptible to work stoppages and other adverse employee actions due to the strong influence of maritime trade unions. We may be adversely affected by future industrial
action against efforts by our management or the management of other companies in our industry to reduce labor costs, restrain wage increases or modify work practices. For example, in 2002 our operations at our U.S. west coast ports were
significantly affected by a 10-day labor interruption by the International Longshore and Warehouse Union. This interruption affected ports and shippers throughout the U.S. west coast.

In addition, in the future, we may not be able to negotiate, on terms and conditions favorable to us, renewals of our collective bargaining agreements
with unions in our industry and strikes and disruptions may occur as a result of our failure or the failure of other companies in our industry to negotiate collective bargaining agreements with such unions successfully.

Our collective bargaining agreements with our unions are scheduled to expire as followsInternational Brotherhood of Teamsters: 2008 and 2010;
Seafarers International Union: 2011; Office & Professional Employees International Union: 2007; International Longshore and Warehouse Union: 2007 and 2008; International Longshoremens Association: 2010; Marine Engineers Beneficial
Association: 2012; and International Organization of Masters, Mates & Pilots: 2012.

Our employees are covered by federal
laws that may subject us to job-related claims in addition to those provided by state laws.

Some of our employees are covered by
several maritime statutes, including provisions of the Jones Act, the Death on the High Seas Act, the Seamens Wage Act and general maritime law. These laws typically operate to make liability limits established by state workers
compensation laws inapplicable to these employees and to permit these employees and their representatives to pursue actions against employers for job-related injuries in federal courts. Because we are not generally protected by the limits imposed by
state workers compensation statutes for these employees, we may have greater exposure for any claims made by these employees than is customary in the United States.

Due to our participation in multi-employer pension plans, we may have exposure under those plans that extends beyond what our obligations would be with respect to our employees.

We contribute to fourteen multi-employer pension plans. In the event of a partial or complete withdrawal by us from any plan which is underfunded, we
would be liable for a proportionate share of such plans unfunded vested benefits. Based on the limited information available from plan administrators, which we cannot independently validate, we believe that our portion of the contingent
liability in the case of a full withdrawal or termination would be material to our financial position and results of operations. In the event that any other contributing employer withdraws from any plan which is underfunded, and such employer (or
any member in its controlled group) cannot satisfy its obligations under the plan at the time of withdrawal, then we, along with the other remaining contributing employers, would be liable for our proportionate share of such plans unfunded
vested benefits. We have no current intention of taking any action that would subject us to any withdrawal liability and cannot assure you that no other contributing employer will take such action.

In addition, if a multi-employer plan fails to satisfy the minimum funding requirements, the Internal Revenue Service, pursuant to Section 4971 of
the Internal Revenue Code of 1986, as amended, referred to herein as the Code, will impose an excise tax of five (5%) percent on the amount of the accumulated funding deficiency. Under Section 413(c)(5) of the Code, the liability of each
contributing employer, including us, will be determined in part by each employers respective delinquency in meeting the required employer contributions under the plan. The Code also requires contributing employers to make additional
contributions in order to reduce the deficiency to zero, which may, along with the payment of the excise tax, have a material adverse impact on our financial results.

Compliance with safety and environmental protection and other governmental requirements may adversely affect our operations.

The shipping industry in general and our business and the operation of our vessels and terminals in particular are affected by extensive and changing safety, environmental protection and other international, national,
state and local governmental laws and regulations. For example, our vessels, as U.S.-flagged vessels, generally must be maintained in class and are subject to periodic inspections by the American Bureau of Shipping or similar
classification societies, and must be periodically inspected by, or on behalf of, the U.S. Coast Guard. In addition, the United States Oil Pollution Act of 1990 (referred to as OPA), the Comprehensive Environmental Response, Compensation &
Liability Act of 1980 (referred to as CERCLA), and certain state laws require us, as a vessel operator, to obtain certificates of financial responsibility and to adopt procedures for oil or hazardous substance spill prevention, response and clean
up. In complying with these laws, we



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have incurred expenses and may incur future expenses for ship modifications and changes in operating procedures. Changes in enforcement policies for existing
requirements and additional laws and regulations adopted in the future could limit our ability to do business or further increase the cost of our doing business.

We believe our vessels are maintained in good condition in compliance with present regulatory requirements, are operated in compliance in all material respects with applicable safety/environmental laws and regulations
and are insured against the usual risks for such amounts as our management deems appropriate. Our vessels operating certificates and licenses are renewed periodically during the required annual surveys of the vessels. However, there can be no
assurance that such certificates and licenses will be renewed. Also, in the future, we may have to alter existing equipment, add new equipment to, or change operating procedures for, our vessels to comply with changes in governmental regulations,
safety or other equipment standards to meet our customers changing needs. If any such costs are material, they could adversely affect our financial condition.

We are subject to new statutory and regulatory directives in the United States addressing homeland security concerns that may increase our costs and adversely affect our operations.

Various government agencies within the Department of Homeland Security (DHS), including the Transportation Security Administration, the U.S.
Coast Guard, and U.S. Bureau of Customs and Border Protection, have adopted, and may adopt in the future, new rules, policies or regulations or changes in the interpretation or application of existing laws, rules, policies or regulations, compliance
with which could increase our costs or result in loss of revenue.

The Coast Guards new maritime security regulations, issued
pursuant to the Maritime Transportation Security Act of 2002 (MTSA), require us to operate our vessels and facilities pursuant to both the maritime security regulations and approved security plans. Our vessels and facilities are subject
to periodic security compliance verification examinations by the Coast Guard. A failure to operate in accordance with the maritime security regulations or the approved security plans may result in the imposition of a fine or control and compliance
measures, including the suspension or revocation of the security plan, thereby making the vessel or facility ineligible to operate. We are also required to audit these security plans on an annual basis and, if necessary, submit amendments to the
Coast Guard for its review and approval. Failure to timely submit the necessary amendments may lead to the imposition of the fines and control and compliance measures mentioned above. Failure to meet the requirements of the maritime security
regulations could have a material adverse effect on our results of operations. The Transportation Security Administration and the Coast Guard have begun implementation of Phase I of the so-called Transportation Worker Identification Credential
(TWIC) program. Phase I of the TWIC program established minimum standards for the issuance of biometric identification cards to all individuals who require unescorted access to secure areas of port facilities or to vessels regulated
under MTSA. Phase II of the TWIC program, for which approval is anticipated to occur during 2007, will propose additional access control requirements and the use of electronic readers. The costs of implementing Phase II of the TWIC program could be
substantial and therefore could adversely affect our results of operations.

DHS may adopt additional security-related regulations,
including new requirements for screening of cargo and our reimbursement to the agency for the cost of security services. These new security-related regulations could have an adverse impact on our ability to efficiently process cargo or could
increase our costs. In particular, our customers typically need quick shipping of their cargos and rely on our on-time shipping capabilities. If these regulations disrupt or impede the timing of our shipments, we may fail to meet the needs of our
customers, or may increase expenses to do so.

Increased inspection procedures and tighter import and export controls could increase
costs and disrupt our business.

Domestic and international container shipping is subject to various security and customs inspection
and related procedures, referred to herein as inspection procedures, in countries of origin and destination as well as in countries in which transshipment points are located. Inspection procedures can result in the seizure of containers or their
contents, delays in the loading, offloading, transshipment or delivery of containers and the levying of customs duties, fines or other penalties against exporters or importers (and, in some cases, shipping and logistics companies such as us).
Failure to comply with these procedures may result in the imposition of fines and/or the taking of control or compliance measures by the applicable governmental agency, including the denial of entry into U.S. waters.

We understand that, currently, only a small proportion of all containers delivered to the United States are physically inspected by U.S., state or local
authorities prior to delivery to their destinations. The U.S. government, foreign governments, international organizations, and industry associations have been considering ways to improve and expand inspection procedures. There are numerous
proposals to enhance the existing inspection procedures, which if implemented would likely affect shipping and logistics companies such as us. Such changes could impose additional financial and legal obligations on us, including additional
responsibility for physically inspecting and recording the contents of containers we are shipping. In addition, changes to inspection procedures could impose additional costs and obligations on our customers and may, in certain cases, render the
shipment of certain types of cargo by container uneconomical or impractical. Any such changes or developments may have a material adverse effect on our business, financial condition and results of operations.



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Restrictions on foreign ownership of our vessels could limit our ability to sell off any portion of
our business or result in the forfeiture of our vessels.

Under the Jones Act, all vessels transporting cargo between U.S. ports
must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S. organized companies that are controlled and 75% owned by U.S. citizens. The Jones Act,
therefore, restricts the foreign ownership interests in the entities that directly or indirectly own the vessels which we operate in the non-contiguous Jones Act markets. If we were to seek to sell any portion of our business that owns any of these
vessels, we would have fewer potential purchasers, since some potential purchasers might be unable or unwilling to satisfy the foreign ownership restrictions described above. As a result, the sales price for that portion of our business may not
attain the amount that could be obtained in an unregulated market. Furthermore, at any point Horizon Lines, LLC, our indirect wholly-owned subsidiary and principal operating subsidiary, ceases to be controlled and 75% owned by U.S. citizens, we
would become ineligible to operate in our current markets and may become subject to penalties and risk forfeiture of our vessels.

No
assurance can be given that our insurance costs will not escalate.

Our protection and indemnity insurance (P&I) is
provided by a mutual P&I club which is a member of the International Group of P&I Clubs. As a mutual club, it relies on member premiums, investment reserves and income, and reinsurance to manage liability risks on behalf of its members.
Increased investment losses, underwriting losses, or reinsurance costs could cause international marine insurance clubs to substantially raise the cost of premiums, resulting not only in higher premium costs but also higher levels of deductibles and
self-insurance retentions.

Catastrophic losses and other liabilities could adversely affect our results of operations and such
losses and liability may be beyond insurance coverage.

The operation of any oceangoing vessel carries with it an inherent risk of
catastrophic maritime disaster, mechanical failure, collision, and loss of or damage to cargo. Also, in the course of the operation of our vessels, marine disasters, such as oil spills and other environmental mishaps, cargo loss or damage, and
business interruption due to political or other developments, as well as maritime disasters not involving us, labor disputes, strikes and adverse weather conditions, could result in loss of revenue, liabilities or increased costs, personal injury,
loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. Damage arising from such occurrences may result in lawsuits asserting large claims.

Although we maintain insurance, including retentions and deductibles, at levels that we believe are consistent with industry norms against the risks
described above, including loss of life, there can be no assurance that this insurance would be sufficient to cover the cost of damages suffered by us from the occurrence of all of the risks described above or the loss of income resulting from one
or more of our vessels being removed from operation. We also cannot assure you that a claim will be paid or that we will be able to obtain insurance at commercially reasonable rates in the future. Further, if we are negligent or otherwise
responsible in connection with any such event, our insurance may not cover our claim.

In the event that any of the claims arising from any
of the foregoing possible events were assessed against us, all of our assets could be subject to attachment and other judicial process.

As
a result of the significant insurance losses incurred in the September 11, 2001 attack and related concern regarding terrorist attacks, global insurance markets increased premiums and reduced or restricted coverage for terrorist losses
generally. Accordingly, premiums payable for terrorist coverage have increased substantially and the level of terrorist coverage has been significantly reduced.

Additionally, new and stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of
insurance unavailable.

Our spare vessels reserved for relief may be inadequate under extreme circumstances.

We generally keep spare vessels in reserve available for relief if one of our vessels in active service suffers a maritime disaster or must be
unexpectedly removed from service for repairs. However, these spare vessels may require several days of sailing before it can replace the other vessel, resulting in service disruptions and loss of revenue. If more than one of our vessels in active
service suffers a maritime disaster or must be unexpectedly removed from service, we may have to redeploy vessels from our other trade routes, or lease one or more vessels from third parties. As there is a relatively limited supply of U.S.-built,
U.S.-owned and U.S.-flagged container vessels available for short- or long-term lease, especially on short notice, we may be unable to lease any such vessels or be faced with prohibitively high lease rates. In any such case, we may suffer a material
adverse effect on our business, our operating results and our financial condition.



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Interruption or failure of our information technology and communications systems could impair our
ability to effectively provide our shipping and logistics services, especially HITS, which could damage our reputation and harm our operating results.

Our provision of our shipping and logistics services depends on the continuing operation of our information technology and communications systems, especially HITS. We have experienced brief system failures in the past
and may experience brief or substantial failures in the future. Any failure of our systems could result in interruptions in our service reducing our revenue and profits and damaging our brand. Some of our systems are not fully redundant, and our
disaster recovery planning does not account for all eventualities. The occurrence of a natural disaster, or other unanticipated problems at our facilities at which we maintain and operate our systems could result in lengthy interruptions or delays
in our shipping and logistics services, especially HITS.

Our vessels could be arrested by maritime claimants, which could result in
significant loss of earnings and cash flow.

Crew members, suppliers of goods and services to a vessel, shippers of cargo, lenders
and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a claimant may enforce its lien by either arresting or attaching a vessel through foreclosure proceedings.
Moreover, crew members may place liens for unpaid wages that can include significant statutory penalty wages if the unpaid wages remain overdue (e.g., double wages for every day during which the unpaid wages remain overdue). The arrest or attachment
of one or more of our vessels could result in a significant loss of earnings and cash flow for the period during which the arrest or attachment is continuing.

In addition, international vessel arrest conventions and certain national jurisdictions allow so-called sister-ship arrests, which allow the arrest of vessels that are within the same legal ownership as the vessel
which is subject to the claim or lien. Certain jurisdictions go further, permitting not only the arrest of vessels within the same legal ownership, but also any associated vessel. In nations with these laws, an association may be recognized when two
vessels are owned by companies controlled by the same party. Consequently, a claim may be asserted against us or any of our vessels for the liability of one or more of the other vessels that we own.

We are susceptible to severe weather and natural disasters.

Our operations are vulnerable to disruption as a result of weather and natural disasters such as bad weather at sea, hurricanes, typhoons and earthquakes. Such events will interfere with our ability to provide the
on-time scheduled service our customers demand resulting in increased expenses and potential loss of business associated with such events. In addition, severe weather and natural disasters can result in interference with our terminal operations, and
may cause serious damage to our vessels, loss or damage to containers, cargo and other equipment and loss of life or physical injury to our employees. Terminals in the South Pacific Ocean, particularly in Guam, and terminals on the east coast of the
continental U.S. and in the Caribbean are particularly susceptible to hurricanes and typhoons. In the recent past, the terminal at our port in Guam was seriously damaged by a typhoon and our terminal in Puerto Rico was seriously damaged by a
hurricane. These storms resulted in damage to cranes and other equipment and closure of these facilities. Earthquakes in Anchorage and in Guam have also damaged our terminal facilities resulting in delay in terminal operations and increased
expenses. Any such damage will not be fully covered by insurance.

We may face new competitors.

Other established or start-up shipping operators may enter our markets to compete with us for business.

Existing non-Jones Act qualified shipping operators whose container ships sail between ports in Asia and the U.S. west coast could add Hawaii, Guam or
Alaska as additional stops on their sailing routes for non-U.S. originated or destined cargo. Shipping operators could also add Puerto Rico as a new stop on sailings of their vessels between the continental U.S. and ports in Europe, the Caribbean,
and Latin America for non-U.S. originated or destined cargo. Further, shipping operators could introduce U.S.-flagged vessels into service sailing between Guam and U.S. ports, including ports on the U.S. west coast or in Hawaii. On these routes to
and from Guam no limits would apply as to the origin or destination of the cargo dropped off or picked up. In addition, current or new U.S. citizen shipping operators may order the building of new vessels by U.S. shipyards and may introduce these
U.S.-built vessels into Jones Act qualified service on one or more of our trade routes. These potential competitors may have access to financial resources substantially greater than our own. The entry of a new competitor on any of our trade routes
could result in a significant increase in available shipping capacity that could have a material adverse effect on our business, financial condition, results of operations and cash flows.



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In early 2005, Pasha Hawaii Transport Lines, a joint venture between The Pasha Group, a California-based
automobile handling and logistics company, and Strong Vessel Operators LLC, a Connecticut-based operator of a U.S.-flagged ship on a trade route between the U.S. east coast and the Azores, began a Jones Act qualified shipping service between Hawaii
and San Diego, utilizing one roll-on/roll-off vessel. Pasha Hawaii has targeted newly manufactured vehicles, including Chrysler and Honda vehicles for shipment from the U.S. west coast to Hawaii, privately-owned vehicles for shipment between the
U.S. west coast and Hawaii and larger, rolling-stock pieces, including tractors and military vehicles and equipment for shipment between the U.S. west coast and Hawaii. Pasha Hawaiis service has had some effect on us through the loss of some
shipments of vehicles between the U.S. west coast and Hawaii. We have also experienced downward rate pressure, resulting in eroding margins, with respect to these types of vehicle shipments.

Delayed delivery or non-delivery of one or more of the new U.S.-flag container vessels or default under the agreements relating to them may
adversely affect our operations and financial condition.

We have entered into a series of agreements with SFL with respect to our
chartering of five new U.S.-flag container vessels, three of which are currently under construction in the Republic of Korea.

If any of
the new vessels are not constructed in accordance with their respective shipbuilding contracts, such vessel(s) could be properly declined under the terms of our agreements with SFL and we would be unable to charter such vessels.

If any of the new vessels are delivered later than contemplated under the shipbuilding contracts either due to construction delays or damage during
construction, or if any of the new vessels is damaged during construction such that the vessel is a total loss, the implementation of our plans to phase the new vessels into our operations and to redeploy a number of our existing vessels would be
delayed or prevented. If the delivery of any of the new vessels is delayed beyond a certain date, the commitment for the bank financing for SFLs purchase of the vessels will expire with respect to any such vessel. In the absence of replacement
financing, SFL would be unable to complete the purchase of any such vessel.

If, as a result of construction cost overruns or changes to
the new vessels requested by us, the purchase price for any of the vessels exceeds the maximum allowable purchase price under our agreements with SFL, it may be necessary for us to agree to cover the excess cost in order for us to charter the
vessels.

If SFL were to default on its contractual obligations with the sellers of the new vessels or the financial institutions providing
financing for SFLs purchase of the vessels, including the requirement for its equity portion of the purchase price of each vessel, or if those financial institutions were to default on their contractual obligations to fund the purchases, we
would be deprived of the use of such vessels, and the implementation of our plans to phase such vessels into our operations and to redeploy a number of our existing vessels on other routes would be hindered or prevented.

In the event we default under our agreements with SFL, we could be liable to SFL and its lenders for losses resulting from our default. Such losses
include reimbursement to SFL of its security deposits of cash in the amount of $11.0 million and letters of credit in the amount of $17.0 million, which could be forfeited to the sellers of the new vessels, interest rate swap breakage fees, and
other actual damages arising from such a default. As collateral for our obligation to reimburse SFL in respect of its letters of credit and interest rate swap breakage fees, as of December 24, 2006, we have provided SFL with letters of credit
in the aggregate amount of $20.1 million, which have been assigned to SFLs lenders as collateral for its obligations to them. In the event of such a default, our letters of credit would be subject to being drawn, thereby adversely affecting
our financial condition, and we could be liable for the above-described additional damages.

Horizon Lines, LLC has entered into the
bareboat charters for the five new vessels based on their treatment as operating leases in order to comply with certain covenants in the senior credit facility under which our indirect wholly owned subsidiaries Horizon Lines Holding and Horizon
Lines, LLC are borrowers. If the bareboat charters were to be deemed capital leases, such treatment may result in a default under certain covenants in the senior credit facility unless waived by the lenders thereunder.

We may not exercise our purchase options for our chartered vessels.

We intend to exercise our purchase options for up to three of the vessels that we have chartered upon the expiration of their charters in January 2015. In
addition, we have not determined whether we will exercise our purchase options for the five newly built U.S.-flag vessels that we have agreed to charter. One of the new vessels began its charter during the fourth quarter of 2006 and the remaining
four new vessels are expected to begin during the first half of 2007. There can be no assurance that, when the options for these eight vessels become exercisable, the price at which these vessels may be purchased will be reasonable in light of the
fair market value of these vessels at such time or that we will have the funds required to make these purchases. As a result, we may not exercise our options to purchase these vessels. If we do not exercise our options, we may need to renew our
existing charters for these vessels or charter replacement vessels. There can be no assurance that our existing charters will be renewed, or, if renewed, that they will be renewed at favorable rates, or, if not renewed, that we will be able to
charter replacement vessels at favorable rates.



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We may face significant costs as the vessels currently in our fleet age.

We believe that each of the vessels we currently operate has an estimated useful life of approximately 45 years from the year it was built. As of the date
hereof, the average age of the vessels is approximately 31 years. We expect to incur increasing costs to operate and maintain the vessels in good condition as they age. Eventually, these vessels will need to be replaced. While we have already agreed
to charter five newly built U.S.-flag vessels, one of which began in the fourth quarter of 2006 and the other four are expected to begin during the first half of 2007, we may not be able to replace all of our existing vessels with new vessels based
on uncertainties related to financing, timing and shipyard availability.

We may face unexpected substantial drydocking costs for our
vessels.

Our vessels are drydocked periodically to comply with regulatory requirements and to affect maintenance and repairs, if
necessary. The cost of such repairs at each drydocking are difficult to predict with certainty and can be substantial. Our established processes have enabled us to make on average six drydockings per year over the last five years with a minimal
impact on schedule. Due to the delivery of the new vessels, we anticipate that we will make nine drydockdings during 2007. In addition, our vessels may have to be drydocked in the event of accidents or other unforeseen damage. Our insurance may not
cover all of these costs. Large unpredictable repair and drydocking expenses could significantly decrease our profits.

Loss of our
key management personnel could adversely affect our business.

Our future success will depend, in significant part, upon the
continued services of Charles G. Raymond, our Chairman of the Board, President and Chief Executive Officer, John W. Handy, our Executive Vice President, John V. Keenan, our Senior Vice President and Chief Transportation Officer, M. Mark
Urbania, our Senior Vice PresidentFinance and Administration and Chief Financial Officer and Brian W. Taylor, Senior Vice President, Sales and Marketing, of Horizon Lines, LLC. The loss of the services of any of these executive officers could
adversely affect our future operating results because of their experience and knowledge of our business and customer relationships. If key employees depart, we may have to incur significant costs to replace them and our ability to execute our
business model could be impaired if we cannot replace them in a timely manner. We do not expect to maintain key person insurance on any of our executive officers.

We are subject to, and may in the future be subject to, disputes, or legal or other proceedings, that could have a material adverse effect on us.

The nature of our business exposes us to the potential for disputes, or legal or other proceedings, from time to time relating to labor and employment
matters, personal injury and property damage, environmental matters and other matters, as discussed in the other risk factors disclosed in this prospectus. In addition, as a common carrier, our tariffs, rates, rules and practices in dealing with our
customers are governed by extensive and complex foreign, federal, state and local regulations which are the subject of disputes or administrative and/or judicial proceedings from time to time. These disputes, individually or collectively, could harm
our business by distracting our management from the operation of our business. If these disputes develop into proceedings, these proceedings, individually or collectively, could involve significant expenditures by us or result in significant changes
to our tariffs, rates, rules and practices in dealing with our customers that could have a material adverse effect on our future revenue and profitability.

We are currently subject to two actions before the Surface Transportation Board (STB). The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against Horizon
Lines, LLC and Matson Navigation Co., seeks a ruling from the STB that Horizon Lines Guam shipping rates during 1996-1998 were unreasonable under the ICC Termination Act of 1995, and an order awarding reparations to Guam and its
citizens. The STB will address this matter in three phases and is currently conducting the second phase. The second action, brought by DHX, Inc., a freight forwarder, in 1999 against Horizon Lines, LLC and Matson, challenges the reasonableness of
certain rates and practices of the defendants in the Hawaii trade. DHX is seeking $11.0 million in damages. An adverse decision in either of these actions could also affect the rates that Horizon Lines, LLC would be permitted to charge on its routes
and could have a material adverse effect on our future revenue and profitability. No assurance can be given that the final decision of the STB with respect to either action will be favorable to us. For additional information concerning the two
actions before the STB, see Item 3.Legal Proceedings, beginning on page 26 of this Form 10-K.



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Integrating acquisitions may be time-consuming and create costs that could reduce our net income
and cash flows.

Part of our growth strategy may include pursuing acquisitions. Any integration process may be complex and
time-consuming, may be disruptive to our business and may cause an interruption of, or a distraction of our managements attention from our business as a result of a number of obstacles, including but not limited to:



| |  |  | the loss of key customers of the acquired company;
| | - |  | --------------------------------------------------



| |  |  | the incurrence of unexpected expenses and working capital requirements;
| | - |  | -----------------------------------------------------------------------



| |  |  | a failure of our due diligence process to identify significant issues or contingencies;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | difficulties assimilating the operations and personnel of the acquired company;
| | - |  | -------------------------------------------------------------------------------



| |  |  | difficulties effectively integrating the acquired technologies with our current technologies;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our inability to retain key personnel of acquired entities;
| | - |  | -----------------------------------------------------------



| |  |  | a failure to maintain the quality of customer service;
| | - |  | ------------------------------------------------------



| |  |  | our inability to achieve the financial and strategic goals for the acquired and combined businesses; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | difficulty in maintaining internal controls, procedures and policies.
| | - |  | ---------------------------------------------------------------------

Any of the foregoing obstacles, or a combination of them, could negatively impact our net income and cash flows.

We have not completed any acquisitions to date. We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In
addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial
statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of such obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of
operations.

We may not realize the expected benefits of our Horizon Edge initiative

The Horizon Edge team will develop and implement a program over the next two and a half years, with the combined goals of reducing operating costs and
enhancing customer focus and service efficiency. With the assistance of outside advisors, we are targeting improvements in maintenance management, marine productivity, supply chain management and information technology. In connection to our
agreements with outside advisors, we will incur costs to develop and implement this program. There can be no assurance that we will realize the anticipated cost savings related to this initiative.

We may be exposed to potential risks resulting from new requirements that we evaluate our internal controls over financial reporting under
Section 404 of the Sarbanes-Oxley Act.

Section 404 of the Sarbanes-Oxley Act requires that publicly reporting companies
cause their managements to perform annual assessments of the effectiveness of their internal controls over financial reporting and their independent auditors to prepare reports that address such assessments. We are required to satisfy the
requirements of Section 404 for the fiscal year ended December 21, 2008. We may not be able to assess our current internal controls and comply with these requirements in due time. If we are able to proceed with a complete assessment in a
timely manner, we may identify deficiencies which we may not be able to remediate, may identify deficiencies which will demand significant resources to remediate or may be unable to identify existing deficiencies at all. In addition, if we fail to
achieve and maintain the adequacy of our internal controls, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover,
effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information and the trading price of our common stock could drop significantly. Our compliance with the Sarbanes-Oxley Act
may require significant expenses and management resources that would need to be diverted from our other operations and could require a restructuring of our internal financial reporting. Any such expenses, time reallocations or restructuring could
have a material adverse effect on our operations.

Our cash flows and capital resources may be insufficient to make required payments
on our substantial indebtedness and future indebtedness.

As of December 24, 2006, on a consolidated basis, we had
(i) approximately $510.8 million of outstanding long-term debt (exclusive of outstanding letters of credit with an aggregate face amount of $26.6 million), including capital lease obligations, (ii) approximately $227.9 million of
aggregate trade payables, accrued liabilities and other balance sheet liabilities (other than the long-term debt referred to above) and (iii) a debt-to-equity ratio of approximately 2.5:1.0.



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Because we have substantial debt, we require significant amounts of cash to fund our debt service
obligations. Our ability to generate cash to meet scheduled payments or to refinance our obligations with respect to our debt depends on our financial and operating performance which, in turn, is subject to prevailing economic and competitive
conditions and to the following financial and business factors, some of which may be beyond our control:



| |  |  | operating difficulties;
| | - |  | -----------------------



| |  |  | increased operating costs;
| | - |  | --------------------------



| |  |  | increased fuel costs;
| | - |  | ---------------------



| |  |  | general economic conditions;
| | - |  | ----------------------------



| |  |  | decreased demand for our services;
| | - |  | ----------------------------------



| |  |  | market cyclicality;
| | - |  | -------------------



| |  |  | tariff rates;
| | - |  | -------------



| |  |  | prices for our services;
| | - |  | ------------------------



| |  |  | the actions of competitors;
| | - |  | ---------------------------



| |  |  | regulatory developments; and
| | - |  | ----------------------------



| |  |  | delays in implementing strategic projects.
| | - |  | ------------------------------------------

If our cash flow and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and might be forced to reduce or delay capital expenditures, dispose of material assets or
operations, seek to obtain additional equity capital, or restructure or refinance our indebtedness. Such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In particular, in the event
that we are required to dispose of material assets or operations to meet our debt service obligations, we cannot be sure as to the timing of such dispositions or the proceeds that we would realize therefrom. The value realized from such dispositions
will depend on market conditions and the availability of buyers, and, consequently, any such disposition may not, among other things, result in sufficient cash proceeds to repay our indebtedness. Also, the senior credit facility and the indentures
governing the 9% senior notes due 2012 co-issued by Horizon Lines Holding and Horizon Lines and guaranteed by their respective subsidiaries, referred to herein as the 9% senior notes, and the 11% senior discount notes due 2013 issued by the Company,
referred to herein as the 11% senior discount notes, contain covenants that may limit our ability to dispose of material assets or operations or to restructure or refinance our indebtedness. Further, we cannot provide assurance that we will be
able to restructure or refinance any of our indebtedness or obtain additional financing, given the uncertainty of prevailing market conditions from time to time, our high levels of indebtedness and the various debt incurrence restrictions imposed by
the senior credit facility and the indentures for the 9% senior notes and the 11% senior discount notes. If we are able to restructure or refinance our indebtedness or obtain additional financing, the economic terms on which such indebtedness is
restructured, refinanced or obtained may not be favorable to us.

We may incur substantial indebtedness in the future. The terms of the
senior credit facility and the indentures governing the 9% senior notes and the 11% senior discount notes permit us to incur or guarantee additional indebtedness under certain circumstances. As of December 24, 2006, our wholly-owned indirect
subsidiaries Horizon Lines Holding and Horizon Lines, LLC had approximately $48.4 million of additional borrowing availability under the revolving credit facility, subject to compliance with the financial and other covenants and the other terms
set forth therein. In addition, our senior credit facility allows for additional term loan borrowing availability of up to $75.0 million if certain covenants are met. Our incurrence of additional indebtedness would intensify the risk that our future
cash flow and capital resources may not be sufficient for payments of interest on and principal of our substantial indebtedness.

The
Senior Credit Facility, the 9% senior notes indenture, and the 11% senior discount notes indenture allow certain upstream payments to the Parent, which may impact our ability to service our debt obligations.

The Parents certificate of incorporation contains provisions voiding transfers of shares of any class or series of the Parents capital stock
that would result in non-U.S. citizens, in the aggregate, owning in excess of 19.9% of the shares of such class or series. In the event that this transfer restriction would be ineffective, the Parents certificate of incorporation provides for
the automatic transfer of such excess shares to a trust specified therein. These trust provisions also apply to excess shares that would result from a change in the status of a record or beneficial owner of shares of the Parents capital stock
from a U.S. citizen to a non-U.S. citizen. In the event that these trust transfer provisions would also be ineffective, the Parents certificate of incorporation permits the redemption of such excess shares. However, the Parent has no
operations and is dependent upon upstream payments from its subsidiaries to service its obligations and to pay dividends on its common stock. The senior credit facility permits upstream payments, subject to exceptions, to the Parent to fund
redemptions of excess



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shares and to pay dividends on the Parents common stock. However, the terms of the 9% senior note indenture and the 11% senior discount note indenture
contain limitations on upstream payments which provide no specific exceptions to fund such redemptions of excess shares and any future indebtedness may contain similar limitations. In addition, we may not be able to redeem such excess shares because
our operations may not have generated sufficient excess cash flow to fund such a redemption. If such a situation occurs, there is no guarantee that we will be able to obtain the funds necessary to effect such a redemption on terms satisfactory to us
or at all.

If, for any of the foregoing reasons or otherwise, we are unable to effect such a redemption when such ownership of shares by
non-U.S. citizens is in excess of 25.0% of such class or series, or otherwise prevent non-U.S. citizens in the aggregate from owning shares in excess of 25.0% of any such class or series, or fail to exercise our redemption right because we are
unaware that such ownership exceeds such percentage, we will likely be unable to comply with applicable maritime laws. If all of the citizenship-related safeguards in our certificate of incorporation fail at a time when ownership of shares of any
class or series of our stock is in excess of 25.0% of such class or series, we will likely be required to suspend our Jones Act operations. Any such actions by governmental authorities would have a severely detrimental impact on our results of
operations.

In addition, if we make upstream payments, for any reason, including the above, this will reduce the amount of cash flows
available to service our debt obligations.

Financial and other covenants under our current and future indebtedness could
significantly impair our ability to operate our business.

The senior credit facility contains covenants that, among other things,
restrict the ability of Horizon Lines Holding and its subsidiaries to:



| |  |  | dispose of assets;
| | - |  | ------------------



| |  |  | incur additional indebtedness, including guarantees;
| | - |  | ----------------------------------------------------



| |  |  | prepay other indebtedness or amend other debt instruments;
| | - |  | ----------------------------------------------------------



| |  |  | pay dividends or make investments, loans or advances;
| | - |  | -----------------------------------------------------



| |  |  | create liens on assets;
| | - |  | -----------------------



| |  |  | enter into sale and lease-back transactions;
| | - |  | --------------------------------------------



| |  |  | engage in mergers, acquisitions or consolidations;
| | - |  | --------------------------------------------------



| |  |  | change the business conducted by them; and
| | - |  | ------------------------------------------



| |  |  | engage in transactions with affiliates.
| | - |  | ---------------------------------------

In
addition, under the senior credit facility, Horizon Lines Holding and its subsidiaries are required to comply with financial covenants, comprised of leverage and interest coverage ratio requirements. Their ability to comply with these covenants will
depend on their ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond their control, and will be substantially dependent on our
financial and operating performance which, in turn, is subject to prevailing economic and competitive conditions and to various financial and business factors, including those discussed in the other risk factors disclosed in this prospectus, some of
which may be beyond our control.

Under the senior credit facility, Horizon Lines, LLC and Horizon Lines Holding are required, subject to
certain exceptions, to make mandatory prepayments of amounts under the senior credit facility with all or a portion of the net proceeds of certain asset sales and events of loss, certain debt issuances, certain equity issuances and a portion of
their excess cash flow. Our circumstances at the time of any such prepayment, particularly our liquidity and ability to access funds, cannot be anticipated at this time. Any such prepayment could, therefore, have a material adverse effect on us.
Mandatory prepayments are first applied to the outstanding term loans and, after all of the term loans are paid in full, then applied to reduce the loans under the revolving credit facility with corresponding reductions in revolving credit facility
commitments.

The indentures that govern the 9% senior notes and the 11% senior discount notes also contain restrictive covenants that,
among other things, limit the ability of Horizon Lines Holding and its subsidiaries, in the case of the 9% senior notes, and the Company, in the case of the 11% senior discount notes, to:



| |  |  | incur more debt;
| | - |  | ----------------



| |  |  | pay dividends, redeem stock or make other distributions;
| | - |  | --------------------------------------------------------



22



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##### Table of Contents

| |  |  | make investments;
| | - |  | -----------------



| |  |  | create liens;
| | - |  | -------------



| |  |  | transfer or sell assets;
| | - |  | ------------------------



| |  |  | merge or consolidate; and
| | - |  | -------------------------



| |  |  | enter into transactions with our affiliates.
| | - |  | --------------------------------------------

The senior credit facility and the indentures that govern the 9% senior notes and the 11% senior discount notes contain cross-default provisions that may result in nearly all of our indebtedness coming due simultaneously.

The breach of any of the covenants or restrictions contained in the senior credit facility could result in a default under the
indenture governing the 9% senior notes that would permit the noteholders thereunder to declare all amounts outstanding under such indenture to be due and payable, together with accrued and unpaid interest, resulting in the acceleration of the
amounts outstanding under the senior credit facility as well. Similarly, the breach of any of the covenants or restrictions contained in the indenture governing the 9% senior notes would permit the lenders under the senior credit facility to declare
all amounts outstanding under such facility to be due and payable, together with accrued and unpaid interest, resulting in the acceleration of the amounts outstanding under such indenture. In the event of a breach of any of the covenants or
restrictions contained in the senior credit facility or the indenture governing the 9% senior notes, the noteholders under the indenture governing the 11% senior discount notes would be permitted to declare all amounts outstanding under such
indenture to be due and payable. If the indebtedness under the senior credit facility and the indentures governing the 9% senior notes and the 11% senior discount notes were all to be accelerated, the aggregate amount of indebtedness immediately due
and payable as of December 24, 2006 would have been approximately $506.0 million. We do not have sufficient liquidity to repay this amount if all of such indebtedness were to be accelerated, and we may not have sufficient liquidity in the
future and may not be able to borrow money from other lenders to enable us to refinance all of such indebtedness.

Our substantial
indebtedness and future indebtedness could significantly impair our operating and financial condition.

The required payments on our
substantial indebtedness and future indebtedness, as well as the restrictive covenants contained in the senior credit facility and the indentures governing the 9% senior notes and the 11% senior discount notes, could significantly impair our
operating and financial condition. For example, these required payments and restrictive covenants could:



| |  |  | make it difficult for us to satisfy our debt obligations;
| | - |  | ---------------------------------------------------------



| |  |  | make us more vulnerable to general adverse economic and industry conditions;
| | - |  | ----------------------------------------------------------------------------



| |  |  | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expose us to interest rate fluctuations because the interest rate on the debt under our revolving credit facility is variable;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for
operations and other purposes;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | place us at a competitive disadvantage compared to competitors that may have proportionately less debt.
| | - |  | -------------------------------------------------------------------------------------------------------

We may incur substantial indebtedness in the future. Our incurrence of additional indebtedness would intensify the risks described above.

The senior credit facility exposes us to the variability of interest rates.

Our subsidiaries, Horizon Lines Holding and Horizon Lines, LLC, have outstanding a $219.4 million term loan, which bears interest at variable rates.
Horizon Lines Holding and Horizon Lines also have a revolving credit facility which provides for borrowings of up to $75.0 million, which bears variable interest rates. The interest rates applicable to the senior credit facility vary with the
prevailing corporate base rate offered by the administrative agent under the senior credit facility or with LIBOR. If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our
substantial indebtedness would intensify. Each quarter point change in interest rates would result in a $0.5 million change in annual interest expense on the term loan. Accordingly, a significant rise in interest rates would adversely affect our
financial results.



23



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##### Table of Contents

Change in tax laws or the interpretation thereof, adverse tax audits and other tax matters related
to our tonnage tax election or such tax may adversely affect our future results.

During 2006, after evaluating the merits and
requirements of the tonnage tax, the Parent elected the application of the tonnage tax instead of the federal corporate income tax on income from our qualifying shipping activities. Changes in tax laws or the interpretation thereof, adverse tax
audits, and other tax matters related to such tax election or such tax may adversely affect our future results.

The Company, a
holding company, is the sole obligor under the 11% senior discount notes and neither the Parent nor any of the Parents subsidiaries are a guarantor of the Companys obligations under the 11% senior discount notes or have any obligation
with respect to the 11% senior discount notes.

The Company is a holding company with no operations of its own and derives all of
its revenues and cash flow from its subsidiaries. The Parent and the Parents subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay amounts due under the 11% senior discount notes or to
make any funds available to pay those amounts, whether by contribution, dividend, distribution, loan or other payments.

The 11% senior
discount notes are structurally subordinated to all debt and other liabilities, including trade payables, of the Companys subsidiaries. Holders of the 11% senior discount notes are entitled only to participate with other holders of the
Companys indebtedness and liabilities in the assets of the Companys subsidiaries remaining after such subsidiaries have paid all of their debt and other liabilities. The Companys subsidiaries may not have sufficient funds or assets
to permit payments to the Company to pay all or any portion of its indebtedness and other obligations, including its obligations on the 11% senior discount notes.

We may be unable to raise funds necessary to finance the change of control repurchase offers required by the indentures governing the 11% senior discount notes and the 9% senior notes and the senior credit
facility prohibits dividends to the Company to fund its obligations under the indenture governing the 11% senior discount notes upon a change of control.

If we experience specified changes of control, we would be required to make an offer to purchase all of the outstanding 11% senior discount notes at a price equal to 101% of the accreted value thereof plus accrued and
unpaid interest, if any, to the date of purchase, and the Companys subsidiaries would be required to make an offer to purchase all of the outstanding 9% senior notes at a price equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase. The occurrence of specified events that would constitute a change of control will constitute a default under the senior credit facility. In addition, in the event of a change of control, the senior
credit facility will prohibit the purchase of the 9% senior notes and the distribution of cash by the Companys subsidiaries to the Company to fund the purchase of the 11% senior discount notes unless and until such time as the indebtedness
under the senior credit facility is repaid in full. In addition, the failure of the Companys subsidiaries to purchase the 9% senior notes after a change of control in accordance with the terms of the related indenture would result in a default
under the senior credit facility.

The inability to repay the indebtedness under the senior credit facility would also constitute an event
of default under the indentures for the 9% senior notes and the 11% senior discount notes, which could have materially adverse consequences to us and to the holders of the 11% senior discount notes and the 9% senior notes. In the event of a change
of control, we cannot provide assurance that we would have sufficient assets to satisfy all of our respective obligations under the senior credit facility and the indentures governing the 11% senior discount notes and the 9% senior notes. Our future
indebtedness may also require such indebtedness to be repurchased upon a change of control.

The senior credit facility currently
prohibits dividends to the Company to make payments under the 11% senior discount notes, including principal and interest payments.

The senior credit facility currently prohibits dividends to the Company unless they are for essential operating or tax expenses. Hence, when the Company is required to make any cash payment under the 11% senior discount notes, including
principal and interest payments, it will not be able to do so unless it generates its own cash flow or amends or refinances the senior credit facility with a new facility that does not contain comparable restrictions. We can not provide assurance
that sufficient cash flow will be generated or that any such amendment or refinancing will take place.

The 11% senior discount notes
are unsecured and structurally subordinated to our secured obligations and to the obligations of the our subsidiaries, including obligations of our subsidiaries under the senior credit facility and the 9% senior notes.

The indenture which governs the 11% senior discount notes permits the Company and its subsidiaries, as applicable, to incur additional indebtedness,
including under the senior credit facility. The 11% senior discount notes are unsecured and therefore do not have the benefit of any such collateral securing any future indebtedness of the Company. Accordingly, if an



24



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##### Table of Contents

event of default occurs under such future indebtedness, the senior secured lenders to the Company (if any) would have a prior right to our assets, to the
exclusion of the holders of the 11% senior discount notes. In such event, such assets would first be used to repay in full all amounts outstanding under such secured indebtedness, resulting in all or a portion of the Companys assets being
unavailable to satisfy the claims of the holders of the 11% senior discount notes and other unsecured indebtedness.

More importantly, the
11% senior discount notes are structurally subordinated to all indebtedness and other obligations of our subsidiaries. As a result of the foregoing, in the event of the bankruptcy, insolvency, liquidation or reorganization of any of our
subsidiaries, holders of the 11% senior discount notes may not be fully paid and may not be paid at all even though creditors of such subsidiaries may receive full payment for their claims.

We are subject to certain fraudulent transfer and conveyance statutes that may have adverse implications for the holders of the 11% senior discount
notes.

If, under relevant federal and state fraudulent transfer and conveyance statutes, in a bankruptcy or reorganization case or
a lawsuit by or on behalf of unpaid creditors, a court were to find that, at the time the 11% senior discount notes were issued, the Company:



| |  |  | was insolvent or was rendered insolvent by reason of the incurrence of the indebtedness constituting the 11% senior discount notes,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | was engaged, or about to engage, in a business or transaction for which its assets constituted unreasonably small capital,
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | intended to incur, or believed that it would incur, debts beyond its ability to pay as such debts matured, or
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | was a defendant in an action for money damages, or had a judgment for money damages docketed against it if, in either case, after final judgment the judgment is
unsatisfied, such court could avoid or subordinate the 11% senior discount notes to then existing and future indebtedness of the Company, and take other action detrimental to the holders of the 11% senior discount notes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law of the
jurisdiction that is being applied in any such proceeding. Generally, however, the Company would be considered insolvent if, at the time it incurs the indebtedness constituting the 11% senior discount notes, either:



| |  |  | the sum of its debts, including contingent liabilities, is greater than its assets, at a fair valuation; or
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the present fair saleable value of its assets is less than the amount required to pay the probable liability on its total existing debts and liabilities, including
contingent liabilities, as they become absolute and matured.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We cannot provide assurance as to what standards a court
would use to determine whether the Company was solvent at the relevant time, or whether, whatever standard was used, the 11% senior discount notes would not be avoided on another of the grounds described above.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None



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##### Table of Contents

|Item 2. | Properties
|------- | ----------

We lease all of our facilities, including our terminal and office facilities located
at each of the ports upon which our vessels call as well as our central sales and administrative offices and regional sales offices. The following table sets forth the locations, descriptions, and square footage of our significant facilities as of
December 24, 2006:



|                          |  |                                                                |  |                   |    
|------------------------- |  | -------------------------------------------------------------- |  | ----------------- | ---
|Location                  |  | Description of Facility                                        |  | Square Footage(1) |    
|Anchorage, Alaska         |  | Stevedoring building and various terminal and related property |  | 1,356,248         |    
|Atlanta, Georgia          |  | Regional sales office                                          |  | 911               |    
|Charlotte, North Carolina |  | Corporate headquarters                                         |  | 28,900            |    
|Chicago, Illinois         |  | Regional sales office                                          |  | 1,533             |    
|Dallas, Texas             |  | Operations center                                              |  | 42,511            |    
|Dedeo, Guam               |  | Terminal and related property                                  |  | 108,425           |    
|Dominican Republic        |  | Operations office                                              |  | 1,500             |    
|Dutch Harbor, Alaska      |  | Office and various terminal and related property               |  | 723,641           |    
|Elizabeth, New Jersey     |  | Terminal supervision and sales office                          |  | 4,994             |    
|Honolulu, Hawaii          |  | Terminal property                                              |  | 29,108            | (2)
|Houston, Texas            |  | Terminal supervision and sales office                          |  | 497               |    
|Jacksonville, Florida     |  | Terminal supervision and sales office                          |  | 4,628             |    
|Kenilworth, New Jersey    |  | Ocean shipping services office                                 |  | 12,110            |    
|Kodiak, Alaska            |  | Office and various terminal and related property               |  | 265,232           |    
|Long Beach, California    |  | Terminal supervision office                                    |  | 843,307           |    
|Oakland, California       |  | Office and various terminal and related property               |  | 279,131           |    
|Piti, Guam                |  | Office and various terminal and related property               |  | 24,837            |    
|Renton, Washington        |  | Regional sales office                                          |  | 9,010             |    
|San Juan, Puerto Rico     |  | Office and various terminal and related property               |  | 3,521,102         |    
|Tacoma, Washington        |  | Office and various terminal and related property               |  | 794,314           |    

---

|(1) | Square footage for marine terminal facilities excludes common use areas used by other terminal customers
and us.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | Excludes 1,647,952 square feet of terminal property which we have the option to use and pay for on an
as-needed basis.
|--- | ----------------------------------------------------------------------------------------------------------------------



|Item 3. | Legal Proceedings
|------- | -----------------

In the ordinary course of
business, from time to time, the Company and its subsidiaries become involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo, employees personal injury claims, and claims for loss or damage to the
person or property of third parties. The Company and its subsidiaries generally maintain insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company and its subsidiaries also,
from time to time, become involved in routine employment-related disputes and disputes with parties with which they have contracts.

There
are two actions currently pending before the Surface Transportation Board (STB) involving Horizon Lines. The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against Horizon Lines and Matson
Navigation Co. (Matson), seeks a ruling from the STB that Horizon Lines Guam shipping rates, which are based on published tariff rates, during 1996-1998 were unreasonable under the Interstate Commerce Commission
Termination Act of 1995 (ICCTA), and an order awarding reparations to Guam and its citizens. The STB is addressing this matter in three phases. During the first phase, which has been completed, the STB reviewed the allegations set forth
in the complaints that were filed by the Government of Guam and dismissed certain complaints while allowing certain other complaints to be addressed in phase two. In phase two, the STB was to determine the methodology by which it would determine
rate reasonableness under the ICCTA for the respondents rates during the relevant 1996-1998 time periods. By decision dated February 2, 2007, the STB has now addressed that issue and has adopted the following methodology:

First, the STB will conduct a hearing on the issue of whether the US/Guam trade is a market characterized by
Effective Competition. At this hearing the burden of proof will be on Horizon Lines and Matson. If the STB finds this market is sufficiently competitive to preclude a carrier from exercising significant market power, it will dismiss the
action brought by the Government of Guam.

Second, if the action is not dismissed, the STB will hold a further hearing at
which the Government of Guam will have the burden of proof to determine if the rates of Horizon Lines during 1996-1998 were reasonable using the STBs Constrained Market Pricing standards found in its rail rate
Guidelines.

Third, the STB ruled that it will apply the 7.5% zone of reasonableness statutory guidelines to the
base rates of Horizon Lines after 1996 to determine whether those rates are reasonable.



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##### Table of Contents

During the third phase, the STB will apply these standards to the rates in effect during 1996-1998. If
the STB determines that the rates charged by Horizon Lines during 1996-1998 were unreasonable, the STB will issue an additional ruling to determine the persons entitled to damages and in what amounts. No assurance can be given that the final
decision with respect to this matter will be favorable to us. An adverse ruling by the STB in this action could result in significant damages. We are unable to quantify the amount of these damages. The business of Horizon Lines that provided marine
container shipping to and from Guam during 1996-1998 was, at the time, part of a larger business. During 1996-1998, the Guam-related business of Horizon Lines was part of the business of Sea-Land Service, Inc. (Sea-Land), which included
transportation, logistics, and terminal services between and at ports in Asia, Guam, Hawaii and the U.S. west coast. Separate financial statements were not prepared for the operations of Sea-Land that related to marine container shipping to and from
Guam. Accordingly, we believe that the actual rates of return that were earned by Horizon Lines business with respect to marine container shipments to and from Guam during 1996-1998 cannot be determined. Consequently, the absence of such
actual rates of return would preclude the calculation of a reasonable rate of return based on the standard proposed by the Government of Guam in the pending action. Even if each of these matters were determined adversely to Horizon Lines, we are
unable at the present time to determine how many citizens of Guam, on whose behalf the pending action has been brought by the Government of Guam, paid such rates during 1996-1998, or the amounts of their related claims, because the requisite
discovery proceedings for that phase of the dispute have not yet begun. Apart from potential damages, an adverse ruling by the STB could affect Horizon Lines current and future rate structure for its Guam shipping by requiring it to reduce its
current base tariff rates and limit future rate increases to amounts determined to be within the zone of reasonableness as defined in the ICCTA, as determined in such ruling. An adverse STB decision could also affect the rates that
Horizon Lines would be permitted to charge on its other routes where rates must be reasonable under the ICCTA. We have not accrued a liability relating to this litigation because we do not believe that an unfavorable outcome is probable
nor can we reasonably estimate the Companys exposure in the event there is an unfavorable outcome.

The second action currently
pending before the STB involving Horizon Lines, brought by DHX, Inc. (DHX) in 1999 against Horizon Lines and Matson, challenges the reasonableness of certain rates and practices of Horizon Lines and Matson. DHX is a major freight
forwarder in the domestic Hawaii trade. Freight forwarders typically accept less than full container loads of cargo, consolidate these loads into full container loads, and offer the full container load to the ocean carriers. Some freight forwarders,
including DHX, also solicit full container loads from shippers. Among other things, DHX charged that Horizon Lines and Matson took actions that were intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for
the full container load business. DHX is seeking $11.0 million in damages. In addition to the award of damages, an adverse ruling could affect Horizon Lines current and future rate structure for its Hawaii shipping. An adverse STB decision
could also affect the rates that Horizon Lines would be permitted to charge on its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHXs complaint; (ii) found that Horizon Lines
met all of its tariff filing obligations; and (iii) reaffirmed the STBs earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which were repealed by the ICCTA, are no longer applicable to our business. On
June 13, 2005, the STB issued a decision that denied DHXs motion for reconsideration and denied the alternative request by DHX for clarification of the STBs December 13, 2004 decision. On August 5, 2005, DHX filed a Notice of Appeal with
the United States Court of Appeals for the Ninth Circuit challenging the STBs order dismissing its complaint. DHX filed an appellate brief on November 10, 2005. Horizon Lines submitted its response to the DHX brief on January 25, 2006, and all
parties are waiting for the court to schedule oral argument. No assurance can be given that the final decision with respect to this matter will be favorable to us. We have not accrued a liability relating to this litigation because we do not believe
than an unfavorable outcome is probable.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

There were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of fiscal 2006.



27



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##### Table of Contents

Part II

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company does not have an established trading market for its equity securities. The Company is a direct wholly owned subsidiary of the Parent

The Companys bank agreement, the indenture with respect to the 11% senior discount notes, and the indenture with respect to the 9% senior notes
restrict the ability of the Parent to make dividends and distributions in respect of their equity.

The Parents Common Stock is
traded on the New York Stock Exchange under the ticker symbol HRZ. As of February 5, 2007, there were approximately 7,868 holders of record of the Common Stock.



|               |  |      |       |     |   |               |  |   |     
|-------------- |  | ---- | ----- | --- | - | ------------- |  | - | ----
|2006           |  | High |       | Low |   | Cash Dividend
|First Quarter  |  | $    | 13.12 |     | $ | 12.13         |  | $ | 0.11
|Second Quarter |  | $    | 15.89 |     | $ | 12.54         |  | $ | 0.11
|Third Quarter  |  | $    | 16.57 |     | $ | 14.50         |  | $ | 0.11
|Fourth Quarter |  | $    | 30.27 |     | $ | 15.66         |  | $ | 0.11



|               |  |      |       |     |   |               |  |   |     
|-------------- |  | ---- | ----- | --- | - | ------------- |  | - | ----
|2005           |  | High |       | Low |   | Cash Dividend
|Fourth Quarter |  | $    | 12.99 |     | $ | 10.00         |  | $ | 0.11

During the fourth quarter of 2006, there were no purchases of shares of the Parents common
stock, by or on behalf of the Company or any affiliated purchaser as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934.



|Item 6. | Selected Financial Data
|------- | -----------------------

The five year selected
financial data below should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 33 of this Form 10-K, and our consolidated and combined financial
statements and the related notes appearing in Item 15 of this Form 10-K.

The Company was formed in connection with the issuance of
the 11% senior discount notes and has no independent operations. All combined and consolidated financial data for the period (or any portion thereof) from December 24, 2001 through February 26, 2003 reflect the combined company CSX Lines,
LLC and its wholly owned subsidiaries, CSX Lines of Puerto Rico, Inc., and the domestic liner business of SL Service, Inc. (formerly known as Sea-Land Service, Inc.), all of which were stand-alone wholly owned entities of CSX Corporation
(Predecessor B). All combined and consolidated financial data for the period (or any portion thereof) from February 27, 2003 through July 6, 2004 reflect Horizon Lines Holding on a consolidated basis (Predecessor
A). All combined and consolidated financial data for the periods (or any portion thereof) from July 7, 2004 through December 24, 2006 reflect the Company on a consolidated basis.

We have a 52- or 53-week fiscal year (every sixth or seventh year) that ends on the Sunday before the last Friday in December. The fiscal year ended
December 22, 2002, the twelve months ended December 21, 2003, and the years ended December 25, 2005 and December 24, 2006 each consisted of 52 weeks. The twelve months ended December 26, 2004 consisted of 53 weeks.

Certain prior period balances have been reclassified to conform with the current period presentation.



28



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##### Table of Contents

Selected Financial Data is as follows:



|                                |  |                              |           |   |                               |                |                                    |  |                                                 |                |  |   |                                                  |  |                                    |  |                                                      |         |  |   |                                                      |  |   |                             |  |  |  |   |         |   |  |   |        
|------------------------------- |  | ---------------------------- | --------- | - | ----------------------------- | -------------- | ---------------------------------- |  | ----------------------------------------------- | -------------- |  | - | ------------------------------------------------ |  | ---------------------------------- |  | ---------------------------------------------------- | ------- |  | - | ---------------------------------------------------- |  | - | --------------------------- |  |  |  | - | ------- | - |  | - | -------
|                                |  | H-Lines Finance Holding Corp |           |   |                               | Predecessor A  |                                    |  |                                                 | Predecessor B 
|                                |  | Year EndedDecember 24, 2006  |           |   | Year EndedDecember 25,2005(1) |                | Twelve MonthsEndedDecember 26,2004 |  | Period from July 7, 2004throughDecember 26,2004 |                |  |   | Period fromDecember 22,2003
through July 6, 2004 |  | Twelve MonthsendedDecember 21,2003 |  | Period fromFebruary 27,2003
through December 21,2003 |         |  |   | Period fromDecember 23,2002
through February 26,2003 |  |   | Year Ended December 22,2002
|                                |  | (in thousands)               |           |   |                               | (in thousands) |                                    |  |                                                 | (in thousands)
|Statement of Operations Data:   |  |                              |           |   |                               |                |                                    |  |                                                 |                |  |   |                                                  |  |                                    |  |                                                      |         |  |   |                                                      |  |   |                             |  |  |  |   |         |   |  |   |        
|Operating revenue               |  | $                            | 1,156,892 |   |                               | $              | 1,096,156                          |  | $                                               | 980,328        |  | $ | 481,898                                          |  |                                    |  | $                                                    | 498,430 |  | $ | 885,978                                              |  | $ | 747,567                     |  |  |  | $ | 138,411 |   |  | $ | 804,424
|Operating income (loss)         |  |                              | 99,620    |   |                               |                | 67,346                             |  |                                                 | 52,537         |  |   | 31,876                                           |  |                                    |  |                                                      | 20,661  |  |   | 38,213                                               |  |   | 40,734                      |  |  |  |   | (2,521  | ) |  |   | 37,408 
|Interest expense, net(1)        |  |                              | 48,558    |   |                               |                | 51,373                             |  |                                                 | 26,057         |  |   | 18,260                                           |  |                                    |  |                                                      | 7,797   |  |   | 13,417                                               |  |   | 12,996                      |  |  |  |   | 421     |   |  |   | 1,908  
|Income tax (benefit) expense(2) |  |                              | (25,248   | ) |                               |                | 1,560                              |  |                                                 | 10,064         |  |   | 5,168                                            |  |                                    |  |                                                      | 4,896   |  |   | 9,615                                                |  |   | 10,576                      |  |  |  |   | (961    | ) |  |   | 13,707 
|Net income (loss)               |  |                              | 75,916    |   |                               |                | 1,233                              |  |                                                 | 16,394         |  |   | 8,433                                            |  |                                    |  |                                                      | 7,961   |  |   | 15,113                                               |  |   | 17,162                      |  |  |  |   | (2,049  | ) |  |   | 21,751 



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|                                                                               |  |                              |                |                  |   |                  |  |                |         |                  |  |  |                |                  |  |  |  |   |        
|------------------------------------------------------------------------------ |  | ---------------------------- | -------------- | ---------------- | - | ---------------- |  | -------------- | ------- | ---------------- |  |  | -------------- | ---------------- |  |  |  | - | -------
|                                                                               |  | H-Lines Finance Holding Corp |                |                  |   | Predecessor A    |  |                |         | Predecessor B   
|                                                                               |  | December 24,2006             |                | December 25,2005 |   | December 26,2004 |  |                |         | December 21,2003 |  |  |                | December 22,2002
|                                                                               |  |                              | (in thousands) |                  |   |                  |  | (in thousands) |         |                  |  |  | (in thousands)
|Balance Sheet Data:                                                            |  |                              |                |                  |   |                  |  |                |         |                  |  |  |                |                  |  |  |  |   |        
|Cash and cash equivalents                                                      |  | $                            | 93,856         |                  | $ | 41,268           |  | $              | 56,349  |                  |  |  | $              | 41,811           |  |  |  | $ | 40,342 
|Working capital                                                                |  |                              | 97,965         |                  |   | 65,601           |  |                | 65,548  |                  |  |  |                | 46,192           |  |  |  |   | 25,301 
|Total assets                                                                   |  |                              | 944,624        |                  |   | 925,715          |  |                | 935,750 |                  |  |  |                | 492,554          |  |  |  |   | 321,129
|Long-term debt, including capital lease obligations, net of current portion(1) |  |                              | 503,850        |                  |   | 527,905          |  |                | 610,201 |                  |  |  |                | 165,417          |  |  |  |   |       
|Total debt, including capital lease obligations                                |  |                              | 510,788        |                  |   | 530,575          |  |                | 612,862 |                  |  |  |                | 165,570          |  |  |  |   |       
|Stockholders equity                                                           |  |                              | 205,909        |                  |   | 148,122          |  |                | 80,612  |                  |  |  |                | 96,860           |  |  |  |   | 113,985



|                                      |  |                              |         |   |                         |   |                |                                 |  |   |                                            |                |  |   |          |                                            |  |  |                                |   |         |                                             |  |   |          |   |                                             |   |          |                         |  |  |  |   |         |   |  |   |        |  
|------------------------------------- |  | ---------------------------- | ------- | - | ----------------------- | - | -------------- | ------------------------------- |  | - | ------------------------------------------ | -------------- |  | - | -------- | ------------------------------------------ |  |  | ------------------------------ | - | ------- | ------------------------------------------- |  | - | -------- | - | ------------------------------------------- | - | -------- | ----------------------- |  |  |  | - | ------- | - |  | - | ------ | -
|                                      |  | H-Lines Finance Holding Corp |         |   |                         |   | Predecessor A  |                                 |  |   |                                            | Predecessor B  | 
|                                      |  | Year EndedDec. 24, 2006      |         |   | Year EndedDec. 25, 2005 |   |                | Twelve MonthsEnded Dec. 26,2004 |  |   | Period fromJuly 7, 2004throughDec. 26,2004 |                |  |   |          | Period from Dec.
22,2003throughJuly 6,2004 |  |  | TwelveMonthsEnded Dec. 21,2003 |   |         | Period fromFeb. 27, 2003throughDec. 21,2003 |  |   |          |   | Period fromDec. 23, 2002throughFeb. 26,2003 |   |          | Year EndedDec. 22, 2002 | 
|                                      |  | (in thousands)               |         |   |                         |   | (in thousands) |                                 |  |   |                                            | (in thousands) | 
|Other Financial Data:                 |  |                              |         |   |                         |   |                |                                 |  |   |                                            |                |  |   |          |                                            |  |  |                                |   |         |                                             |  |   |          |   |                                             |   |          |                         |  |  |  |   |         |   |  |   |        |  
|EBITDA(3)                             |  | $                            | 164,101 |   |                         | $ | 121,073        |                                 |  | $ | 113,496                                    |                |  | $ | 63,612   |                                            |  |  |                                | $ | 50,334  |                                             |  | $ | 84,442   |   |                                             | $ | 80,757   |                         |  |  |  | $ | 3,685   |   |  | $ | 70,331 |  
|Capital expenditures(4)               |  |                              | 21,288  |   |                         |   | 41,234         |                                 |  |   | 32,889                                     |                |  |   | 11,000   |                                            |  |  |                                |   | 21,889  |                                             |  |   | 35,150   |   |                                             |   | 16,680   |                         |  |  |  |   | 18,470  |   |  |   | 19,298 |  
|Vessel drydocking payments            |  |                              | 16,815  |   |                         |   | 16,038         |                                 |  |   | 12,273                                     |                |  |   | 2,075    |                                            |  |  |                                |   | 10,198  |                                             |  |   | 16,536   |   |                                             |   | 12,029   |                         |  |  |  |   | 4,507   |   |  |   | 15,905 |  
|Cash flows provided by (used in):     |  |                              |         |   |                         |   |                |                                 |  |   |                                            |                |  |   |          |                                            |  |  |                                |   |         |                                             |  |   |          |   |                                             |   |          |                         |  |  |  |   |         |   |  |   |        |  
|Operating activities                  |  |                              | 116,964 |   |                         |   | 78,693         |                                 |  |   | 73,370                                     |                |  |   | 73,298   |                                            |  |  |                                |   | (2,928  | )                                           |  |   | 44,048   |   |                                             |   | 81,375   |                         |  |  |  |   | (37,327 | ) |  |   | (1,840 | )
|Investing activities(4)(5)            |  |                              | (19,341 | ) |                         |   | (38,817        | )                               |  |   | (694,563                                   | )              |  |   | (673,923 | )                                          |  |  |                                |   | (20,640 | )                                           |  |   | (350,666 | ) |                                             |   | (332,196 | )                       |  |  |  |   | (18,470 | ) |  |   | (4,905 | )
|Financing activities(5)               |  |                              | (45,035 | ) |                         |   | (54,957        | )                               |  |   | 656,887                                    |                |  |   | 656,974  |                                            |  |  |                                |   | (87     | )                                           |  |   | 305,687  |   |                                             |   | 289,720  |                         |  |  |  |   | 15,967  |   |  |   |       |  
|Ratio of earnings to fixed charges(6) |  |                              | 1.74x   |   |                         |   | 1.04x          |                                 |  |   | 1.50x                                      |                |  |   | 1.45x    |                                            |  |  |                                |   | 1.58x   |                                             |  |   | 1.61x    |   |                                             |   | 1.79x    |                         |  |  |  |   |        |   |  |   | 2.05x  |  

---

|(1) | During 2002 we incurred interest charges totaling $7.1 million on outstanding debt that had been borrowed in prior years to fund vessel construction costs of our Alaska D-7 vessels
and equipment purchases. To fund principal and interest payments on this debt we held investments from which we earned interest income. Interest income from these investments, as well as other investments, totaled $5.2 million during 2002. During
the year ended December 22, 2002, substantially all of the $84.8 million of Collateralized Extendible Notes and $68.5 million of other long-term debt and capital lease obligations of the combined company CSX Lines LLC and its wholly owned
subsidiaries, CSX Lines of Puerto Rico, Inc. and the domestic liner business of SL Service, Inc. were either repaid or assumed by CSX Corporation, resulting in no total debt outstanding as of December 22, 2002. During 2003 we incurred interest
charges totaling $8.9 million on the outstanding debt borrowed to finance the February 27, 2003 purchase transaction, as described in Managements Discussion and Analysis of Financial Condition and Results of Operations
beginning on page 33 of this Form 10-K. Debt outstanding as of December 21, 2003 was repaid in connection with the Acquisition-Related Transactions. The period from February 27, 2003 through December 21, 2003 and the period from
December 22, 2003 through July 6, 2004 include interest expense-preferred units of subsidiary of $4.5 million and $2.7 million, respectively. On July 7, 2004, as part of the Acquisition-Related Transactions, $250.0 million original
principal amount of 9% senior notes were issued, $250.0 million was borrowed under the term loan facility, $6.0 million was borrowed under the revolving credit facility and interest began to accrue thereon. On December 10, 2004, 11% senior
discount notes with an initial accreted value of $112.3 million were issued and the accreted value thereof began to increase. During the fourth quarter of 2005, utilizing proceeds from the Parents initial public offering, the Company
repurchased $53.0 million and $43.2 million of the 9% senior notes and 11% senior discount notes, respectively. During 2006, HL made a $1.3 million open market purchase of the Companys 11% notes and made a $25.0 million voluntary prepayment of
its term loan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During 2006, after evaluating the merits and requirements of the tonnage tax, the Parent elected the application of the tonnage tax instead of the federal corporate income tax on
income from its qualifying shipping activities. This 2006 election of the tonnage tax was made in connection with the filing of the Parents 2005 federal corporate income tax return and will also apply to all subsequent federal income tax
returns unless the Parent revokes this alternative tonnage tax treatment. The Parent does not intend to revoke its election of the tonnage tax in the foreseeable future. The Company is accounting for this election as a change in the tax status of
its qualifying shipping activities. The impact of this tonnage tax election resulted in a decrease in income tax expense of approximately $44.1 million during the year ended December 24, 2006. Approximately $11.4 million and $18.8 million
relate to the 2005 reduction in income tax expense and revaluation of the deferred taxes related to the application of tonnage tax to qualifying activities, respectively. The Companys effective tax rate for the year ended December 24,
2006 is (49.8%). Excluding the 2005 income tax impact and revaluation of the deferred taxes related to qualifying activities, the Companys effective tax rate for the year ended December 24, 2006 would be 9.8%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | EBITDA is defined as net income plus net interest expense, income taxes, depreciation and amortization. We believe that in addition to GAAP based financial information, the EBITDA
is a meaningful disclosure for the following reasons: (i) EBITDA is a component of the measure used by our board of directors and management team to evaluate our operating performance, (ii) the senior credit facility contains covenants
that require Horizon Lines Holding and its subsidiaries to maintain certain interest expense coverage and leverage ratios, which contain EBITDA as a component, and restrict upstream cash payments if certain ratios are not met, subject to certain
exclusions, and our management team uses EBITDA to monitor compliance with such covenants, (iii) EBITDA is a component of the measure used by our management team to make day-to-day operating decisions, (iv) EBITDA is a component of the
measure used by our management to facilitate internal comparisons to competitors results and the marine container shipping and logistics industry in general and (v) the payment of discretionary bonuses to certain members of our management
is contingent upon, among other things, the satisfaction by the Parent of certain targets, which contain EBITDA as a component. We acknowledge that there are limitations when using EBITDA. EBITDA is not a recognized term under GAAP and does not
purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow for managements
discretionary use, as it does not consider certain cash requirements such as tax payments and debt service requirements. Because all companies do not use identical calculations, this presentation of EBITDA may not be comparable to other similarly
titled measures of other companies. A reconciliation of net income (loss) to EBITDA is included below (in thousands):
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                              |  |                               |         |   |                         |               |                                |  |                                           |               |  |   |                                             |  |                                |  |                                              |        |  |   |                                               |  |   |                          |  |  |  |   |        |   |  |   |       
|----------------------------- |  | ----------------------------- | ------- | - | ----------------------- | ------------- | ------------------------------ |  | ----------------------------------------- | ------------- |  | - | ------------------------------------------- |  | ------------------------------ |  | -------------------------------------------- | ------ |  | - | --------------------------------------------- |  | - | ------------------------ |  |  |  | - | ------ | - |  | - | ------
|                              |  | H-Lines Finance Holding Corp. |         |   |                         | Predecessor A |                                |  |                                           | Predecessor B
|                              |  | Year EndedDec. 24, 2006       |         |   | Year EndedDec. 25, 2005 |               | TwelveMonthsEndedDec. 26, 2004 |  | Period fromJuly 7,2004throughDec. 26,2004 |               |  |   | Period fromDec. 22, 2003throughJuly 6, 2004 |  | TwelveMonthsEndedDec. 21, 2003 |  | Period fromFeb. 27, 2003through Dec. 21,2003 |        |  |   | Period fromDec. 23, 2002through Feb. 26, 2003 |  |   | Year Ended Dec. 22, 2002
|Net income (loss)             |  | $                             | 75,916  |   |                         | $             | 1,233                          |  | $                                         | 16,394        |  | $ | 8,433                                       |  |                                |  | $                                            | 7,961  |  | $ | 15,113                                        |  | $ | 17,162                   |  |  |  | $ | (2,049 | ) |  | $ | 21,751
|Interest expense, net         |  |                               | 48,558  |   |                         |               | 51,373                         |  |                                           | 26,057        |  |   | 18,260                                      |  |                                |  |                                              | 7,797  |  |   | 13,417                                        |  |   | 12,996                   |  |  |  |   | 421    |   |  |   | 1,908 
|Income tax expense (benefit)  |  |                               | (25,248 | ) |                         |               | 1,560                          |  |                                           | 10,064        |  |   | 5,168                                       |  |                                |  |                                              | 4,896  |  |   | 9,615                                         |  |   | 10,576                   |  |  |  |   | (961   | ) |  |   | 13,707
|Depreciation and amortization |  |                               | 64,875  |   |                         |               | 66,907                         |  |                                           | 61,431        |  |   | 31,751                                      |  |                                |  |                                              | 29,680 |  |   | 46,297                                        |  |   | 40,023                   |  |  |  |   | 6,274  |   |  |   | 32,965
|                              |  |                               |         |   |                         |               |                                |  |                                           |               |  |   |                                             |  |                                |  |                                              |        |  |   |                                               |  |   |                          |  |  |  |   |        |   |  |   |       
|EBITDA                        |  | $                             | 164,101 |   |                         | $             | 121,073                        |  | $                                         | 113,946       |  | $ | 63,612                                      |  |                                |  | $                                            | 50,334 |  | $ | 84,442                                        |  | $ | 80,757                   |  |  |  | $ | 3,685  |   |  | $ | 70,331
|                              |  |                               |         |   |                         |               |                                |  |                                           |               |  |   |                                             |  |                                |  |                                              |        |  |   |                                               |  |   |                          |  |  |  |   |        |   |  |   |       

---

|(4) | Includes the acquisition of the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of two vessels, for $25.2
million during the year ended December 25, 2005. Includes vessel purchases of $11.9 million, $7.7 million, $21.9 million, and $5.5 million for the period from December 22, 2003 through July 6, 2004, the period from July 7, 2004
through December 26, 2004, the period from February 27, 2003 through December 21, 2003, and the year ended December 22, 2002, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | During 2003, the amounts in cash flows provided by (used in) investing and financing activities primarily represent the accounting for the February 27, 2003 purchase
transaction. Investing activities related to the February 27, 2003 purchase transaction included the purchase price of $296.2 million and spending for transaction costs of $18.8 million. Financing activities related to the February 27,
2003 purchase transaction included the initial capitalization of $80.0 million and borrowings under the term loan facility of $175.0 million and the issuance of preferred and common units to CSX Corporation and its affiliates with an aggregate
original cost totaling $60.0 million. During 2004, the amounts in cash flows provided by (used in) investing primarily represent the accounting for the Acquisition-Related Transactions and financing activities primarily represent the accounting for
the Acquisition-Related Transactions and subsequent financing transactions. Investing activities related to the Acquisition-Related Transactions included the acquisition consideration of $663.3 million and spending for transaction costs. Financing
activities related to the Acquisition-Related Transactions included a capital contribution of $157.0 million, $250.0 million borrowed under the term loan facility, $6.0 million borrowed under the revolving credit facility, and the issuance of the 9%
senior notes in the aggregate original principal amount of $250.0 million. Subsequent financing transactions included the issuance of $160.0 million in aggregate original principal amount at maturity of 11% senior discount notes. Financing
activities during 2005 included the utilization of dividends received in connection with the Parents initial public offering, along with cash flows from operations, to redeem $53.0 million principal amount of the 9% senior notes, $43.2 million
of the 11% senior discount notes and to pay associated redemption premiums.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consist of interest expense,
including amortization of net discount or premium and financing costs, accretion of preferred stock, and the portion of operating rental expense (33%) which management believes is representative of the interest component of rent expense. For
the year from December 23, 2002 through February 26, 2003, earnings were insufficient to cover fixed charges by $3.0 million. The calculation of the ratio of earnings to fixed charges is noted below (in thousands):
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                   |  |                               |         |                         |   |                                |  |                                           |        |               |   |                                             |  |                                |  |                                              |        |  |   |                                               |  |   |                          |  |  |  |   |        |   |  |   |       
|---------------------------------- |  | ----------------------------- | ------- | ----------------------- | - | ------------------------------ |  | ----------------------------------------- | ------ | ------------- | - | ------------------------------------------- |  | ------------------------------ |  | -------------------------------------------- | ------ |  | - | --------------------------------------------- |  | - | ------------------------ |  |  |  | - | ------ | - |  | - | ------
|                                   |  | H-Lines Finance Holding Corp. |         |                         |   | Predecessor A                  |  |                                           |        | Predecessor B
|                                   |  | Year EndedDec. 24, 2006       |         | Year EndedDec. 25, 2005 |   | TwelveMonthsEndedDec. 26, 2004 |  | Period fromJuly 7,2004throughDec. 26,2004 |        |               |   | Period fromDec. 22, 2003throughJuly 6, 2004 |  | TwelveMonthsEndedDec. 21, 2003 |  | Period fromFeb. 27, 2003through Dec. 21,2003 |        |  |   | Period fromDec. 23, 2002through Feb. 26, 2003 |  |   | Year Ended Dec. 22, 2002
|Pretax income (loss)               |  | $                             | 50,668  |                         | $ | 2,793                          |  | $                                         | 26,458 |               | $ | 13,601                                      |  |                                |  | $                                            | 12,857 |  | $ | 24,728                                        |  | $ | 27,738                   |  |  |  | $ | (3,010 | ) |  | $ | 35,458
|Interest expense                   |  |                               | 51,328  |                         |   | 53,057                         |  |                                           | 26,363 |               |   | 18,488                                      |  |                                |  |                                              | 7,875  |  |   | 13,593                                        |  |   | 13,126                   |  |  |  |   | 467    |   |  |   | 7,133 
|Rentals                            |  |                               | 23,616  |                         |   | 24,530                         |  |                                           | 26,193 |               |   | 11,836                                      |  |                                |  |                                              | 14,357 |  |   | 26,662                                        |  |   | 22,113                   |  |  |  |   | 4,549  |   |  |   | 26,674
|                                   |  |                               |         |                         |   |                                |  |                                           |        |               |   |                                             |  |                                |  |                                              |        |  |   |                                               |  |   |                          |  |  |  |   |        |   |  |   |       
|Total fixed charges                |  | $                             | 74,944  |                         |   | 77,587                         |  |                                           | 79,014 |               |   | 30,324                                      |  |                                |  |                                              | 22,232 |  |   | 40,255                                        |  |   | 35,239                   |  |  |  |   | 5,016  |   |  |   | 33,807
|                                   |  |                               |         |                         |   |                                |  |                                           |        |               |   |                                             |  |                                |  |                                              |        |  |   |                                               |  |   |                          |  |  |  |   |        |   |  |   |       
|Pretax earnings plus fixed charges |  | $                             | 128,255 |                         | $ | 80,380                         |  | $                                         | 84,778 |               | $ | 43,925                                      |  |                                |  | $                                            | 35,089 |  | $ | 64,983                                        |  | $ | 62,977                   |  |  |  | $ | 2,006  |   |  | $ | 69,265
|Ratio of earnings to fixed charges |  |                               | 1.71 x  |                         |   | 1.04 x                         |  |                                           | 1.50 x |               |   | 1.45 x                                      |  |                                |  |                                              | 1.58 x |  |   | 1.61 x                                        |  |   | 1.79 x                   |  |  |  |   |       |   |  |   | 2.05 x



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with Selected
Consolidated and Combined Financial Data and our annual audited consolidated and combined financial statements and related notes thereto included elsewhere in this Form 10-K. The following discussion includes forward-looking statements that involve
certain risks and uncertainties. For additional information regarding forward looking statements, see the Safe Harbor Statement on page (i) of this Form 10-K.

Executive Overview



|                           |  |                            |           |   |                            |   |           |                                    |  |   |         |  
|-------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | --------- | ---------------------------------- |  | - | ------- | -
|                           |  | Year EndedDecember 24,2006 |           |   | Year EndedDecember 25,2005 |   |           | Twelve MonthsEndedDecember 26,2004 | 
|                           |  | ($ in thousands)           |          
|Operating revenue          |  | $                          | 1,156,892 |   |                            | $ | 1,096,156 |                                    |  | $ | 980,328 |  
|Operating expense          |  |                            | 1,057,272 |   |                            |   | 1,028,810 |                                    |  |   | 927,791 |  
|                           |  |                            |           |   |                            |   |           |                                    |  |   |         |  
|Operating income           |  | $                          | 99,620    |   |                            | $ | 67,346    |                                    |  | $ | 52,537  |  
|                           |  |                            |           |   |                            |   |           |                                    |  |   |         |  
|Operating ratio            |  |                            | 91.4      | % |                            |   | 93.9      | %                                  |  |   | 94.6    | %
|Revenue containers (units) |  |                            | 296,566   |   |                            |   | 307,895   |                                    |  |   | 308,435 |  

Operating revenue increased by $60.7 million or 5.5% for the year ended December 24, 2006
from the year ended December 25, 2005. This revenue growth is primarily attributable to rate improvements resulting from favorable changes in cargo mix, general rate increases, increased bunker fuel and intermodal fuel surcharges to help offset
increases in fuel costs, and revenue increases from non-transportation and other revenue services. This revenue increase is offset partially by lower container volumes primarily attributable to soft market conditions in Puerto Rico.

Operating expenses increased by $28.5 million or 2.8% for the year ended December 24, 2006 from the year ended December 25, 2005. The increase
in operating expenses is primarily due to increases in vessel fuel expense and rail and truck transportation costs as a result of increases in fuel prices, offset by a decrease in selling, general, and administrative expenses and other variable
operating expenses. The decline in selling, general, and administrative expenses is primarily due to lower stock based compensation charges, the elimination of the Castle Harlan management fee, and a decrease in variable operating costs as a result
of lower revenue container volumes shipped.

Operating revenue increased by $115.8 million or 11.8% for the year ended December 25,
2005 from the twelve months ended December 26, 2004. This revenue growth is primarily attributable to rate improvements resulting from favorable changes in cargo mix, general rate increases, increased bunker and intermodal fuel surcharges to
help offset significant increases in fuel costs, and revenue increases from non-transportation and other revenue services. This revenue increase is offset slightly by lower container volumes due to 53 weeks in the twelve months ended
December 26, 2004 compared to 52 weeks in the year ended December 25, 2005.

Operating expenses increased by $101.0 million or
10.9% for the year ended December 25, 2005 from the twelve months ended December 26, 2004. Factors contributing to the increase in operating expense include significant increases in vessel fuel expense and rail and truck transportation
costs as a result of increases in fuel prices, and higher depreciation and amortization costs due to the purchase price accounting step-up in basis of customer contracts and trademarks related to the consummation on July 7, 2004 of the
Acquisition-Related Transactions. The increase is also due to a $7.5 million charge related to the termination of the ongoing management services and related fee provisions of a management agreement with Castle Harlan, Inc. This termination was in
conjunction with the Parents initial public offering.

General

We believe that we are the nations leading Jones Act container shipping and integrated logistics company, accounting for approximately 36% of total U.S. marine container shipments from the continental U.S. to
Alaska, Puerto Rico and Hawaii, constituting the three non-contiguous Jones Act markets, and to Guam. Under the Jones Act, all vessels transporting cargo between U.S. ports must, subject to limited exceptions, be built in the U.S., registered under
the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. We operate the largest Jones Act containership fleet with 16 vessels and approximately 23,300
cargo containers. We provide comprehensive shipping and logistics services in our markets. We have long-term access to terminal facilities in each of our ports, operating our terminals in Alaska, Hawaii, and Puerto Rico and contracting for terminal
services in the six ports in the continental U.S. and in the ports in Guam, Hong Kong and Taiwan.



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History and Transactions

Our long operating history dates back to 1956, when Sea-Land pioneered the marine container shipping industry and established our business. In 1958, we introduced container shipping to the Puerto Rico market and in
1964 we pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing container shipping services between the U.S. west coast and Hawaii and Guam through our acquisition from an existing
carrier of all of its vessels and certain other assets that were already serving that market. Today, as the only Jones Act vessel operator with an integrated organization serving Alaska, Puerto Rico, and Hawaii, we are uniquely positioned to serve
our customers that require shipping and logistics services in more than one of these markets.

On February 27, 2003, Horizon Lines
Holding (which at the time was indirectly majority-owned by Carlyle-Horizon Partners, L.P.) acquired from CSX Corporation (CSX), which was the successor to Sea-Land, 84.5% of CSX Lines, LLC (Predecessor A), and 100% of CSX
Lines of Puerto Rico, Inc. (Predecessor Puerto Rico Entity), which together constitute our business today. This transaction is referred to in this Form 10-K as the February 27, 2003 purchase transaction. CSX Lines, LLC is now known
as Horizon Lines, LLC and CSX Lines of Puerto Rico, Inc. is now known as Horizon Lines of Puerto Rico, Inc.

Our Parents current
ownership and corporate structure relates to its acquisition of Horizon Lines Holding on July 7, 2004. The foregoing acquisition and related financing and other transactions, referred to in this Form 10-K collectively as the
Acquisition-Related Transactions, included a merger whereby Horizon Lines Holding became the Parents direct wholly-owned subsidiary. The Parent was formed at the direction of CHP IV, a private equity investment fund managed by
Castle Harlan, which provided a substantial portion of our equity financing and bridge financing in connection with the Acquisition-Related Transactions.

The consideration that was paid in the Acquisition-Related Transactions consisted of approximately $663.3 million in cash, net of purchase price adjustments, but including transaction costs. This amount was used to
repay certain indebtedness of Horizon Lines Holding and its subsidiaries, to pay the equity holders of Horizon Lines Holding for their equity interests in Horizon Lines Holding, and to pay certain other equity holders for their minority equity
interests in Horizon Lines, the principal operating subsidiary of Horizon Lines Holding.

On July 7, 2004, as part of the
Acquisition-Related Transactions, H-Lines Subcorp., a wholly-owned subsidiary of the Company, merged with and into Horizon Lines Holding, with the latter entity as the survivor of such merger. As a result, Horizon Lines Holding became a wholly-owned
subsidiary of the Company.

On December 6, 2004, the Company was formed by the Parent as a vehicle to issue the 11% senior discount
notes and is a wholly-owned subsidiary of the Parent. At that time, the Parent contributed all of its shares of the capital stock of Horizon Lines Holding to the Company. As a result, HLHC became a direct wholly-owned subsidiary of the Company and
an indirect wholly-owned subsidiary of the Parent.

On September 30, 2005, the Parent issued and sold 12,500,000 shares of its common
stock in the initial public offering, at a price of $10.00 per share, less the underwriters discount of 7% per share. On October 14, 2005, the Parent issued and sold additional shares of its common stock to the underwriters of its
initial public offering at a price of $10.00 per share, representing the initial public offering price to the public, less the underwriters discount of 7% per share. These 1,875,000 shares were issued and sold pursuant to the exercise in
full by the underwriters of their option to purchase additional shares from the Parent granted to them with respect to the initial public offering. The Parent used the proceeds to repurchase certain indebtedness, pay related debt redemption
premiums, redeem its outstanding preferred stock, and pay related transaction expenses. In conjunction with these offerings, CHP IV and other affiliated private equity investment funds managed by Castle Harlan divested their ownership in the Parent.

Basis of Presentation

The Company was
formed on December 6, 2004, in connection with the issuance of the 11% senior discount notes. Consequently, the accompanying consolidated financial statements include the consolidated accounts of the Company as of December 24, 2006,
December 25, 2005 and December 26, 2004 and for the years ended December 24, 2006, December 25, 2005 and for the period from December 6, 2004 through December 26,2004 and of Horizon Lines Holding for the periods
from December 22, 2003 through December 5, 2004.

The financial statements for periods subsequent to February 26, 2003 but
prior to July 7, 2004 have been prepared using Horizon Lines Holdings basis in the assets and liabilities acquired in the February 27, 2003 purchase transaction, determined by applying the purchase method of accounting to such
transaction. The financial statements for periods subsequent to July 6, 2004 have been prepared using the basis of the Company in the assets and



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liabilities deemed acquired by the Parent in the Acquisition-Related Transactions, determined by applying the purchase method of accounting to such
transactions.

The information for the twelve months ended December 26, 2004 discussed below represents the combined financial
information for the appropriate pre-acquisition and post-acquisition periods to present more meaningful information on a comparative annual basis.

Certain prior period balances have been reclassified to conform with the current period presentation.

Fiscal Year

We have a 52- or 53-week (every sixth or seventh year) fiscal year that ends on the Sunday before the last Friday in December. The fiscal years ended
December 24, 2006 and December 25, 2005 each consisted of 52 weeks. The twelve months ended December 26, 2004 consisted of 53 weeks.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions in the reported amounts of revenues and expenses during the reporting period and in reporting the amounts of assets and liabilities, and disclosures of contingent
assets and liabilities at the date of our financial statements. Since many of these estimates and assumptions are based on future events which cannot be determined with certainty, the actual results could differ from these estimates.

We believe that the application of our critical accounting policies, and the estimates and assumptions inherent in those policies, are reasonable. These
accounting policies and estimates are constantly re-evaluated and adjustments are made when facts or circumstances dictate a change. Historically, we have found the application of accounting policies to be appropriate and actual results have not
differed materially from those determined using necessary estimates.

Revenue Recognition

We account for transportation revenue based upon method two under Emerging Issues Task Force No. 91-9 Revenue and Expense Recognition for
Freight Services in Process. Under this method we record transportation revenue for the cargo when shipped and an expense accrual for the corresponding costs to complete delivery when the cargo first sails from its point of origin. We believe
that this method of revenue recognition does not result in a material difference in reported net income on an annual or quarterly basis as compared to recording transportation revenue between accounting periods based upon the relative transit time
within each respective period with expenses recognized as incurred.

Terminal and other service revenue and related costs of sales are
recognized as services are performed.

Allowance for Doubtful Accounts and Revenue Adjustments

The Company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable. The Company monitors its
collection risk on an ongoing basis through the use of credit reporting agencies. The Company does not require collateral from its trade customers.

In addition, the Company maintains an allowance for revenue adjustments consisting of amounts reserved for billing rate changes that are not captured upon load initiation. These adjustments generally arise: (1) when the sales
department contemporaneously grants small rate changes (spot quotes) to customers that differ from the standard rates in the system; (2) when freight requires dimensionalization or is reweighed resulting in a different required
rate; (3) when billing errors occur; and (4) when data entry errors occur. When appropriate, permanent rate changes are initiated and reflected in the system. These revenue adjustments are recorded as a reduction to revenue.

Casualty Claims

We purchase insurance coverage for a
portion of our exposure related to certain employee injuries (workers compensation and compensation under the Longshore and Harbor Workers Compensation Act), vehicular and vessel collision, accidents and personal injury and cargo claims.
Most insurance arrangements include a level of self-insurance (self-



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retention or deductible) applicable to each claim or vessel voyage, but provide an umbrella policy to limit our exposure to catastrophic claim costs. The
amounts of self-insurance coverage change from time to time. Our current insurance coverage specifies that the self-insured limit on claims ranges from $2,500 to $1,000,000. Our safety and claims personnel work directly with representatives from our
insurance companies to continually update the anticipated residual exposure for each claim. In establishing accruals and reserves for claims and insurance expenses, we evaluate and monitor each claim individually, and we use factors such as
historical experience, known trends and third-party estimates to determine the appropriate reserves for potential liability. Changes in the perceived severity of previously reported claims, significant changes in medical costs and legislative
changes affecting the administration of our plans could significantly impact the determination of appropriate reserves.

Goodwill, Purchase Costs and
Other Identifiable Intangible Assets

Under Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill
and Other Intangible Assets, previously recorded goodwill and other intangible assets with indefinite lives are not amortized but are subject to annual undiscounted cash flow impairment tests. If there is an apparent impairment, a new fair
value of the reporting unit would be determined. If the new fair value is less than the carrying amount, an impairment loss would be recognized.

Customer contracts and trademarks were valued on July 7, 2004, as part of the Acquisition-Related Transactions, by an independent third-party valuation company using the income appraisal methodology. The income appraisal methodology
includes a determination of the present value of future monetary benefits to be derived from the anticipated income, or ownership, of the subject asset. The value of our customer contracts includes the value expected to be realized from existing
contracts as well as from expected renewals of such contracts and is calculated using unweighted and weighted total undiscounted cash flows as part of the income appraisal methodology. The value of our trademarks and service marks is based on
various factors including the strength of the trade or service name in terms of recognition and generation of pricing premiums and enhanced margins. We amortize customer contracts and trademarks and service marks on a straight-line method over the
estimated useful life of nine to fifteen years. We evaluate these assets annually for potential impairment in accordance with SFAS No. 142.

Shipping Rates

We publish tariffs with fixed rates for all three of our Jones Act trade routes. These rates are subject to
regulation by the Surface Transportation Board (STB). However, in the case of our Puerto Rico and Alaska trade routes, we primarily ship containers on the basis of confidential negotiated transportation service contracts that are not
subject to rate regulation by the STB.

Vessel Drydocking

Under U.S. Coast Guard Rules, administered through the American Bureau of Shippings alternative compliance program, all vessels must meet specified seaworthiness standards to remain in service carrying cargo
between U.S. marine terminals. Vessels must undergo regular inspection, monitoring and maintenance, referred to as drydocking, to maintain the required operating certificates. These drydockings generally occur every two and a half years, or twice
every five years. Because drydockings enable the vessel to continue operating in compliance with U.S. Coast Guard requirements, the costs of these scheduled drydockings are customarily deferred and amortized over a 30-month period beginning with the
accounting period following the vessels release from drydock.

We also take advantage of vessel drydockings to perform normal repair
and maintenance procedures on our vessels. These routine vessel maintenance and repair procedures are expensed as incurred. In addition, we will occasionally, during a vessel drydocking, replace vessel machinery or equipment and perform procedures
that materially enhance capabilities of a vessel. In these circumstances, the expenditures are capitalized and depreciated over the estimated useful lives.

Deferred Tax Assets and Liabilities

Deferred tax assets represent expenses recognized for financial reporting purposes that
may result in tax deductions in the future and deferred tax liabilities represent expense recognized for tax purposes that may result in financial reporting expenses in the future. Certain judgments, assumptions and estimates may affect the carrying
value of the valuation allowance and income tax expense in the consolidated financial statements. We record an income tax valuation allowance when the realization of certain deferred tax assets, net operating losses and capital loss carryforwards is
not likely. In conjunction with the election of tonnage tax, we revalued our deferred taxes to accurately reflect the rates at which we expect such items to reverse in future periods.



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Stock Options

On September 16, 2005, the Board of Directors of the Parent authorized the issuance of up to an aggregate of 3,088,668 shares of common stock. The Company early adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R) in the fourth quarter of fiscal year 2005. Because the participants in this plan are generally limited to employees of the Company, and therefore options were granted for services to be provided to the Company, the stock
based compensation expense related to these options is being recorded on the Companys financial statements. SFAS 123R covers a wide range of share-based compensation arrangements including stock options, restricted share plans, and employee
stock purchase plans.

In applying SFAS 123R, the value of each equity-based award is estimated on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes model takes into account volatility in the price of the Parents stock, the risk-free interest rate, the estimated life of the equity-based award, the closing market price of the
Parents stock and the exercise price. Due to the lack of trading activity since the Parents stock became publicly traded, the estimates of stock price volatility on the average of (i) the Parents historical stock price over
the period in which it has been publicly traded and (ii) historical volatility of similar entities commensurate with the expected term of the equity-based award; however, this estimate is neither predictive nor indicative of the future
performance of the Parents. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. In addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those options expected to vest.

Property and Equipment

We capitalize property and equipment as permitted or required by applicable accounting standards, including replacements and improvements when costs
incurred for those purposes extend the useful life of the asset. We charge maintenance and repairs to expense as incurred. Depreciation on capital assets is computed using the straight-line method and ranges from 3 to 40 years. Our management makes
assumptions regarding future conditions in determining estimated useful lives and potential salvage values. These assumptions impact the amount of depreciation expense recognized in the period and any gain or loss once the asset is disposed.

We evaluate each of our long-lived assets for impairment using undiscounted future cash flows relating to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover the carrying amount of an asset, the asset is written down to its fair
value.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (the FASB) issued SFAS 158. SFAS 158 does not change how pensions and other postretirement benefits are accounted for and reported in the income statement. The required



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transition method of adoption is a prospective application and recognizing the funded status of a companys benefit plans will require an offsetting
adjustment to the ending balance of accumulated other comprehensive income in shareholders equity. As discussed above, during the fourth quarter of 2006, the Company recorded a decrease to accumulated other comprehensive income of $1.0 million to
reflect the underfunded status of it post-retirement and pension plans.

In September 2006, the FASB issued Statement No. 157
(SFAS 157), Fair Value Measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting
principles. As a result of SFAS 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures
about those measures. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS 157 will have a material impact on its statement of operations.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect
adjustment recorded to the beginning balance of retained earnings. The Company is in the process of determining the financial impact the adoption of FIN 48 will have on its consolidated statement of operations or financial position.

Results of Operations

Operating Revenue Overview

We derive our revenue primarily from providing comprehensive shipping and logistics services to and from the continental U.S. and
Alaska, Puerto Rico, Hawaii and Guam. We charge our customers on a per load basis and price our services based on the length of inland and ocean cargo transportation hauls, type of cargo and other requirements, such as shipment timing and type of
container. In addition, we assess fuel surcharges on a basis consistent with industry practice and at times may incorporate these surcharges into our basic transportation rates. At times, there is a timing disparity between volatility in our fuel
costs and related adjustments to our fuel surcharges (or the incorporation of adjusted fuel surcharges into our base transportation rates) that may result in insufficient recovery of our fuel costs during sharp hikes in the price of fuel and
recoveries in excess of our fuel costs when fuel prices level off or decline.

Over 90% of our revenues are generated from our shipping and
logistics services in markets where the marine trade is subject to the Jones Act or other U.S. maritime laws. The balance of our revenue is derived from (i) vessel loading and unloading services that we provide for vessel operators at our
terminals, (ii) agency services that we provide for third-party shippers lacking administrative presences in our markets, (iii) vessel space charter income from third-parties in trade lanes not subject to the Jones Act,
(iv) management of vessels owned by third-parties, (v) trucking and warehousing services for third-parties, and (vi) other non-transportation services.

As used in this Form 10-K, the term revenue containers connotes containers that are transported for a charge (as opposed to empty containers).

Operating Expense Overview

Our operating expenses consist primarily of marine operating
costs, inland transportation costs, vessel operating costs, land costs and rolling stock rent. Our marine operating costs consist of stevedoring, port charges, wharfage and various other costs to secure vessels at the port and to load and unload
containers to and from vessels. Our inland transportation costs consist primarily of the costs to move containers to and from the port via rail, truck or barge. Our vessel operating costs consist primarily of crew payroll costs and benefits, vessel
fuel costs, vessel maintenance costs, space charter costs, vessel insurance costs and vessel rent. We view our vessel fuel costs as subject to potential fluctuation as a result of changes in unit prices in the fuel market. Our vessel fuel
consumption has been generally constant for corresponding years or corresponding interim periods, since the number of active vessels, voyages and destinations have generally been the same for corresponding years or corresponding interim periods. Our
land costs consist primarily of maintenance, yard and gate operations, warehousing operations and terminal overhead in the terminals in which we operate. Rolling stock rent consists primarily of rent for street tractors, yard equipment, chassis,
gensets and various dry and refrigerated containers.



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Year Ended December 24, 2006 Compared to Year Ended December 25, 2005



|                                    |  |                            |           |   |                            |   |           |         |  |       |   
|----------------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | --------- | ------- |  | ----- | --
|                                    |  | Year EndedDecember 24,2006 |           |   | Year EndedDecember 25,2005 |   |           | %Change | 
|                                    |  | (in thousands)             |          
|Operating revenue                   |  | $                          | 1,156,892 |   |                            | $ | 1,096,156 |         |  | 5.5   | % 
|Operating expense:                  |  |                            |           |   |                            |   |           |         |  |       |   
|Vessel                              |  |                            | 319,581   |   |                            |   | 300,324   |         |  | 6.4   | % 
|Marine                              |  |                            | 192,242   |   |                            |   | 195,279   |         |  | (1.6  | )%
|Inland                              |  |                            | 201,963   |   |                            |   | 190,205   |         |  | 6.2   | % 
|Land                                |  |                            | 138,193   |   |                            |   | 138,320   |         |  | (0.1  | )%
|Rolling stock rent                  |  |                            | 44,332    |   |                            |   | 43,179    |         |  | 2.7   | % 
|                                    |  |                            |           |   |                            |   |           |         |  |       |   
|Operating expense                   |  |                            | 896,311   |   |                            |   | 867,307   |         |  | 3.3   | % 
|                                    |  |                            |           |   |                            |   |           |         |  |       |   
|Depreciation and amortization       |  |                            | 50,223    |   |                            |   | 51,141    |         |  | (1.8  | )%
|Amortization of vessel drydocking   |  |                            | 14,652    |   |                            |   | 15,766    |         |  | (7.1  | )%
|Selling, general and administrative |  |                            | 94,753    |   |                            |   | 93,947    |         |  | 0.9   | % 
|Miscellaneous expense, net          |  |                            | 1,333     |   |                            |   | 649       |         |  | 105.4 | % 
|                                    |  |                            |           |   |                            |   |           |         |  |       |   
|Total operating expenses            |  |                            | 1,057,272 |   |                            |   | 1,028,810 |         |  | 2.8   | % 
|                                    |  |                            |           |   |                            |   |           |         |  |       |   
|Operating income                    |  | $                          | 99,620    |   |                            | $ | 67,346    |         |  | 47.9  | % 
|                                    |  |                            |           |   |                            |   |           |         |  |       |   
|Operating ratio                     |  |                            | 91.4      | % |                            |   | 93.9      | %       |  | 2.5   | % 
|Revenue containers (units)          |  |                            | 296,566   |   |                            |   | 307,895   |         |  | (3.7  | )%

Operating Revenue. Operating revenue increased to $1,156.9 million for the year ended
December 24, 2006 from $1,096.2 million for the year ended December 25, 2005, an increase of $60.7 million, or 5.5%. This revenue increase can be attributed to the following factors (in thousands):



|                                                                                    |  |   |         |  
|----------------------------------------------------------------------------------- |  | - | ------- | -
|Revenue container volume decrease                                                   |  | $ | (35,650 | )
|More favorable cargo mix and general rate increases                                 |  |   | 44,442  |  
|Bunker and intermodal fuel surcharges included in rates to offset rising fuel costs |  |   | 48,639  |  
|Growth in other non-transportation services                                         |  |   | 3,305   |  
|                                                                                    |  |   |         |  
|Total operating revenue increase                                                    |  | $ | 60,736  |  
|                                                                                    |  |   |         |  

The decreased revenue due to revenue container volume declines for the year ended
December 24, 2006 is primarily due to overall soft market conditions in Puerto Rico as well as a strategic shift away from lower margin automobile cargo to more refrigerated cargo and other higher margin freight. The temporary government
shutdown in Puerto Rico and uncertainty surrounding tax reform contributed to the continued soft market conditions. This revenue container volume decrease is offset by higher margin cargo mix in addition to general rate increases. Bunker and
intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 12% of total revenue in the year ended December 24, 2006 and approximately 8% of total revenue in the year ended December 25, 2005.
We increased our bunker and intermodal fuel surcharges several times throughout 2005 and 2006, as a result of significant increases in the cost of fuel for our vessels and as a result of fuel increases passed on to us by our truck, rail, and barge
carriers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into the base transportation rates that we charge. The growth in other non-transportation services is primarily due
to increases in terminal services provided to third parties, offset slightly by a decrease in equipment rental income.



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Operating Expense. Operating expense increased to $896.3 million for the year ended
December 24, 2006 from $867.3 million for the year ended December 25, 2005, an increase of $29.0 million or 3.3%. The increase in operating expense primarily reflects the effect of rising fuel prices, and an increase in rolling stock rent,
offset by lower expenses associated with lower container volumes. Vessel expense, which is not primarily driven by revenue container volume, increased to $319.6 million for the year ended December 24, 2006 from $300.3 million for the year ended
December 25, 2005, an increase of $19.3 million or 6.4%. This $19.3 million increase can be attributed to the following factors (in thousands):



|                                                          |  |   |        |  
|--------------------------------------------------------- |  | - | ------ | -
|Increased vessel fuel costs                               |  | $ | 27,124 |  
|Reduction of vessel lease expense due to vessel purchases |  |   | (4,567 | )
|Labor and other vessel operating decreases                |  |   | (2,214 | )
|Decrease in construction differential subsidy             |  |   | (1,086 | )
|                                                          |  |   |        |  
|Total vessel expense increase                             |  | $ | 19,257 |  
|                                                          |  |   |        |  

The $27.1 million increase in fuel expense is comprised of an increase of $32.1 million due to a
27.7% increase in fuel prices, offset by a decrease of $5.0 million due to lower fuel consumption. The decrease in vessel lease expense is due to the purchase of the Horizon Enterprise and the Horizon Pacific in September 2005, offset by lease
expense incurred during 2006 for the Horizon Hunter. The decrease in vessel labor and other operating expenses is primarily due to operating one less vessel in Puerto Rico during most of 2006.

Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to load and unload containers. The types of costs included
in marine expense are stevedoring and benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expense decreased to $192.2 million for the year ended December 24, 2006 from $195.3 million
for the year ended December 25, 2005, a decrease of $3.0 million or 1.6%. This decrease in marine expenses can be attributed to a 3.7% decrease in total revenue container volume period over period, offset by contractual labor increases.

Inland expense increased to $202.0 million for the year ended December 24, 2006 from $190.2 million for the year ended
December 25, 2005, an increase of $11.8 million or 6.2%. Approximately $7.6 million of this increase is due to higher fuel costs, as rail, truck, and barge carriers have substantially increased their fuel surcharges period over period. The
remaining increase is due to rate increases offset by lower volumes.

Land expense is comprised of the costs included within the terminal
for the handling, maintenance and storage of containers, including yard operations, gate operations, maintenance, warehouse and terminal overhead. Land expense was flat for the year ended December 24, 2006 compared to the year ended
December 25, 2005.



|                   |  |                            |         |                            |   |          |  |      |   
|------------------ |  | -------------------------- | ------- | -------------------------- | - | -------- |  | ---- | --
|                   |  | Year EndedDecember 24,2006 |         | Year EndedDecember 25,2005 |   | % Change | 
|                   |  | (in thousands)             |         |                            |  
|Land expense:      |  |                            |         |                            |   |          |  |      |   
|Maintenance        |  | $                          | 54,107  |                            | $ | 54,343   |  | (0.4 | )%
|Terminal overhead  |  |                            | 49,316  |                            |   | 48,027   |  | 2.7  | % 
|Yard and gate      |  |                            | 26,649  |                            |   | 27,397   |  | (2.7 | )%
|Warehouse          |  |                            | 8,121   |                            |   | 8,553    |  | (5.1 | )%
|                   |  |                            |         |                            |   |          |  |      |   
|Total land expense |  | $                          | 138,193 |                            | $ | 138,320  |  | (0.1 | )%
|                   |  |                            |         |                            |   |          |  |      |   

Non-vessel related maintenance expenses decreased primarily due to lower maintenance expenses
associated with the new refrigerated container equipment added to our fleet during 2005 and other new container equipment added to our fleet in 2006. This decrease is partially offset by an increase of $1.6 million in fuel costs. Terminal overhead
increased primarily due to higher utility expenses, labor related expenses and higher insurance costs. Yard and gate expense is comprised of the costs associated with moving cargo into and out of the terminal facility and the costs associated with
the storage of equipment and revenue loads in the terminal facility. Yard and gate expenses decreased primarily due to decreased revenue container volumes, offset slightly by a $0.3 million increase in fuel costs.



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|                                    |  |                            |        |                            |   |          |  |       |   
|----------------------------------- |  | -------------------------- | ------ | -------------------------- | - | -------- |  | ----- | --
|                                    |  | Year EndedDecember 24,2006 |        | Year EndedDecember 25,2005 |   | % Change | 
|                                    |  | (in thousands)             |       
|Depreciation and amortization:      |  |                            |        |                            |   |          |  |       |   
|Depreciationowned vessels          |  | $                          | 10,893 |                            | $ | 9,303    |  | 17.1  | % 
|Depreciation and amortizationother |  |                            | 19,783 |                            |   | 22,277   |  | (11.2 | )%
|Amortization of intangible assets   |  |                            | 19,547 |                            |   | 19,561   |  | (0.1  | )%
|                                    |  |                            |        |                            |   |          |  |       |   
|Total depreciation and amortization |  | $                          | 50,223 |                            | $ | 51,141   |  | (1.8  | )%
|                                    |  |                            |        |                            |   |          |  |       |   
|Amortization of vessel drydocking   |  | $                          | 14,652 |                            | $ | 15,766   |  | (7.1  | )%
|                                    |  |                            |        |                            |   |          |  |       |   

Depreciation and Amortization. Depreciation and amortization costs decreased to $50.2
million for the year ended December 24, 2006 from $51.1 million for the year ended December 25, 2005, a decrease of $0.9 million or 1.8%. Depreciation of owned vessels increased by $1.6 million due to the acquisition of the rights and
beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific in the third quarter of fiscal year 2005. The $2.5 million decrease in depreciation
and amortization-other is primarily due to a decrease in depreciation of leasehold improvements and containers. The decrease in leasehold improvements is due to the write-off of certain leasehold improvements made prior to the acquisition of the
rights and beneficial interests in the aforementioned trusts in September 2005.

Amortization of Vessel
Drydocking. Amortization of vessel drydocking decreased to $14.7 million for the year ended December 24, 2006 compared to $15.8 million for the year ended December 25, 2005, a decrease of $1.1 million or 7.1%. The decrease is
primarily related to an increased number of drydockings in 2004 and 2005 and to lower overall costs on recent drydockings.

Selling,
General and Administrative. Selling, general and administrative costs increased to $94.8 million for the year ended December 24, 2006 from $93.9 million for the year ended December 25, 2005, an increase of $0.8 million or 0.9%.
This increase is comprised of a $4.2 million increase in professional fees and a $4.8 million increase in salaries and related expenses, offset by a $9.7 million decrease in management fees. The professional fees increase is primarily due to
consulting related professional fees, and an increase in audit and legal fees. The management fee expenses related to the previous management services and related fee provisions of a management agreement with Castle Harlan. Such management agreement
was terminated in conjunction with the Parents initial public offering in September 2005.

Miscellaneous Expense,
Net. Miscellaneous expense increased to $1.3 million for the year ended December 24, 2006 from $0.6 million for the year ended December 25, 2005, an increase of $0.7 million or 105.4%. This increase is primarily a result of
recognized losses on the retirement of equipment during 2006 and an increase in bad debt expense.

Interest Expense,
Net. Interest expense, net decreased to $48.6 million for the year ended December 24, 2006 from $51.4 million for the year ended December 25, 2005, a decrease of $2.8 million or 5.4%. This decrease is comprised of a $7.1 million
decrease attributable to the redemption of $53.0 million of the principal amount of the 9% senior notes and $56.0 million principal amount of the 11% senior discount notes utilizing proceeds from the Parents initial public offering in
September 2005 and a $1.1 million increase in interest income related to higher cash balances and higher interest rates earned on the Companys cash balances during 2006 compared to 2005. The decrease is offset by a $4.4 million increase in
interest expense under our senior credit facility due to a 195 basis point increase in interest rates during 2006 as compared to 2005 and a $0.4 million increase in interest expense related to the notes issued by the owner trustees for the purchase
of the Horizon Enterprise and the Horizon Pacific.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt
was $0.6 million for the year ended December 24, 2006 compared to $13.2 million during the year ended December 25, 2005, a decrease of 12.6 million or 95.5%. The 2006 loss on extinguishment is due to the write off of deferred finance
fees associated with the $25.0 million voluntary prepayment of our term loan. The 2005 loss on extinguishment is primarily due to redemption premiums and the write-off of deferred financing costs associated with the early retirement of a portion of
our 9% senior notes and 11% senior discount notes that occurred during 2005.

Income Tax Expense. Income tax (benefit) expense
was ($25.2) million in 2006 and $1.6 million in 2005, which represent effective tax rates of (49.8%) and 56.9%, respectively. During 2006, after evaluating the merits and requirements of the tonnage tax, the Company elected the application of
the tonnage tax instead of the federal corporate income tax on income from its qualifying shipping activities. This 2006 election of the tonnage tax was made in connection with the filing of the Companys 2005 federal corporate income tax
return and will also apply to all subsequent federal income tax returns



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unless the Company revokes this alternative tonnage tax treatment. The Company does not intend to revoke its election of the tonnage tax in the foreseeable
future. The Company is accounting for this election as a change in the tax status of its qualifying shipping activities. The impact of this tonnage tax election resulted in a decrease in income tax expense of approximately $44.1 million during the
year ended December 24, 2006. Approximately $11.4 million and $18.8 million relate to the 2005 reduction in income tax expense and revaluation of the deferred taxes related to the application of tonnage tax to qualifying activities,
respectively. Excluding the 2005 reduction in income tax expense and revaluation of the deferred taxes related to qualifying activities, the Companys effective tax rate for the year ended December 24, 2006 would be 9.8%. Retroactively
applying the tonnage tax to the year ended December 25, 2005 would result in a 2005 effective tax rate of (353.0%). The differences between the federal and state statutory tax rates and the overall effective tax rate for the year ended
December 25, 2005 is related primarily to permanent differences resulting from stock-based compensation.

Year Ended December 25, 2005
Compared with Twelve Months Ended December 26, 2004



|                                    |  |                            |           |   |                                    |   |         |          |  |       |   
|----------------------------------- |  | -------------------------- | --------- | - | ---------------------------------- | - | ------- | -------- |  | ----- | --
|                                    |  | Year EndedDecember 25,2005 |           |   | Twelve MonthsEndedDecember 26,2004 |   |         | % Change | 
|                                    |  | (in thousands)             |           |   |                                    |  
|Operating revenue                   |  | $                          | 1,096,156 |   |                                    | $ | 980,328 |          |  | 11.8  | % 
|Operating expense:                  |  |                            |           |   |                                    |   |         |          |  |       |   
|Vessel                              |  |                            | 300,324   |   |                                    |   | 247,314 |          |  | 21.4  | % 
|Marine                              |  |                            | 195,279   |   |                                    |   | 190,554 |          |  | 2.5   | % 
|Inland                              |  |                            | 190,205   |   |                                    |   | 170,443 |          |  | 11.6  | % 
|Land                                |  |                            | 138,320   |   |                                    |   | 131,044 |          |  | 5.6   | % 
|Rolling stock rent                  |  |                            | 43,179    |   |                                    |   | 40,988  |          |  | 5.3   | % 
|                                    |  |                            |           |   |                                    |   |         |          |  |       |   
|Operating expense                   |  |                            | 867,307   |   |                                    |   | 780,343 |          |  | 11.1  | % 
|                                    |  |                            |           |   |                                    |   |         |          |  |       |   
|Depreciation and amortization       |  |                            | 51,141    |   |                                    |   | 45,570  |          |  | 12.2  | % 
|Amortization of vessel drydocking   |  |                            | 15,766    |   |                                    |   | 15,861  |          |  | (0.6  | )%
|Selling, general and administrative |  |                            | 93,947    |   |                                    |   | 83,857  |          |  | 12.0  | % 
|Miscellaneous expense               |  |                            | 649       |   |                                    |   | 2,160   |          |  | (70.0 | )%
|                                    |  |                            |           |   |                                    |   |         |          |  |       |   
|Total operating expenses            |  |                            | 1,028,810 |   |                                    |   | 927,791 |          |  | 10.9  | % 
|                                    |  |                            |           |   |                                    |   |         |          |  |       |   
|Operating income                    |  | $                          | 67,346    |   |                                    | $ | 52,537  |          |  | 28.2  | % 
|                                    |  |                            |           |   |                                    |   |         |          |  |       |   
|Operating ratio                     |  |                            | 93.9      | % |                                    |   | 94.6    | %        |  | (0.7  | )%
|Revenue containers (units)          |  |                            | 307,895   |   |                                    |   | 308,435 |          |  | (0.2  | )%

Operating Revenue. Operating revenue increased to $1,096.2 million for the year ended
December 25, 2005 from $980.3 million for the twelve months ended December 26, 2004, an increase of $115.8 million, or 11.8%. This revenue increase can be attributed to the following factors (in thousands):



|                                                                                                                                                    |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|Revenue container volume decrease                                                                                                                   |  | $ | (1,567  | )
|More favorable cargo mix and general rate increases                                                                                                 |  |   | 42,345  |  
|Bunker and intermodal fuel surcharges included in rates to offset rising fuel costs                                                                 |  |   | 33,166  |  
|Management contract to manage seven oceanographic vessels for the U.S. Government and management contract to manage two Ready Reserve Fleet
vessels |  |   | 21,671  |  
|Growth in other non-transportation services                                                                                                         |  |   | 20,213  |  
|                                                                                                                                                    |  |   |         |  
|Total operating revenue increase                                                                                                                    |  | $ | 115,828 |  
|                                                                                                                                                    |  |   |         |  

The decreased revenue due to lower container volume for the year ended December 25, 2005
compared to the twelve months ended December 26, 2004 is primarily a result of a 52 week accounting year in 2005 compared to a 53 week accounting year in 2004 and a strategic shift away from lower margin automobile cargo to more refrigerated
cargo and other higher margin freight. This decreased volume was mostly offset by strong market demand for transportation services in the markets we serve, particularly in the Alaska market. Bunker and intermodal fuel surcharges, which are included
in our transportation revenue, accounted for approximately 8% of total revenue in the year ended December 25, 2005 and approximately 6% of total revenue in the year ended December 26, 2004. We increased our bunker and intermodal fuel
surcharges several times throughout 2005 as a result of significant increases in the cost of fuel for our vessels in addition to



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fuel increases passed on to us by our truck, rail, and barge carriers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates and we may at
times incorporate these surcharges into our base transportation rates that we charge. The management contract to manage seven oceanographic vessels was awarded to us in the fourth quarter of the twelve month period ended December 26, 2004 and
the management contract to manage two Ready Reserve Fleet vessels was awarded to us in the third quarter of fiscal year 2005. The growth in other non-transportation services includes increases in agency and terminal services provided to third
parties, other ancillary services, and space charter revenue not included in transportation revenue.

Operating
Expense. Operating expense increased to $867.3 million for the year ended December 25, 2005 from $780.3 million for the twelve months ended December 26, 2004, an increase of $87.0 million or 11.1%. The increase in operating
expense primarily reflects the effect of rising fuel prices, increases in labor and other inflationary costs, and additional costs associated with the growth in our non-transportation and other revenue. Vessel expense, which is not primarily driven
by revenue container volume, increased to $300.3 million for the year ended December 25, 2005 from $247.3 million for the twelve months ended December 26, 2004, an increase of $53.0 million or 21.4%. This $53.0 million increase can be
attributed to the following factors (in thousands):



|                                                                                                                    |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Increased vessel fuel costs                                                                                         |  | $ | 30,371 |  
|Vessel operating costs from vessel management contracts                                                             |  |   | 20,465 |  
|Reduction of vessel lease expense from vessel purchases                                                             |  |   | (5,143 | )
|Vessel space purchases from other carriers                                                                          |  |   | 2,164  |  
|Labor and other vessel operating increases including operating the Horizon Fairbanks in Alaska during summer months |  |   | 5,153  |  
|                                                                                                                    |  |   |        |  
|Total vessel expense increase                                                                                       |  | $ | 53,010 |  
|                                                                                                                    |  |   |        |  

Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to
load and unload containers. The types of costs included in marine expense are stevedoring and benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expenses increased to $195.3 million for the
year ended December 25, 2005 from $190.6 million for the twelve months ended December 26, 2004, an increase of $4.7 million or 2.5%. This increase can be attributed to contractual labor increases as expenses related to revenue container
volumes were nearly flat from year to year.

Inland expense increased to $190.2 million for the year ended December 25, 2005 from
$170.4 million for the twelve months ended December 26, 2004, an increase of $19.8 million or 11.6%. This increase is a result of a higher percentage of inland moves versus port to port moves performed for our revenue containers shipped, and a
substantial increase in fuel surcharges passed onto us by rail, truck, and barge carriers, in addition to normal contractual labor increases.

Land expense is comprised of the costs included within the terminal for the handling, maintenance and storage of containers, including yard operations, gate operations, maintenance, warehouse and terminal overhead. Land expense increased to
$138.3 million for the year ended December 25, 2005 from $131.0 million for the twelve months ended December 26, 2004, an increase of $7.3 million or 5.6%. Higher non-vessel related maintenance expenses can primarily be attributed to
higher fuel costs to power our refrigerated containers in addition to an increase in refrigerated cargo moves. Yard and gate expenses increased year over year due to additional grounding moves in our yards due to yard congestion and increased labor
costs due to normal contractual rate increase. Warehouse expenses declined in 2005 as a result of lower automobile volumes shipped.



|                   |  |                            |         |                                    |   |          |  |       |   
|------------------ |  | -------------------------- | ------- | ---------------------------------- | - | -------- |  | ----- | --
|                   |  | Year EndedDecember 25,2005 |         | Twelve MonthsEndedDecember 26,2004 |   | % Change | 
|                   |  | (in thousands)             |         |                                    |  
|Land expense:      |  |                            |         |                                    |   |          |  |       |   
|Maintenance        |  | $                          | 54,343  |                                    | $ | 52,236   |  | 4.0   | % 
|Terminal overhead  |  |                            | 48,027  |                                    |   | 45,460   |  | 5.6   | % 
|Yard and gate      |  |                            | 27,397  |                                    |   | 22,722   |  | 20.6  | % 
|Warehouse          |  |                            | 8,553   |                                    |   | 10,626   |  | (19.5 | )%
|                   |  |                            |         |                                    |   |          |  |       |   
|Total land expense |  | $                          | 138,320 |                                    | $ | 131,044  |  | 5.6   | % 
|                   |  |                            |         |                                    |   |          |  |       |   

The purchase of two vessels in 2004, the Horizon Navigator and Horizon Trader, in addition to the
2005 acquisition of the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of



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the Horizon Pacific and Horizon Enterprise, all of which were previously operated by us under operating leases led to a decrease in vessel lease expense of
$5.1 million for the year ended December 25, 2005 compared to the twelve months ended December 26, 2004. The decrease in vessel lease expense was partially offset by the resulting increase in depreciation and amortization from those
vessels.



|                                    |  |                            |        |                                    |   |          |  |       |   
|----------------------------------- |  | -------------------------- | ------ | ---------------------------------- | - | -------- |  | ----- | --
|                                    |  | Year EndedDecember 25,2005 |        | Twelve MonthsEndedDecember 26,2004 |   | % Change | 
|                                    |  | (in thousands)             |        |                                    |  
|Depreciation and amortization:      |  |                            |        |                                    |   |          |  |       |   
|Depreciationowned vessels          |  | $                          | 9,303  |                                    | $ | 8,060    |  | 15.4  | % 
|Depreciation and amortizationother |  |                            | 22,277 |                                    |   | 26,557   |  | (16.1 | )%
|Amortization of intangible assets   |  |                            | 19,561 |                                    |   | 10,953   |  | 78.6  | % 
|                                    |  |                            |        |                                    |   |          |  |       |   
|Total depreciation and amortization |  | $                          | 51,141 |                                    | $ | 45,570   |  | 12.2  | % 
|                                    |  |                            |        |                                    |   |          |  |       |   
|Amortization of vessel drydocking   |  | $                          | 15,766 |                                    | $ | 15,861   |  | (0.6  | )%
|                                    |  |                            |        |                                    |   |          |  |       |   

Depreciation and Amortization. Depreciation and amortization costs increased to $51.1
million for the year ended December 25, 2005 from $45.6 million for the twelve months ended December 26, 2004, an increase of $5.5 million or 12.2%. The increase in depreciation and amortization is primarily due to the purchase price
accounting step-up in basis of customer contracts and trademarks related to the Acquisition-Related Transactions. Amortization costs related to customer contracts and trademarks increased by $8.6 million from the twelve months ended
December 26, 2004 to the year ended December 25, 2005. Depreciation of owned vessels increased by $1.2 million, or 15.4%, as a result of purchasing vessels previously under operating leases. These increases were partially offset by a
decrease in other depreciation and amortization, primarily due to a decrease in depreciation of vessel leasehold improvements.

Amortization of Vessel Drydocking. Amortization of vessel drydocking remained relatively flat at $15.8 million for the year ended December 25, 2005 compared to $15.9 million for the twelve months ended December 26,
2004.

Selling, General and Administrative.Selling, general and administrative costs increased to $93.9 million for the year ended
December 25, 2005 from $83.9 million for the twelve months ended December 26, 2004, an increase of $10.1 million or 12.0%. The termination of the ongoing management services and related fee provisions of a management agreement with Castle
Harlan resulted in a $7.5 million increase in expense for the year ended December 25, 2005. The remaining increase in selling, general and administrative expenses are due to additional management bonus expense, higher professional fees, and
labor and other inflationary increases.

Miscellaneous Expense, Net. Miscellaneous expense decreased to $0.6 million for the
year ended December 25, 2005 from $2.2 million for the twelve months ended December 26, 2004, a decrease of $1.5 million or 70.0%. This reduction is primarily a result of lower bad debt expense recorded for the year ended December 25,
2005 in addition to recognized gains on the sale of equipment.

Interest Expense, Net. Interest expense increased to $51.4
million for the year ended December 25, 2005 from $23.4 million for the year ended December 26, 2004, an increase of $28.0 million or 119.8%. This increase can be attributable to the incurrence of approximately $340.0 million of additional
debt in conjunction with the Acquisition-Related Transactions, the issuance of the 11% senior discount notes on December 10, 2004, and an increasing LIBOR rate throughout 2005 impacting our outstanding term debt. With a portion of the proceeds
from the initial public offering on September 30, 2005, the subsequent exercise on October 14, 2005, of the underwriters option to purchase additional shares from the Company granted to them in connection with the initial public
offering and cash flows generated from operations, $40.0 million and $13.0 million of outstanding 9% senior notes and $52.3 million and $3.7 million of the original principal amount at maturity of the 11% senior discount notes were redeemed on
November 2, 2005 and November 21, 2005, respectively.

Loss on Early Extinguishment of Debt. A $13.2 million loss on
early extinguishment of debt was incurred during the year ended December 25, 2005 due to redemption premiums and the write-off of deferred financing costs associated with the early retirement of a portion of our 9% senior notes and 11% senior
discount notes.

Interest ExpensePreferred Units of Subsidiary. Interest expense  preferred units of subsidiary
decreased to $0 for the year ended December 25, 2005 from $2.7 million for the twelve months ended December 26, 2004. The preferred units were issued in conjunction with the closing of the February 27, 2003 purchase transaction and
began accreting interest at 10%. The preferred units were redeemed in conjunction with the closing of the Acquisition-Related Transactions on July 7, 2004.



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Income Tax Expense. Income tax expense was $1.6 million and $10.1 million for the year ended
December 25, 2005 and for the twelve months ended December 26, 2004, respectively, which represent effective annual tax rates of 55.9% and 38.0%, respectively. The difference between the combined Federal and state statutory tax rates and
the overall effective tax rate for the year ended December 25, 2005 is related primarily to the certain nondeductible items and the increase in the valuation allowance recorded against certain deferred tax assets attributable to state net
operating losses.

Liquidity and Capital Resources

Our principal sources of funds have been (i) earnings before non-cash charges, (ii) borrowings under debt arrangements and (iii) equity capitalization. Our principal uses of funds have been
(i) capital expenditures on our container fleet, our terminal operating equipment, improvements to our owned and leased vessel fleet, and our information technology systems, (ii) vessel drydocking expenditures, (iii) the purchase of
vessels upon expiration of operating leases, (iv) working capital consumption, (v) principal and interest payments on our existing indebtedness, and (vi) dividend payments to our common stockholders. Cash and cash equivalents totaled
$93.9 million at December 24, 2006. As of December 24, 2006, $48.4 million was available for borrowing under the $75.0 million revolving credit facility, after taking into account $26.6 million utilized for outstanding letters of credit.

Operating Activities



|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ------------------------------------- |  | - | ------- | -
|                                                                                  |  | Year Ended December 24, 2006 |         |   | Year Ended December 25, 2005 |   |         | Twelve Months Ended December 26, 2004 | 
|                                                                                  |  |                              |         |   | (in thousands)               |   |         |                                       | 
|Cash flows provided by operating activities                                       |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Net income                                                                        |  | $                            | 75,916  |   |                              | $ | 1,233   |                                       |  | $ | 16,394  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Depreciation                                                                      |  |                              | 30,676  |   |                              |   | 31,580  |                                       |  |   | 34,572  |  
|Amortization of other intangible assets                                           |  |                              | 19,547  |   |                              |   | 19,561  |                                       |  |   | 10,998  |  
|Amortization of vessel drydocking                                                 |  |                              | 14,652  |   |                              |   | 15,766  |                                       |  |   | 15,861  |  
|Amortization of deferred financing costs                                          |  |                              | 3,990   |   |                              |   | 3,363   |                                       |  |   | 1,853   |  
|Loss on extinguishment of debt                                                    |  |                              | 581     |   |                              |   | 13,154  |                                       |  |   |        |  
|Deferred income taxes                                                             |  |                              | (24,881 | ) |                              |   | (6,453  | )                                     |  |   | 7,592   |  
|Stock-based compensation                                                          |  |                              | 949     |   |                              |   | 99      |                                       |  |   | 1,765   |  
|Tax (deficiency) benefit from exercise of stock options                           |  |                              | (1,289  | ) |                              |   | 5,495   |                                       |  |   | 9,494   |  
|Accretion of interest on 11% senior discount notes                                |  |                              | 9,174   |   |                              |   | 12,057  |                                       |  |   | 549     |  
|Accretion of preferred units of subsidiary                                        |  |                              |        |   |                              |   |        |                                       |  |   | 2,686   |  
|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Subtotal                                                                          |  |                              | 53,399  |   |                              |   | 94,622  |                                       |  |   | 85,370  |  
|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Earnings adjusted for non-cash charges                                            |  |                              | 129,315 |   |                              |   | 95,855  |                                       |  |   | 101,764 |  
|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Changes in operating assets and liabilities:                                      |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Accounts receivable                                                               |  |                              | (894    | ) |                              |   | (9,037  | )                                     |  |   | (5,045  | )
|Materials and supplies                                                            |  |                              | 1,819   |   |                              |   | (5,309  | )                                     |  |   | (3,181  | )
|Other current assets                                                              |  |                              | (2,503  | ) |                              |   | 10,785  |                                       |  |   | (12,897 | )
|Accounts payable                                                                  |  |                              | 5,951   |   |                              |   | (2,907  | )                                     |  |   | (3,003  | )
|Accrued liabilities                                                               |  |                              | 3,409   |   |                              |   | 9,256   |                                       |  |   | 9,083   |  
|Other assets / liabilities                                                        |  |                              | (3,560  | ) |                              |   | (2,919  | )                                     |  |   | (3,962  | )
|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Subtotal                                                                          |  |                              | 4,222   |   |                              |   | (131    | )                                     |  |   | (19,005 | )
|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Loss (gain) on equipment disposals                                                |  |                              | 242     |   |                              |   | (993    | )                                     |  |   | (116    | )
|Vessel drydocking payments                                                        |  |                              | (16,815 | ) |                              |   | (16,038 | )                                     |  |   | (12,273 | )
|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  
|Net cash provided by operating activities                                         |  | $                            | 116,964 |   |                              | $ | 78,693  |                                       |  | $ | 70,370  |  
|                                                                                  |  |                              |         |   |                              |   |         |                                       |  |   |         |  

Operating Activities

Net cash provided by operating activities increased by $38.3 million to $117.0 million for the year ended December 24, 2006 from $78.7 million for the year ended December 25, 2005. Net earnings adjusted for
depreciation, amortization,



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deferred income taxes, accretion and other non-cash operating activities, which includes non-cash stock based compensation expense, resulted in cash flow
generation of $129.3 million for the year ended December 24, 2006 compared to $95.9 million for the year ended December 25, 2005, an increase of $33.5 million. Other assets/liabilities working capital use includes $4.2 million of various
costs associated with our contractual obligations with SFL. Accounts payable and accrued liabilities working capital changes are primarily due to timing of interest payments and various other operating expenses.

Net cash provided by operating activities increased by $8.3 million to $78.7 million for the year ended December 25, 2005 from $70.4 million of net
cash provided by operating activities for the twelve months ended December 26, 2004. Net earnings adjusted for depreciation, amortization, deferred income taxes, accretion and other non-cash operating activities resulted in cash flow generation
of $95.9 million for the year ended December 25, 2005 compared to $101.8 million for the twelve months ended December 26, 2004, a decrease of $5.9 million. This decrease is primarily driven by cash charges related to the Parents
initial public offering, including redemption premiums from the early retirement of debt, in addition to a $7.5 million cash charge related to the termination of the ongoing management services and related fee provisions of a management agreement
with Castle Harlan. Changes in working capital resulted in a use of cash of $5.7 million for the year ended December 25, 2005 compared to a use of cash of $19.0 million for the year ended December 26, 2004. This working capital use of cash
in 2005 is primarily due to (i) higher accounts receivables as a result of higher revenues and (ii) higher materials and supplies, which is largely due to significantly higher fuel prices during 2005. This is offset by a source of cash
from other current assets primarily due to the collection of a $7.3 million income tax receivable during the year ended December 25, 2005.

Investing Activities

Net cash used in investing activities was $19.3 for the year ended December 24, 2006 compared to
$38.8 million for the year ended December 25, 2005. Approximately $25.2 million of the capital expenditures in the year ended December 25, 2005 is comprised of the acquisition of the rights and beneficial interests of the sole owner
participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific and the charters related thereto under which HL operates such vessels. Excluding this expenditure, capital expenditures
increased approximately $5.3 million in 2006 as compared to 2005. Capital expenditures in 2006 primarily relate to the acquisition of containers, expenditures related to the new fleet enhancement initiative, and capital expenditures relating to the
redevelopment of the San Juan, Puerto Rico terminal.

Net cash used in investing activities, excluding the Acquisition-Related
Transactions, increased by $7.5 million to $38.8 million for the year ended December 25, 2005 from $31.3 million for the twelve months ended December 26, 2004. These amounts exclude $663.3 million of acquisition expenditures related to the
July 7, 2004 Acquisition-Related Transactions. The $7.5 million increase in cash used in investing activities is primarily a result of $25.2 million of cash used in 2005 for the acquisition of the rights and beneficial interests of the sole
owner participant in two separate trusts, the assets of which consists primarily of the Horizon Enterprise and the Horizon Pacific, compared to $19.6 million of cash used in 2004 to purchase three vessels, the Horizon Navigator, the Horizon
Fairbanks and the Horizon Trader, all of which were previously under operating lease

Financing Activities

Net cash used in financing activities during the year ended December 24, 2006 was $45.0 million compared to $55.0 million for the year ended
December 25, 2005. The net cash used for financing activities during 2006 includes a $25.0 million prepayment under the senior credit facility, $17.2 million in dividends the Parent, the payment of $1.2 million in financing costs related to
fees associated with amendments to HL and HLHCs senior credit facility, and a $1.3 million open market purchase of the Companys 11% senior discount notes.

Net cash used in financing activities, excluding those activities associated with the Parents Initial Public Offering and dividends related thereto was $4.1 million for the year ended December 25, 2005
compared to $6.8 million for the twelve months ended December 26, 2004, excluding financing activities related to the July 7, 2004 Acquisition-Related Transactions and subsequent issuance of the 11% discount senior notes in December 2004.
The $4.1 million net cash used for financing activities for the year ended December 25, 2005 primarily includes $1.8 million in fees related to exchange offers for the 9% senior notes and the 11% senior discount notes and $2.5 million of
principal payments on long-term debt.

Net cash used in financing activities for the twelve months ended December 26, 2004, excluding
financing activities related to the July 7, 2004 Acquisition-Related Transactions and subsequent 2004 financing transactions, totaled $6.8 million. This amount reflects a $6.0 million repayment of outstanding borrowings under the revolving loan
facility, $0.6 million principal payments on long-term debt, and $0.2 million payments on capital lease obligations. Financing activities related to the July 7, 2004 Acquisition-Related Transactions included a capital contribution of $87.0
million, the issuance of the $70.0 million of 13% promissory notes, $250.0 million borrowed under the term loan facility, $6.0 million borrowed under the



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revolving credit facility, and the issuance of the 9% senior notes in the aggregate original principal amount of $250.0 million. Financing activities related
to the subsequent 2004 financing transactions included the issuance of common shares and Series A preferred shares for gross proceeds of $20.7 million and the repayment of $20.0 million of outstanding principal amount, together with accrued but
unpaid interest thereon, of the 13% promissory notes. Other subsequent 2004 financing activities included the issuance of $160.0 million in aggregate original principal amount at maturity of 11% senior discount notes, the repayment of $50.0 million
of the outstanding principal amount, together with accrued but unpaid interest thereon, of the 13% promissory notes, and the repurchase of a portion of the outstanding Series A preferred shares having an aggregate original stated value of $53.2
million.

Capital Requirements

Our
current and future capital needs relate primarily to debt service, maintenance, and improvement of our vessel fleet, including purchasing vessels upon expiration of vessel operating leases and providing for other necessary equipment acquisitions.
Cash to be used for investing activities, including purchases of property and equipment for the next twelve months is expected to total approximately $30.0 million. Such capital expenditures will include redevelopment of our San Juan, Puerto Rico
terminal, raising of our Honolulu, Hawaii cranes in connection with our fleet enhancement initiative, and yard improvements in our Honolulu, Hawaii terminal. In addition, expenditures for vessel drydocking payments are estimated at $26.0 million.

Four of our vessels, the Horizon Anchorage, Horizon Tacoma, Horizon Kodiak and Horizon Hunter, are leased, or chartered, under charters
that are due to expire in January 2015 for the Horizon Anchorage, Horizon Tacoma and Horizon Kodiak and in November 2018 for the Horizon Hunter. The charters for these vessels permit us to purchase the applicable vessel at the expiration of the
charter period for a fair market value specified in the relevant charter that is determined through a pre-agreed appraisal procedure. The fair market values of the these vessels at the expiration of their charters cannot be predicted with any
certainty. During 2005, we expended $25.2 million in cash to purchase owner participant interests in two vessels, the Horizon Pacific and the Horizon Enterprise, that were operating solely under lease agreements. During 2004 and 2003, we purchased
four vessels, Horizon Fairbanks, Horizon Hawaii, Horizon Navigator and Horizon Trader, at the expiration of their charter periods, utilizing similar fair market value purchase option arrangements. The purchase prices of the four vessels ranged from
$3.8 million to $8.2 million per vessel and totaled $19.6 million.



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##### Table of Contents

Contractual Obligations

Contractual obligations(1)as of December 24, 2006 are as follows (in thousands):



|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|------------------------------ |  | ----------------- | --------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------- |  | - | ------- |  | - | -------
|                               |  | Total Obligations |           | 2007 |   | 2008    |  | 2009 |        | 2010 |   | 2011   |  | After 2011
|Principal obligations:         |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Senior credit facility         |  | $                 | 219,375   |      | $ | 2,244   |  | $    | 2,244  |      | $ | 2,244  |  | $          | 54,423  |  | $ | 158,220 |  | $ |       
|Notes issued by owner trustees |  |                   | 4,513     |      |   | 4,513   |  |      |       |      |   |       |  |            |        |  |   |        |  |   |       
|9% senior notes                |  |                   | 197,014   |      |   |        |  |      |       |      |   |       |  |            |        |  |   |        |  |   | 197,014
|11% senior discount notes      |  |                   | 102,505   |      |   |        |  |      |       |      |   |       |  |            |        |  |   |        |  |   | 102,505
|Operating leases (2)           |  |                   | 422,519   |      |   | 92,986  |  |      | 47,343 |      |   | 45,891 |  |            | 44,505  |  |   | 27,587  |  |   | 164,207
|Capital lease obligations      |  |                   | 354       |      |   | 193     |  |      | 161    |      |   |       |  |            |        |  |   |        |  |   |       
|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Subtotal                       |  |                   | 946,280   |      |   | 99,936  |  |      | 49,748 |      |   | 48,135 |  |            | 98,928  |  |   | 185,807 |  |   | 463,726
|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Interest obligations:          |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Senior credit facility         |  |                   | 77,376    |      |   | 17,957  |  |      | 18,054 |      |   | 17,706 |  |            | 17,136  |  |   | 6,523   |  |   |       
|Notes issued by owner trustees |  |                   | 240       |      |   | 240     |  |      |       |      |   |       |  |            |        |  |   |        |  |   |       
|9% senior notes                |  |                   | 121,162   |      |   | 17,731  |  |      | 17,731 |      |   | 17,731 |  |            | 17,731  |  |   | 17,731  |  |   | 32,507 
|11% senior discount notes      |  |                   | 56,380    |      |   |        |  |      | 5,638  |      |   | 11,276 |  |            | 11,276  |  |   | 11,276  |  |   | 16,914 
|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Subtotal                       |  |                   | 255,158   |      |   | 35,928  |  |      | 41,423 |      |   | 46,713 |  |            | 46,143  |  |   | 35,530  |  |   | 49,421 
|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Total principal and interest   |  | $                 | 1,201,438 |      | $ | 135,864 |  | $    | 91,171 |      | $ | 94,848 |  | $          | 145,071 |  | $ | 221,337 |  | $ | 513,147
|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Other commercial commitments:  |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Standby letters of credit (3)  |  | $                 | 26,568    |      | $ | 26,568  |  | $    |       |      | $ |       |  | $          |        |  | $ |        |  | $ |       
|Surety bonds (4)               |  |                   | 6,333     |      |   | 6,330   |  |      | 2      |      |   | 1      |  |            |        |  |   |        |  |   |       
|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        
|Other commercial commitments   |  | $                 | 32,901    |      | $ | 32,898  |  | $    | 2      |      | $ | 1      |  | $          |        |  | $ |        |  | $ |       
|                               |  |                   |           |      |   |         |  |      |        |      |   |        |  |            |         |  |   |         |  |   |        

---

|(1) | Included in contractual obligations are scheduled interest payments. Interest payments on the senior credit facility are variable and are based as of December 24, 2006 upon the
London Inter-Bank Offered Rate (LIBOR) plus 2.25%. The three-month LIBOR / swap curve has been utilized to estimate interest payments on the senior credit facility. Interest on the 9% senior notes is fixed and is paid semi-annually on May 1 and
November 1 of each year until maturity on November 1, 2012. Interest on the 11% senior discount notes is fixed. However, no cash interest will accrue prior to April 1, 2008. Thereafter, cash interest will accrue at a rate of
11.0% per annum and will be payable on April 1 and October 1 of each year, commencing on October 1, 2008 and continuing until maturity on April 1, 2013.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The above contractual obligations table does not include the residual guarantee related to our transaction with SFL. If Horizon Lines does not elect to purchase the vessels at the
end of the initial twelve year period and the vessel owners sell the vessels for less than a specified amount, Horizon Lines is responsible for paying the amount of such shortfall which will not exceed $3.8 million per vessel. Such residual
guarantee will be recorded at its fair value of approximately $0.2 million as a liability upon commencement of the bareboat charters. The above operating lease amounts do not include anticipated payments of $20.7 million during 2007, $25.4 million
during each year from 2008 to 2011 and $182.7 thereafter for the four new vessels in which Horizon Lines has not yet taken delivery.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The standby letters of credit include $20.1 million in letters of credit that serve as collateral related to our agreements with SFL, $5.3 million in letters of credit that serve as
collateral on state workers compensation and auto liability policies, and $1.2 million in letters of credit that serve as security for all bonds excluding U.S. Customs bonds.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes $4.8 million is U.S. customs bonds, $0.4 million in bonds for payment of taxes levied under the Excise Tax Act of the Commonwealth of Puerto Rico of 1987, and $1.1 million
in utility or lease bonds. We have the financial ability and intention to satisfy our obligations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Long-Term Debt

To finance the Acquisition-Related Transactions, we incurred substantial debt, including under the senior credit facility and through the issuance of the
9% senior notes in the original principal amount of $250.0 million, with interest payments on this indebtedness substantially increasing our liquidity requirements.

On July 7, 2004, HL and HLHC entered into a senior credit facility with various financial lenders, which was amended and restated on April 7, 2005. As of December 24, 2006, the senior credit facility
consisted of a $219.4 million term loan and a $75.0 million revolver. No amounts were outstanding under the revolving credit facility as of December 24, 2006 or December 25, 2005. However, $26.6 million and $6.9 million of availability
under the revolving credit facility was utilized for outstanding letters of credit as of December 24, 2006 and December 25, 2005, respectively. On December 12, 2006, the



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senior credit facility was amended to include: 1) increasing the revolving credit facility to $75 million; 2) increasing the additional term loan borrowing
availability to $75 million; 3) raising the annual capital spending limit to $40 million, exclusive of vessel and equipment lease buyouts; 4) allowing for 100% carryover of unutilized permitted annual capital spending; 5) increasing maximum
restricted payments on a rolling four quarters basis to $36 million; 6) providing 100% credit for voluntary loan prepayments on the required annual excess cash flow sweep now commencing in 2007; and 7) increasing permitted acquisitions to $120
million annually and to $200 million over the life of the facility. We expect that we will be permitted to incur up to an additional $75 million of senior secured debt in the form of term loans at the option of the participating lenders under the
term loan facility, provided that no default or event of default under the senior credit facility has occurred or would occur after giving effect to such incurrence and certain other conditions are satisfied. The term loan matures on July 7, 2011
and the revolving credit facility matures on July 7, 2009.

Principal payments of approximately $0.6 million are due quarterly on the term
loan facility through June 30, 2010, at which point quarterly payments increase to $52.7 million until final maturity on July 7, 2011. Borrowings under the term loan facility bear interest at HL and HLHCs choice of LIBOR or the base rate, in
each case, plus an applicable margin. The margin applicable to the term loan facility is equal to 1.25% for base rate loans and 2.25% for LIBOR loans. The interest rate at December 24, 2006 approximated 7.6%. HL and HLHC are also charged a
commitment fee on the daily unused amount of the revolving credit facility during the availability period based upon a rate of 0.50%.

The
senior credit facility requires HL and HLHC to meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the senior credit facility contains restrictive covenants which will, among other things, limit the incurrence of
additional indebtedness, capital expenditures, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily
restricted in such agreements. It also contains certain customary events of default, subject to grace periods, as appropriate. HL and HLHC were in compliance with all such covenants as of December 24, 2006. The senior credit facility is secured by
the assets of HL and HLHC. The 9% senior notes and the 11% senior discount notes also contain restrictive covenants including, limiting incurrence of additional indebtedness, dividends and restrictions customary in such agreements.

On July 7, 2004, HL and HLHC completed an offering of $250.0 million in principal amount of 9% senior notes. The 9% senior notes mature on November 1,
2012. Interest on the 9% senior notes accrues at the rate of 9% per annum and is payable in cash semi-annually on May 1 and November 1 of each year. The 9% senior notes are the general unsecured obligations of HL and HLHC and rank equally with the
existing and future unsecured indebtedness and other obligations of HL and HLHC that are not, by their terms, expressly subordinated in right of payment to the 9% senior notes and senior in right to any future subordinated debt. HL and HLHC used
$57.8 million of the proceeds of the issuance and sale by the Parent of shares of its common stock in its initial public offering in 2005 to redeem $53.0 million of the principal amount of the 9% senior notes and pay associated redemption premiums
of $4.8 million.

On December 10, 2004, the Company completed an offering of $160.0 million in principal amount of 11% senior discount
notes. The 11% senior discount notes were issued at a discount from their principal amount at maturity and generated gross proceeds of approximately $112.3 million. The 11% senior discount notes mature on April 1, 2013. Until April 1, 2008, the
notes will accrete at the rate of 11% per annum, compounded semiannually on April 1 and October 1 of each year, beginning October 1, 2005, to but not including April 1, 2008. Beginning on April 1, 2008, cash interest will accrue at the rate of 11%
per annum and will be payable in cash semi-annually in arrears on each April 1 and October 1, commencing October 1, 2008. The 11% senior discount notes are the general unsecured obligations of HLFHC and rank equally with the existing and future
unsecured indebtedness and other obligations of HLFHC that are not, by their terms, expressly subordinated in right of payment to the 11% senior discount notes and senior in right to any future subordinated debt. The Company used $48.0 million of
the proceeds of the issuance by the Parent of shares of its common stock in its initial public offering in 2005 to redeem $56.0 million of the original principal amount at maturity, or $43.2 million in accreted value, of the 11% senior discount
notes and pay associated redemption premiums of $4.8 million. During 2006, the Company made a $1.3 million open market purchase of its 11% senior discount notes, which represented a $46 thousand premium to the accreted value at the date of purchase.

We intend to fund our ongoing operations through cash generated by operations and availability under the senior credit facility.

Future principal debt payments are expected to be paid out of cash flows from operations, borrowings under the senior credit facility, and
future refinancings of our debt.

Our ability to make scheduled payments of principal, or to pay the interest, if any, on, or to refinance
our indebtedness, or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our
control.



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Based upon the current level of operations and certain anticipated improvements, we believe that cash
flow from operations and available cash, together with borrowings available under the senior credit facility, will be adequate to meet our future liquidity needs throughout 2007. We expect to use approximately $68.9 million of cash generated from
operations to fund vessel lease payments on our four vessels currently leased in addition to our new vessels during 2007. We expect our new fleet enhancement initiative will use approximately $15.0 million of cash generated from operations and that
our EDGE initiative will generate approximately $13.0 million during 2007. In addition, we expect to make capital expenditures and drydocking payments of $30.0 million and $26.0 million, respectively, during 2007. There can be no assurance that we
will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the senior credit facility in an amount sufficient to enable us to
service our indebtedness or to fund other liquidity needs. In addition, there can be no assurance that we will be able to effect any future refinancing of our debt on commercially reasonable terms or at all.

Interest Rate Risk

Our primary interest rate
exposure relates to the senior credit facility. As of December 24, 2006, HLHC and HL had outstanding a $219.4 million term loan, which bears interest at variable rates. Each quarter point change in interest rates would result in a $0.5 million
change in interest expense on the term loan. HLHC and HL also have a revolving credit facility that provides for borrowings of up to $75.0 million. As of December 24, 2006, no amounts were outstanding under the revolving credit facility.

Working Capital

Working capital at
December 24, 2006, was $99.2 million, compared to $65.6 million at December 25, 2005. Adequate current assets are maintained to satisfy current liabilities and maturing obligations when they come due and we have sufficient financial
capacity to manage our daily cash requirements.

Credit Ratings

As of December 24, 2006, Moodys Investors Service and Standard and Poors Rating Services assigned the following credit ratings to our outstanding debt:



|                                   |  |                 |  |                  
|---------------------------------- |  | --------------- |  | -----------------
|                                   |  | Moodys         |  | Standard & Poors
|Debt/Rating Outlook:               |  |                 |  |                  
|                                   |  |                
|Senior Secured Credit Facility     |  | Ba2, LDG2, 20%  |  | B                
|                                   |  |                
|9% Senior Notes due 2012           |  | B3, LGD4, 69%   |  | CCC+             
|                                   |  |                
|11% Senior Discount Notes due 2013 |  | Caa1, LGD6, 94% |  | CCC+             
|                                   |  |                
|Rating Outlook                     |  | Stable, PD      |  | Positive         

In September 2006, Moodys Investors Service (Moodys) implemented its new
Probability-of-Default (PD) and Loss-Given-Default (LGD) rating methodologies for the transportation sector. PD ratings are assigned only to issuers, not specific debt instruments, and use the standard Moodys
alpha-numeric scale. They express Moodys opinion about the likelihood that any entity within a corporate family will default on any of its debt obligations. LGD assessments are assigned to individual rated debt issues and are expressed as a
percentage of principal and interest at the resolution of default, with assessments ranging from LGD1 (loss expected to be 0%-9%) to LGD6 (loss anticipated to be 90%-100%).



|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

We maintain a policy for managing risk related to exposure to variability in interest rates, fuel prices and other relevant market rates and prices which includes entering into derivative instruments in order to mitigate our risks.

Our exposure to market risk for changes in interest rates is limited to our senior credit facility and one of our operating leases. The
interest rate for our senior credit facility is currently indexed to LIBOR of one, two, three, or six months as selected by us, or the Alternate Base Rate as defined in the senior credit facility. One of our operating leases is currently indexed to
LIBOR of one month. Predecessor A used interest rate protection agreements in the past to reduce borrowing rates although none are in effect as of December 24, 2006.

In addition, we utilize derivative instruments tied to various indexes to hedge a portion of our quarterly exposure to bunker fuel price increases. These instruments consist of fixed price swap agreements. We do not
use derivative instruments for trading purposes. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit standards for its counterparties.



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Changes in fair value of derivative financial instruments are recorded as adjustments to the assets or
liabilities being hedged in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the
effectiveness of the hedge. As of December 24, 2006, we do not have any hedges in place.

The aggregate annual charter hire for the
vessels under our agreements with SFL is based on certain assumptions with respect to final vessel price and interest rates that will be adjusted on the date of the delivery of the particular vessel. The vessel owners have entered into forward
starting swaps to lock in the interest rate on the underlying bank loan with Fortis. However, if the vessel delivery date or vessel cost changes, the forward starting swap agreements will need to be adjusted. If the underlying interest rate on the
bank loans to the vessel owners is changed due to any of the above reasons, the aggregate annual charter hire will also change.

The table
below provides information about our debt obligations indexed to LIBOR. The principal cash flows are in thousands.



|                      |  |      |       |   |      |   |       |      |  |   |       |   |  |      |        |   |            |   |         |       |  |                               |         |   |  |   |         |  |   |        
|--------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ------ | - | ---------- | - | ------- | ----- |  | ----------------------------- | ------- | - |  | - | ------- |  | - | -------
|                      |  | 2007 |       |   | 2008 |   |       | 2009 |  |   | 2010  |   |  | 2011 |        |   | Thereafter |   |         | Total |  | Fair ValueDecember 24,2006(1)
|Debt:                 |  |      |       |   |      |   |       |      |  |   |       |   |  |      |        |   |            |   |         |       |  |                               |         |   |  |   |         |  |   |        
|Fixed rate            |  | $    | 4,513 |   |      | $ |      |      |  | $ |      |   |  | $    |        |   |            | $ |        |       |  | $                             | 299,519 |   |  | $ | 304,032 |  | $ | 307,728
|Average interest rate |  |      | 10.6  | % |      |   |       |      |  |   |       |   |  |      |        |   |            |   |         |       |  |                               | 9.7     | % |  |   |         |  |   |        
|Variable rate         |  | $    | 2,244 |   |      | $ | 2,244 |      |  | $ | 2,244 |   |  | $    | 54,423 |   |            | $ | 158,220 |       |  | $                             |        |   |  | $ | 219,375 |  | $ | 219,375
|Average interest rate |  |      | 7.9   | % |      |   | 8.0   | %    |  |   | 8.0   | % |  |      | 8.0    | % |            |   | 8.0     | %     |  |                               |         |   |  |   |         |  |   |        

---

|(1) | Fair Value as of December 24, 2006 includes the fair value of the 11% senior discount notes based
on their accreted balance as of December 24, 2006. The principal cash flows above include the principal amount of $102.5 million in the thereafter column.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | We receive the arithmetic average of the reference price calculated using the unweighted method of
averaging
|--- | ------------------------------------------------------------------------------------------------------------



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

See
index in Item 15 of this annual report on Form 10-K. Quarterly information (unaudited) is presented in a Note to the consolidated financial statements.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in Company reports
filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls
and procedures are designed to provide reasonable assurance that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Companys Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Companys management, with
the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act as of
December 24, 2006. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are effective as of December 24, 2006.



|Item 9B. | Other Information
|-------- | -----------------

None.



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##### Table of Contents

PART III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------

The information required by this item as to the Parents directors, director nominees, audit committee financial expert, audit committee, and procedures for stockholders to recommend director nominees will be included in the
Parents proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2007, under the captions Election of Directors and Corporate Governance Matters and Committees of the Board of
Directors and is incorporated by reference herein. The information required by this item as to compliance by the Companys directors, executive officers and certain beneficial owners of the Companys Common Stock with
Section 16(a) of the Securities Exchange Act of 1934 also will be included in said proxy statement under the caption Section 16(a) Beneficial Ownership Reporting Compliance and also is incorporated herein by reference. The
information required by this item as to executive officers is included in Part I, Item 1 of this Report and also is incorporated herein by reference.

The Company has adopted a Code of Business Conduct and Ethics that governs the actions of all Company employees, including officers. The Code of Business Conduct and Ethics is posted within the Investor Relations
section of the Companys internet website at www.horizonlines.com. The Company will provide a copy of the Code of Business Conduct and Ethics to any stockholder upon request. Any amendments to and/or any waiver from a provision of any of
the Code of Business Conduct and Ethics granted to any director, executive officer or any senior financial officer, must be approved by the Board of Directors and will be disclosed on the Companys internet website as soon as reasonably
practical following the amendment or waiver. The information contained on or connected to the Companys internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report
that the Company files with or furnishes to the Securities and Exchange Commission.



|Item 11. | Executive Compensation
|-------- | ----------------------

The information required by
this item will be included in the Parents proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2007, under the captions Executive Compensation and Compensation of Directors and
is incorporated herein by reference.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information required by this item as to security ownership by certain beneficial owners and management will be included in the Parents proxy
statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2007, under the caption Ownership of the Companys Securities and is incorporated herein by reference. The information required by this
item as to securities authorized for issuance under equity compensation plans also will be included in said proxy statement under the caption Equity Compensation Plan Information and also is incorporated herein by reference.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The information required by this item will be included in the Parents proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2007, under the caption Related
Transactions and is incorporated herein by reference.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The
information required by this item will be included in the Parents proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2007 under the caption Independent Registered Public Accounting Firms
Fees and Services and is incorporated herein by reference.



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##### Table of Contents

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

(a)(1)
Financial Statements:

H-Lines Finance Holding Corp. and Predecessor Company

Index to Consolidated and Combined Financial Statements



|                                                                               |  |     
|------------------------------------------------------------------------------ |  | ----
|                                                                               |  | Page
|Report of Independent Registered Public Accounting Firm                        |  | F-1 
|Consolidated Financial Statements for the fiscal year ended December 24, 2006: |  |     
|Consolidated Balance Sheets                                                    |  | F-2 
|Consolidated and Combined Statements of Operations                             |  | F-3 
|Consolidated and Combined Statements of Cash Flows                             |  | F-4 
|Consolidated and Combined Statements of Changes In Stockholders Equity        |  | F-5 
|Notes to Consolidated and Combined Financial Statements                        |  | F-6 
|Schedule IIValuation and Qualifying Accounts                                  |  | F-27

(a)(2) Exhibits:



|               |  |                                                                                                                                                                                                                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                    
|1.1            |  |                                                                                                                                                                                                                                                                                                                                                
|               | 
|2              |  | Amended and Restated Merger Agreement, dated as of July 7, 2004, by and among Horizon Lines, Inc., Horizon Lines Holding Corp., H-Lines Subcorp. and TC Group, L.L.C. (Previously filed as an
exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                    
|               | 
|3.1            |  | Amended and Restated Certificate of Incorporation of the Registrant. (Incorporated by reference to Horizon Lines, Inc.s Report on Form 10-K for the fiscal year ended December 25,
2005)                                                                                                                                                      
|               | 
|3.2            |  | Form of Amended and Restated Bylaws of the Registrant. (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File
No. 333-123073), filed on September 19, 2005)                                                                                                                      
|               | 
|4.1            |  | Indenture, dated as of July 7, 2004, by and among Horizon Lines Holding Corp., Horizon Lines, LLC, the guarantors party thereto and The Bank of New York Trust Company, N.A., as Trustee.
(Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)
|               | 
|4.2            |  | Indenture, dated as of December 10, 2004 between H-Lines Finance Holding Corp. and The Bank of New York Trust Company, N.A., as Trustee. (Previously filed as an exhibit to Horizon Lines,
Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                 
|               | 
|4.3            |  | Form of 9% Senior Notes due 2012 (included in Exhibit 4.1). (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073),
originally filed on March 2, 2005)                                                                                                                              
|               | 
|4.4            |  | Form of 11% Senior Discount Note due 2013 (included in Exhibit 4.2). (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073),
originally filed on March 2, 2005)                                                                                                                     
|               | 
|4.5            |  | Form of Guarantee (included in Exhibit 4.1). (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on
March 2, 2005)                                                                                                                                             
|               | 
|4.6            |  | Specimen of Common Stock Certificate. (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed
on September 19, 2005)                                                                                                                                       
|               | 
|10.1           |  | Stockholders Agreement, dated as of July 7, 2004, by and among Horizon Lines, Inc. and the other parties thereto. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration
Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                        
|               | 
|10.2           |  | First Amendment to Stockholders Agreement, dated as of October 15, 2004, by and among Horizon Lines, Inc. and the other parties thereto. (Previously filed as an exhibit to Horizon Lines,
Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                 
|               | 
|10.2.1         |  | Form of Amended and Restated Stockholders Agreement. (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File
No. 333-123073), filed on September 19, 2005)                                                                                                                        



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##### Table of Contents

|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3      |  | Preferential Usage Agreement dated December 1, 1985, between the Municipality of Anchorage, Alaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines of Alaska, LLC, as successor
in interest to SL Service, Inc. (formerly known as Sea-Land Service, Inc.), pursuant to a consent to general assignment and assumption, dated September 5, 2002), as amended by the Amendment to Preferential Usage Agreement dated January 31,
1991, Second Amendment to December 1, 1985 Preferential Usage Agreement dated June 20, 1996, and Third Amendment to December 1, 1985 Preferential Usage Agreement dated January 7, 2003. (Previously filed as an exhibit to Horizon
Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)
|          | 
|10.4      |  | Crane Relocation Agreement dated August 20, 1992, between Matson Navigation Company, Inc. (as successor in interest to American President Lines, Ltd., pursuant to an amendment to the Crane
Relocation Agreement, dated 1996), Sea-Land Service, Inc. and Port Authority of Guam, as amended by Amendment No. 1 to Crane Relocation Agreement dated March 22, 1995, and by Assignment of and Second Amendment to Crane Relocation Agreement dated
January 24, 1996. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                  
|          | 
|10.4.1    |  | Second Assignment of and Third Amendment to Crane Relocation Agreement dated July 5, 2005 among SL Service, Inc. (formerly known as Sea-Land Service, Inc.), Horizon Lines, LLC, Matson Navigation
Company, Inc. and Port Authority of Guam. (Previously filed as an exhibit to Amendment No. 3 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed on July 29, 2005)                                                                                                                                                                                                                                                                                                                                                                                  
|          | 
|10.5      |  | Employment Agreement dated as of July 7, 2004, between Horizon Lines, LLC and Charles G. Raymond. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1
(File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | 
|10.6      |  | Employment Agreement dated as of July 7, 2004, between Horizon Lines, LLC and M. Mark Urbania. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form
S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | 
|10.6.1    |  | First Amended and Restated Employment Agreement dated as of September 16, 2005, between Horizon Lines, LLC and M. Mark Urbania. (Previously filed as an exhibit to Amendment No. 6 to Horizon
Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed on September 19, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | 
|10.7      |  | Amended and Restated Guarantee and Indemnity Agreement dated as of February 27, 2003, by and among HLH, LLC, Horizon Lines, LLC, CSX Corporation, CSX Alaska Vessel Company, LLC and SL
Service, Inc., as supplemented by the joinder agreements, dated as of July 7, 2004, of Horizon Lines Holding Corp., Horizon Lines of Puerto Rico, Inc., Falconhurst, LLC, Horizon Lines Ventures, LLC, Horizon Lines of Alaska, LLC, Horizon Lines
of Guam, LLC, Horizon Lines Vessels, LLC, Horizon Services Group, LLC, Sea Readiness, LLC, Sea-Logix, LLC, S-L Distribution Services, LLC and SL Payroll Services, LLC. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration
Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                    
|          | 
|10.8      |  | Amended and Restated Put/Call Agreement, dated as of September 20, 2005, by and among Horizon Lines, Inc. and other parties thereto. (Incorporated by reference to the Report on Form 8-K of
Horizon Lines, Inc.s filed on October 24, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          | 
|10.9      |  | Horizon Lines Holding Corp. Stock Option Plan. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on
March 2, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | 
|10.10    |  | International Intermodal Agreement 5124-5024, dated as of March 1, 2002, between Horizon Lines, LLC, Horizon Lines of Puerto Rico, Inc., Horizon Lines of Alaska, LLC and CSX Intermodal, Inc.
(Incorporated by reference to Amendment No. 2 to the Registration Statement on form S-4 of Horizon Lines Holding Corp. (File No. 333-123601), filed on June 23, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | 
|10.11    |  | Sub-Bareboat Charter Party Respecting 3 Vessels, dated as of February 27, 2003, in relation to U.S.-flag vessels Horizon Anchorage, Horizon Tacoma and Horizon Kodiak, between CSX Alaska Vessel
Company, LLC, as charterer, and Horizon Lines, LLC, as sub-charterer. (Incorporated by reference to the Registration Statement on Form S-4 of Horizon Lines Holding Corp. (File No. 333-123681), filed on March 30, 2005)                                                                                                                                                                                                                                                                                                                                                                  
|          | 
|10.12    |  | TP1 Space Charter and Transportation Service Contract, dated May 9, 2004, between A.P. Møller-Maersk A/S and Horizon Lines, LLC. (Incorporated by reference to Amendment No. 2 to the
Registration Statement on form S-4 of Horizon Lines Holding Corp. (File No. 333-123601), filed on June 23, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | 
|10.12.1 |  | Amendment No. 1 to TP1 Space Charter and Transportation Service Contract, dated November 30, 2006 between A.P. Møller-Maersk A/S and Horizon Lines, LLC. (Incorporated by
reference to the Annual Report on Form 10-K of Horizon Lines, Inc. for the year ended December 24, 2006 (File No. 001-32627), filed on March 2, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                             



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.13         |  | Container Interchange Agreement, dated April 1, 2002, between A.P. Møller-Maersk A/S, CSX Lines, LLC, CSX Lines of Puerto Rico, Inc., CSX Lines of Alaska, LLC and Horizon Lines of Alaska,
LLC. (Incorporated by reference to the Registration Statement on Form S-4 of Horizon Lines Holding Corp. (File No. 333-123681), filed on March 30, 2005)                                                                                                                                                                                                                                                                                                                                                                                                
|               | 
|10.13.1      |  | Agreement Regarding the Container Interchange Agreement, dated November 30, 2006, among A.P. Møller-Maersk A/S, Horizon Lines, LLC, Horizon Lines of Puerto Rico, Inc. and Horizon
Lines of Alaska, LLC (Incorporated by reference to the Annual Report on Form 10-K of Horizon Lines, Inc. for the year ended December 24, 2006 (File No. 001-32627), filed on March 2, 2007)                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|10.14         |  | Stevedoring and Terminal Services Agreement, dated May 9, 2004, between APM Terminals, North America, Inc., Horizon Lines, LLC and Horizon Lines of Alaska, LLC. (Incorporated by reference to the
Registration Statement on Form S-4 of Horizon Lines Holding Corp. (File No. 333-123681), filed on March 30, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                
|               | 
|10.14.1      |  | Amendment No. 2 to Stevedoring and Terminal Services Agreement, dated November 30, 2006, among APM Terminals, North America, Inc., Horizon Lines, LLC and Horizon Lines of Alaska, LLC
(Incorporated by reference to the Annual Report on Form 10-K of Horizon Lines, Inc. for the year ended December 24, 2006 (File No. 001-32627), filed on March 2, 2007)                                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|10.15         |  | Bareboat Charter Party in relation to the U.S.-flag vessel Horizon Pacific, dated as of December 1, 1998, by and between State Street Bank and Trust Company (as successor in interest to The
Connecticut National Bank), as owner trustee, and Horizon Lines, LLC (formerly known as CSX Lines LLC, as successor in interest to Sea-Land Service, Inc. pursuant to an assignment and assumption agreement dated as of September 2, 1999 by and between
Sea-Land Service, Inc., as assignor, and CSX Lines, LLC (as successor in interest to Sea-Land Domestic Shipping, LLC)), as charterer. (Incorporated by reference to the Registration Statement on Form S-4 of Horizon Lines Holding Corp. (File
No. 333-123681), filed on March 30, 2005)   
|               | 
|10.16         |  | Bareboat Charter Party in relation to the U.S.-flag vessel Horizon Enterprise, dated as of December 1, 1998, by and between State Street Bank and Trust Company (as successor in interest to The
Connecticut National Bank), as owner trustee, and Horizon Lines, LLC (formerly known as CSX Lines LLC, as successor in interest to Sea-Land Service, Inc. pursuant to an assignment and assumption agreement dated as of September 2, 1999 by and between
Sea-Land Service, Inc., as assignor, and CSX Lines, LLC (as successor in interest to Sea-Land Domestic Shipping, LLC)), as charterer. (Incorporated by reference to the Registration Statement on Form S-4 of Horizon Lines Holding Corp. (File
No. 333-123681), filed on March 30, 2005)
|               | 
|10.17.1        |  | Assignment and Assumption Agreement dated as of September 2, 1999, by and between Sea-Land Service, Inc. and Sea-Land Domestic Shipping, LLC. (Incorporated by reference to the Registration
Statement on Form S-4 of Horizon Lines Holding Corp. (File No. 333-123681), filed on March 30, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|               | 
|10.17.2        |  | Asset Purchase Agreement, dated September 2, 2005, by and among DaimlerChrysler Services North America LLC, Elspeth Pacific, Inc. and Horizon Lines, LLC. (Previously filed as an exhibit to
Amendment No. 5 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed on September 7, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                         
|               | 
|10.18          |  | Capital Construction Fund Agreement, dated March 29, 2004, between Horizon Lines, LLC and the United States of America, represented by the Secretary of Transportation, acting by and through the
Maritime Administrator. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|10.19          |  | Harbor Lease dated January 12, 1996, between Horizon Lines, LLC (formerly known as CSX Lines, LLC, as successor in interest to SL Services, Inc. (formerly known as Sea-Land Service, Inc.),
pursuant to Consent to Two Assignments of Harbor Lease No. H-92-22, dated February 14, 2003) and the State of Hawaii, Department of Transportation, Harbors Division. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration
Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                                                                            
|               | 
|10.20          |  | Agreement dated May 16, 2002, between Horizon Lines of Puerto Rico, Inc. (formerly known as CSX Lines of Puerto Rico, Inc.) and The Puerto Rico Ports Authority. (Previously filed as an exhibit
to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                              
|               | 
|10.21          |  | Agreement dated March 29, 2001, between Horizon Lines of Puerto Rico, Inc. (formerly known as CSX Lines of Puerto Rico, Inc.) and The Puerto Rico Ports Authority. (Previously filed as an exhibit
to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                            
|               | 
|10.22          |  | Port of Kodiak Preferential Use Agreement dated April 12, 2002, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines of Alaska, LLC, as successor in
interest to CSX Lines, LLC, pursuant to Amendment No. 1 to the Preferential Use Agreement, dated April 12, 2002). (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073),
originally filed on March 2, 2005)                                                                                                                                                                                                                                                                            
|               | 
|10.22.1        |  | Port of Kodiak Preferential Use Agreement dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC. (Previously filed as an exhibit to Amendment No. 3
to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed on July 29, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                 



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.23          |  | Terminal Operation Contract dated May 2, 2002, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines of Alaska, LLC). (Previously filed as an exhibit
to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)                                                                                                                                                                                                                                                      
|               | 
|10.23.1        |  | Terminal Operation Contract dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC. (Previously filed as an exhibit to Amendment No. 3 to Horizon Lines,
Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed on July 29, 2005)                                                                                                                                                                                                                                                                                       
|               | 
|10.24          |  | Sublease, Easement and Preferential Use Agreement dated October 2, 1990, between the City of Unalaska and Horizon Lines, LLC (formerly known as CSX Lines LLC), as successor in interest to
Sea-Land Service, Inc., together with the addendum thereto dated October 2, 1990, as amended by the Amendment to Sublease, Easement and Preferential Use Agreement dated May 31, 2000, and Amendment #1 dated May 1, 2002. (Previously filed as an
exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), originally filed on March 2, 2005)
|               | 
|10.24.1        |  | Amendment #2 dated February 27, 2003 to Preferential Use Agreement dated October 2, 1990 between the City of Unalaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines of Alaska,
LLC). (Previously filed as an exhibit to Amendment No. 3 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed on July 29, 2005)                                                                                                                                                                                                          
|               | 
|10.25          |  | Form of Directors and Officers Indemnification Agreement. (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s Registration Statement on Form S-1
(File No. 333-123073), filed on September 19, 2005)                                                                                                                                                                                                                                                                                                                                              
|               | 
|10.26          |  | Employment Agreement dated as of September 16, 2005, between Horizon Lines, LLC and John V. Keenan. (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s
Registration Statement on Form S-1 (File No. 333-123073), filed on September 19, 2005)                                                                                                                                                                                                                                                                                                      
|               | 
|10.26.1        |  | First Amendment to Employment Agreement dated as of December 20, 2003, between Horizon Lines and John V. Keenan. (Incorporated by reference to the Report on Form 8-K of Horizon Lines, Inc. filed
on December 21, 2005)                                                                                                                                                                                                                                                                                                                                                    
|               | 
|10.27          |  | Horizon Lines, Inc., Equity Incentive Plan (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073),
filed on September 19, 2005)                                                                                                                                                                                                                                                                                                                                                               
|               | 
|10.27.1        |  | Amended and Restated Equity Incentive Plan (Incorporated by reference to the Report on Form 8-K of Horizon Lines, Inc. filed on October 24, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|10.28          |  | Horizon Lines, Inc., Employee Stock Purchase Plan (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File
No. 333-123073), filed on September 19, 2005)                                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.29          |  | Form of Registration Rights Agreement (Previously filed as an exhibit to Amendment No. 6 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-123073), filed
on September 19, 2005)                                                                                                                                                                                                                                                                                                                                                                    
|               | 
|10.30          |  | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of September 22, 2005, by and among Horizon Lines, LLC, UBS AG, Stamford Branch, as administrative agent, the lenders from time
to time party thereto and other parties thereto (Incorporated by reference to Horizon Lines, Inc.s Report on Form 10-Q for the fiscal quarter ended September 25, 2005)                                                                                                                                                                                                 
|               | 
|10.31          |  | Amendment to Horizon Lines Holding Corp. Stock Option Plan (Incorporated by reference to the Report on Form 8-K of Horizon Lines, Inc. filed on October 24, 2005)                                                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|10.32          |  | Stock Option Award Agreement (Incorporated by reference to the Report on Form 8-K of Horizon Lines, Inc. filed on April 11, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                           



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                             
|10.33          |  | Bareboat Charter Agreement dated as of April 7, 2006, by and among HL Eagle and Horizon Lines, LLC. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form
S-1 (File No. 333-134270), filed on May 19, 2006)                                                                                                                                                                           
|               | 
|10.34          |  | Bareboat Charter Agreement dated as of April 7, 2006, by and among HL Falcon and Horizon Lines, LLC. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form
S-1 (File No. 333-134270), filed on May 19, 2006)                                                                                                                                                                          
|               | 
|10.35          |  | Bareboat Charter Agreement dated as of April 7, 2006, by and among HL Hunter and Horizon Lines, LLC. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form
S-1 (File No. 333-134270), filed on May 19, 2006)                                                                                                                                                                          
|               | 
|10.36          |  | Bareboat Charter Agreement dated as of April 7, 2006, by and among HL Tiger and Horizon Lines, LLC. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form
S-1 (File No. 333-134270), filed on May 19, 2006)                                                                                                                                                                           
|               | 
|10.37          |  | Bareboat Charter Agreement dated as of April 7, 2006, by and among HL Hawk and Horizon Lines, LLC. (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form
S-1 (File No. 333-134270), filed on May 19, 2006)                                                                                                                                                                            
|               | 
|10.38          |  | Restricted Stock Agreement dated as of February 1, 2006, among Horizon Lines, Inc. and John Handy (Previously filed as an exhibit to Horizon Lines, Inc.s Registration Statement on Form S-1
(File No. 333-134270), filed on May 19, 2006)                                                                                                                                                                             
|               | 
|10.39          |  | Amendment No. 2 to Amended and Restated Credit Agreement, dated as of April 7, 2006, by and among Horizon Lines, LLC, UBS AG, Stamford Branch, as administrative agent, the lenders from time to
time party thereto and other parties thereto (Previously filed as an exhibit to Amendment No. 1 to Horizon Lines, Inc.s Registration Statement on Form S-1 (File No. 333-134270), filed on June 2, 2006)              
|               | 
|10.40          |  | Amendment No. 3 to Amended and Restated Credit Agreement, dated as of December 12, 2006, by and among Horizon Lines, LLC, UBS AG, Stamford Branch, as administrative agent, the lenders from time
to time party thereto and other parties thereto (Incorporated by reference to the Annual Report on Form 10-K of Horizon Lines, Inc. for the year ended December 24, 2006 (File No. 001-32627), filed on March 2, 2007)
|               | 
|21             |  | List of Subsidiaries of H-Lines Finance Holding Corp. (Previously filed as an exhibit to the Parents Registrants Registration Statement on Form S-1 (File No. 333-123073),
originally filed on March 2, 2005)                                                                                                                                                                                                         
|               | 
|31.1*          |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                          
|               | 
|31.2*          |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                          
|               | 
|32.1*          |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                           
|               | 
|32.2*          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                           

---

|* | Filed herewith
|- | --------------

| | Portions of this document were omitted and filed separately pursuant to a request for confidential treatment in accordance with Rule 406 of the Securities Act.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Portions of this document were omitted and filed separately pursuant to a request for confidential treatment in accordance with Rule 24b-2 of the Exchange Act.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 2ndday of March 2007.



H-Lines Finance Holding Corp.By:

/s/ CHARLES G. RAYMONDCharles G. Raymond Chairman, Chief Executive Officer and President


Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the 2ndday of March 2007.



|                     |  |                                                                                                                
|-------------------- |  | ---------------------------------------------------------------------------------------------------------------
|Signature            |  | Title                                                                                                          
|                     | 
|/s/ CHARLES
RAYMOND  |  | Chairman, Chief Executive Officer and President(Principal Executive Officer)                                   
|                     | 
|Charles G. Raymond   |  |                                                                                                                
|                     | 
|/s/ M. MARK
URBANIA  |  | Senior Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)
|                     | 
|M. Mark Urbania      |  |                                                                                                                
|                     | 
|/s/ JAMES G.
CAMERON |  | Director                                                                                                       
|                     | 
|James G. Cameron     |  |                                                                                                                
|                     | 
|/s/ DAN A.
COLUSSY   |  | Director                                                                                                       
|                     | 
|Dan A. Colussy       |  |                                                                                                                
|                     | 
|/s/ ERNIE L.
DANNER  |  | Director                                                                                                       
|                     | 
|Ernie L. Danner      |  |                                                                                                                
|                     | 
|/s/ MARCEL
FOURNIER  |  | Director                                                                                                       
|                     | 
|Marcel Fournier      |  |                                                                                                                
|                     | 
|/s/ THOMAS M.
HICKEY |  | Director                                                                                                       
|                     | 
|Thomas M. Hickey     |  |                                                                                                                
|                     | 
|/s/ FRANCIS
JUNGERS  |  | Director                                                                                                       
|                     | 
|Francis Jungers      |  |                                                                                                                



57



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

H-Lines Finance Holding Corp.

We have audited the
accompanying consolidated balance sheets of H-Lines Finance Holding Corp. as of December 24, 2006 and December 25, 2005, and the related consolidated and combined statements of operations, cash flows, and changes in stockholders
equity of H-Lines Finance Holding Corp. for the years ended December 24, 2006 and December 25, 2005 and for the period from July 7, 2004 through December 26, 2004, and of Predecessor A for the period from December 22, 2003
through July 6, 2004. Our audits also included the financial statement schedule of H-Lines Finance Holding Corp. and Predecessor A listed in the index at item 15(a). These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of H-Lines Finance Holding Corp. at December 24, 2006 and December 25, 2005, and the consolidated and combined results of their operations and
their cash flows for the years ended December 24, 2006 and December 25, 2005 and for the period from July 7, 2004 through December 26, 2004, and of Predecessor A for the period from December 22, 2003 through July 6,
2004 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

/s/ Ernst & Young LLP

Charlotte, North Carolina

February 28, 2007



F-1



---

##### Table of Contents

H-Lines Finance Holding Corp.

Consolidated Balance Sheets

(in thousands, except per share data)



|                                                                                                                       |  |                   |         |   |                   |   |        
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | -------
|                                                                                                                       |  | December 24, 2006 |         |   | December 25, 2005
|Assets                                                                                                                 |  |                   |         |   |                   |   |        
|Current assets:                                                                                                        |  |                   |         |   |                   |   |        
|Cash and cash equivalents                                                                                              |  | $                 | 93,856  |   |                   | $ | 41,268 
|Accounts receivable, net of allowance                                                                                  |  |                   | 120,732 |   |                   |   | 119,838
|Deferred tax asset                                                                                                     |  |                   | 11,538  |   |                   |   | 15,898 
|Materials and supplies                                                                                                 |  |                   | 24,658  |   |                   |   | 26,355 
|Other current assets                                                                                                   |  |                   | 8,002   |   |                   |   | 5,499  
|                                                                                                                       |  |                   |         |   |                   |   |        
|Total current assets                                                                                                   |  |                   | 258,786 |   |                   |   | 208,858
|Property and equipment, net                                                                                            |  |                   | 188,652 |   |                   |   | 200,597
|Goodwill                                                                                                               |  |                   | 306,724 |   |                   |   | 306,724
|Intangible assets, net                                                                                                 |  |                   | 167,882 |   |                   |   | 191,502
|Other long-term assets                                                                                                 |  |                   | 22,580  |   |                   |   | 18,034 
|                                                                                                                       |  |                   |         |   |                   |   |        
|Total assets                                                                                                           |  | $                 | 944,624 |   |                   | $ | 925,715
|                                                                                                                       |  |                   |         |   |                   |   |        
|Liabilities and Stockholders Equity                                                                                   |  |                   |         |   |                   |   |        
|Current liabilities:                                                                                                   |  |                   |         |   |                   |   |        
|Accounts payable                                                                                                       |  | $                 | 28,319  |   |                   | $ | 22,368 
|Current portion of long-term debt                                                                                      |  |                   | 6,758   |   |                   |   | 2,500  
|Other accrued liabilities                                                                                              |  |                   | 125,744 |   |                   |   | 118,389
|                                                                                                                       |  |                   |         |   |                   |   |        
|Total current liabilities                                                                                              |  |                   | 160,821 |   |                   |   | 143,257
|Long-term debt, net of current                                                                                         |  |                   | 503,708 |   |                   |   | 527,568
|Deferred tax liability                                                                                                 |  |                   | 34,109  |   |                   |   | 64,008 
|Deferred rent                                                                                                          |  |                   | 36,003  |   |                   |   | 40,476 
|Other long-term liabilities                                                                                            |  |                   | 4,074   |   |                   |   | 2,284  
|                                                                                                                       |  |                   |         |   |                   |   |        
|Total liabilities                                                                                                      |  |                   | 738,715 |   |                   |   | 777,593
|                                                                                                                       |  |                   |         |   |                   |   |        
|Stockholders equity:                                                                                                  |  |                   |         |   |                   |   |        
|Common stock, $.01 par value, 1 shares authorized outstanding at December 24, 2006 and December 25, 2005,
respectively |  |                   |        |   |                   |   |       
|Additional paid in capital                                                                                             |  |                   | 77,665  |   |                   |   | 78,005 
|Accumulated other comprehensive (loss) income                                                                          |  |                   | (1,011  | ) |                   |   | 74     
|Retained earnings                                                                                                      |  |                   | 129,255 |   |                   |   | 70,043 
|                                                                                                                       |  |                   |         |   |                   |   |        
|Total stockholders equity                                                                                             |  |                   | 205,909 |   |                   |   | 148,122
|                                                                                                                       |  |                   |         |   |                   |   |        
|Total liabilities and stockholders equity                                                                             |  | $                 | 944,624 |   |                   | $ | 925,715
|                                                                                                                       |  |                   |         |   |                   |   |        

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



F-2



---

##### Table of Contents

H-Lines Finance Holding Corp. and Predecessor Company

Consolidated and Combined Statements of Operations

(in thousands)



|                                                   |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        
|-------------------------------------------------- |  | ------------------------------------------------------ | --------- | - | ------------------------------------------------------ | ------------- | ------------------------------------------------ |  | - | ------- | --------------------------------------------------- |  |  | - | -------
|                                                   |  | H-Lines Finance Holdings Corp.                         |           |   |                                                        | Predecessor A
|                                                   |  | For the periodDecember 26,2005 throughDecember 24,2006 |           |   | For the periodDecember 27,2004 throughDecember 25,2005 |               | For theperiodJuly 7, 2004throughDecember 26,2004 |  |   |         | For the periodDecember 22,2003 throughJuly 06, 2004
|Operating revenue                                  |  | $                                                      | 1,156,892 |   |                                                        | $             | 1,096,156                                        |  | $ | 481,898 |                                                     |  |  | $ | 498,430
|                                                   |  |                                                        |           |   |                                                       
|Operating expense:                                 |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        
|Operating expense (excluding depreciation expense) |  |                                                        | 896,311   |   |                                                        |               | 867,307                                          |  |   | 377,468 |                                                     |  |  |   | 402,875
|Depreciation and amortization                      |  |                                                        | 50,223    |   |                                                        |               | 51,141                                           |  |   | 24,633  |                                                     |  |  |   | 20,937 
|Amortization of vessel dry-docking                 |  |                                                        | 14,652    |   |                                                        |               | 15,766                                           |  |   | 7,118   |                                                     |  |  |   | 8,743  
|Selling, general and administrative                |  |                                                        | 94,753    |   |                                                        |               | 93,947                                           |  |   | 40,534  |                                                     |  |  |   | 43,323 
|Miscellaneous expense                              |  |                                                        | 1,333     |   |                                                        |               | 649                                              |  |   | 269     |                                                     |  |  |   | 1,891  
|                                                   |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        
|Total operating expense                            |  |                                                        | 1,057,272 |   |                                                        |               | 1,028,810                                        |  |   | 450,022 |                                                     |  |  |   | 477,769
|                                                   |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        
|Operating income                                   |  |                                                        | 99,620    |   |                                                        |               | 67,346                                           |  |   | 31,876  |                                                     |  |  |   | 20,661 
|                                                   |  |                                                        |           |   |                                                       
|Other expense (income):                            |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        
|Interest expense, net                              |  |                                                        | 48,558    |   |                                                        |               | 51,373                                           |  |   | 18,260  |                                                     |  |  |   | 5,111  
|Interest expensepreferred units of subsidiary     |  |                                                        |          |   |                                                        |               |                                                 |  |   |        |                                                     |  |  |   | 2,686  
|                                                   |  |                                                        |           |   |                                                       
|Loss on early extinguishment of debt               |  |                                                        | 581       |   |                                                        |               | 13,154                                           |  |   |        |                                                     |  |  |   |       
|Other (income) expense, net                        |  |                                                        | (187      | ) |                                                        |               | 26                                               |  |   | 15      |                                                     |  |  |   | 7      
|                                                   |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        
|Income before income taxes                         |  |                                                        | 50,668    |   |                                                        |               | 2,793                                            |  |   | 13,601  |                                                     |  |  |   | 12,857 
|Income tax expense (benefit)                       |  |                                                        | (25,248   | ) |                                                        |               | 1,560                                            |  |   | 5,168   |                                                     |  |  |   | 4,896  
|                                                   |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        
|Net income                                         |  | $                                                      | 75,916    |   |                                                        | $             | 1,233                                            |  | $ | 8,433   |                                                     |  |  | $ | 7,961  
|                                                   |  |                                                        |           |   |                                                        |               |                                                  |  |   |         |                                                     |  |  |   |        

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



F-3



---

##### Table of Contents

H-Lines Finance Holding Corp. and Predecessor Company

Consolidated and Combined Statements of Cash Flows

(in thousands)



|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- | ------- | - | ------------------------------------------------------- | - | ------------- | -------------------------------------------------- |  | - | -------- | - | -------------------------------------------------- |  |  | - | ------- | -
|                                                                                                   |  | H-Lines Finance Holding Corp.                           |         |   |                                                         |   | Predecessor A |                                                   
|                                                                                                   |  | For the periodDecember 26,2005
throughDecember 24, 2006 |         |   | For the periodDecember 27,2004
throughDecember 25, 2005 |   |               | For the periodJuly 7,
2004throughDecember 26, 2004 |  |   |          |   | For the periodDecember 22,2003
throughJuly 6, 2004 | 
|Cash flows from operating activities:                                                              |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Net income                                                                                         |  | $                                                       | 75,916  |   |                                                         | $ | 1,233         |                                                    |  | $ | 8,433    |   |                                                    |  |  | $ | 7,961   |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Depreciation                                                                                       |  |                                                         | 30,676  |   |                                                         |   | 31,580        |                                                    |  |   | 15,187   |   |                                                    |  |  |   | 19,385  |  
|Amortization of intangibles                                                                        |  |                                                         | 19,547  |   |                                                         |   | 19,561        |                                                    |  |   | 9,446    |   |                                                    |  |  |   | 1,552   |  
|Amortization of vessel dry-docking                                                                 |  |                                                         | 14,652  |   |                                                         |   | 15,766        |                                                    |  |   | 7,118    |   |                                                    |  |  |   | 8,743   |  
|Amortization of deferred financing costs                                                           |  |                                                         | 3,990   |   |                                                         |   | 3,363         |                                                    |  |   | 1,303    |   |                                                    |  |  |   | 550     |  
|Deferred income taxes                                                                              |  |                                                         | (24,881 | ) |                                                         |   | (6,453        | )                                                  |  |   | 4,624    |   |                                                    |  |  |   | 2,968   |  
|Loss (gain) on equipment disposals                                                                 |  |                                                         | 242     |   |                                                         |   | (993          | )                                                  |  |   | (140     | ) |                                                    |  |  |   | 24      |  
|Loss on early extinguishment of debt                                                               |  |                                                         | 581     |   |                                                         |   | 13,154        |                                                    |  |   |         |   |                                                    |  |  |   |        |  
|Accretion on 11% senior discount notes                                                             |  |                                                         | 9,174   |   |                                                         |   | 12,057        |                                                    |  |   | 549      |   |                                                    |  |  |   |        |  
|Accretion of preferred units of subsidiary                                                         |  |                                                         |        |   |                                                         |   |              |                                                    |  |   |         |   |                                                    |  |  |   | 2,686   |  
|Stock based compensation                                                                           |  |                                                         | 949     |   |                                                         |   | 99            |                                                    |  |   |         |   |                                                    |  |  |   | 1,765   |  
|Tax (deficiency) benefit from exercise of stock options                                            |  |                                                         | (1,289  | ) |                                                         |   | 5,495         |                                                    |  |   | 9,494    |   |                                                    |  |  |   |        |  
|Changes in operating assets and liabilities:                                                       |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Accounts receivable                                                                                |  |                                                         | (894    | ) |                                                         |   | (9,037        | )                                                  |  |   | 8,633    |   |                                                    |  |  |   | (13,678 | )
|Materials and supplies                                                                             |  |                                                         | 1,819   |   |                                                         |   | (5,309        | )                                                  |  |   | (161     | ) |                                                    |  |  |   | (3,020  | )
|Other current assets                                                                               |  |                                                         | (2,503  | ) |                                                         |   | 10,785        |                                                    |  |   | (6,745   | ) |                                                    |  |  |   | (6,152  | )
|Accounts payable                                                                                   |  |                                                         | 5,951   |   |                                                         |   | (2,907        | )                                                  |  |   | (3,203   | ) |                                                    |  |  |   | 200     |  
|Accrued liabilities                                                                                |  |                                                         | 3,409   |   |                                                         |   | 9,256         |                                                    |  |   | 22,235   |   |                                                    |  |  |   | (13,152 | )
|Vessel dry-docking payments                                                                        |  |                                                         | (16,815 | ) |                                                         |   | (16,038       | )                                                  |  |   | (2,075   | ) |                                                    |  |  |   | (10,198 | )
|Other assets/liabilities                                                                           |  |                                                         | (3,560  | ) |                                                         |   | (2,919        | )                                                  |  |   | (1,400   | ) |                                                    |  |  |   | (2,562  | )
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                                                         | 116,964 |   |                                                         |   | 78,693        |                                                    |  |   | 73,298   |   |                                                    |  |  |   | (2,928  | )
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Cash flows from investing activities:                                                              |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Purchases of equipment                                                                             |  |                                                         | (21,288 | ) |                                                         |   | (41,234       | )                                                  |  |   | (11,000  | ) |                                                    |  |  |   | (21,889 | )
|Acquisition of company                                                                             |  |                                                         |        |   |                                                         |   |              |                                                    |  |   | (663,031 | ) |                                                    |  |  |   |        |  
|Transaction costs associated with acquisition                                                      |  |                                                         |        |   |                                                         |   |              |                                                    |  |   | (246     | ) |                                                    |  |  |   |        |  
|Proceeds from sale of equipment                                                                    |  |                                                         | 2,192   |   |                                                         |   | 2,417         |                                                    |  |   | 354      |   |                                                    |  |  |   | 1,399   |  
|Other investing activities                                                                         |  |                                                         | (245    | ) |                                                         |   |              |                                                    |  |   |         |   |                                                    |  |  |   | (150    | )
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Net cash used in investing activities                                                              |  |                                                         | (19,341 | ) |                                                         |   | (38,817       | )                                                  |  |   | (673,923 | ) |                                                    |  |  |   | (20,640 | )
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Cash flows from financing activities:                                                              |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Initial capitalization of Company                                                                  |  |                                                         |        |   |                                                         |   |              |                                                    |  |   | 157,031  |   |                                                    |  |  |   |        |  
|Issuance of long term debt                                                                         |  |                                                         |        |   |                                                         |   |              |                                                    |  |   | 612,819  |   |                                                    |  |  |   |        |  
|Borrowing under revolving credit facility                                                          |  |                                                         |        |   |                                                         |   |              |                                                    |  |   | 6,000    |   |                                                    |  |  |   |        |  
|Payment on revolving credit facility                                                               |  |                                                         |        |   |                                                         |   |              |                                                    |  |   | (6,000   | ) |                                                    |  |  |   |        |  
|Tax (deficiency) benefit from exercise of stock options                                            |  |                                                         | 1,289   |   |                                                         |   | (5,495        | )                                                  |  |   |         |   |                                                    |  |  |   |        |  
|Payment of financing costs                                                                         |  |                                                         | (1,182  | ) |                                                         |   | (1,754        | )                                                  |  |   | (4,800   | ) |                                                    |  |  |   |        |  
|Capital Contribution                                                                               |  |                                                         |        |   |                                                         |   | 303           |                                                    |  |   |         |   |                                                    |  |  |   |        |  
|Payments of long-term debt                                                                         |  |                                                         | (28,776 | ) |                                                         |   | (98,696       | )                                                  |  |   | (625     | ) |                                                    |  |  |   |        |  
|Redemption premiums                                                                                |  |                                                         |        |   |                                                         |   | (9,522        | )                                                  |  |   |         |   |                                                    |  |  |   |        |  
|Dividend from (to) Parent                                                                          |  |                                                         | (16,171 | ) |                                                         |   | 60,377        |                                                    |  |   | (107,386 | ) |                                                    |  |  |   |        |  
|Payments on capital lease obligation                                                               |  |                                                         | (195    | ) |                                                         |   | (170          | )                                                  |  |   | (65      | ) |                                                    |  |  |   | (87     | )
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Net cash provided by (used in) financing activities                                                |  |                                                         | (45,035 | ) |                                                         |   | (54,957       | )                                                  |  |   | 656,974  |   |                                                    |  |  |   | (87     | )
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                                                         | 52,588  |   |                                                         |   | (15,081       | )                                                  |  |   | 56,349   |   |                                                    |  |  |   | (23,655 | )
|Cash and cash equivalents at beginning of period                                                   |  |                                                         | 41,268  |   |                                                         |   | 56,349        |                                                    |  |   |         |   |                                                    |  |  |   | 41,811  |  
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $                                                       | 93,856  |   |                                                         | $ | 41,268        |                                                    |  | $ | 56,349   |   |                                                    |  |  | $ | 18,156  |  
|                                                                                                   |  |                                                         |         |   |                                                         |   |               |                                                    |  |   |          |   |                                                    |  |  |   |         |  

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



F-4



---

##### Table of Contents

H-Lines Finance Holding Corp. and Predecessor Company

Consolidated and Combined Statements of Changes in
Stockholders Equity

(in thousands)



|                                                                 |  |               |  |              |   |                          |   |                   |  |                                    |        |  |                      |      |   |  |   |        
|---------------------------------------------------------------- |  | ------------- |  | ------------ | - | ------------------------ | - | ----------------- |  | ---------------------------------- | ------ |  | -------------------- | ---- | - |  | - | -------
|Predecessor - A                                                  |  | Common Shares |  | Common Stock |   | AdditionalPaid InCapital |   | Retained Earnings |  | AccumulatedOtherComprehensive Loss |        |  | Stockholders Equity
|Stockholders equity at December 21, 2003                        |  | 800           |  | $            | 8 |                          | $ | 79,992            |  | $                                  | 17,162 |  | $                    | (302 | ) |  | $ | 96,860 
|Grant of stock options                                           |  |              |  |              |  |                          |   | 1,765             |  |                                    |       |  |                      |     |   |  |   | 1,765  
|Change in fair value of interest rate contract                   |  |              |  |              |  |                          |   |                  |  |                                    |       |  |                      | 286  |   |  |   | 286    
|Net income for the period December 22, 2003 through July 6, 2004 |  |              |  |              |  |                          |   |                  |  |                                    | 7,961  |  |                      |     |   |  |   | 7,961  
|                                                                 |  |               |  |              |   |                          |   |                   |  |                                    |        |  |                      |      |   |  |   |        
|Comprehensive Income                                             |  |               |  |              |   |                          |   |                   |  |                                    |        |  |                      |      |   |  |   | 8,247  
|                                                                 |  |               |  |              |   |                          |   |                   |  |                                    |        |  |                      |      |   |  |   |        
|Stockholders equity at July 6, 2004                             |  | 800           |  | $            | 8 |                          | $ | 81,757            |  | $                                  | 25,123 |  | $                    | (16  | ) |  | $ | 106,872
|                                                                 |  |               |  |              |   |                          |   |                   |  |                                    |        |  |                      |      |   |  |   |        



|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------ |  | ----------- | - | ------------------------ | - | -------- | ---------------- |  | - | ------------------------------------------ | - |  | ------------------- | ------ | - |  | - | -------- | -
|H-Lines Finance Holding Corp.                                    |  | CommonShares |  | CommonStock |   | AdditionalPaid inCapital |   |          | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | StockholdersEquity |       
|Stockholders equity at July 7, 2004                             |  |             |  | $           |  |                          | $ |         |                  |  | $ |                                           |   |  | $                   |       |   |  | $ |         |  
|Initial capitalization                                           |  | 1            |  |             |  |                          |   | 170,000  |                  |  |   |                                           |   |  |                     |       |   |  |   | 170,000  |  
|Tax benefit from stock option deduction                          |  |             |  |             |  |                          |   | 9,494    |                  |  |   |                                           |   |  |                     |       |   |  |   | 9,494    |  
|Dividend to parent                                               |  |             |  |             |  |                          |   | (107,386 | )                |  |   |                                           |   |  |                     |       |   |  |   | (107,386 | )
|Net income for the period July 7, 2004 through December 26, 2004 |  |             |  |             |  |                          |   |         |                  |  |   | 8,433                                      |   |  |                     |       |   |  |   | 8,433    |  
|Change in fair value of fuel fixed priced contract               |  |             |  |             |  |                          |   |         |                  |  |   |                                           |   |  |                     | 129    |   |  |   | 129      |  
|Unrealized loss on pension                                       |  |             |  |             |  |                          |   |         |                  |  |   |                                           |   |  |                     | (58    | ) |  |   | (58      | )
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|Comprehensive income                                             |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   | 8,504    |  
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|Stockholders equity at December 26, 2004                        |  | 1            |  |             |  |                          |   | 72,108   |                  |  |   | 8,433                                      |   |  |                     | 71     |   |  |   | 80,612   |  
|Sale of stock                                                    |  |             |  |             |  |                          |   | 303      |                  |  |   |                                           |   |  |                     |       |   |  |   | 303      |  
|Tax benefit from exercise of stock options                       |  |             |  |             |  |                          |   | 5,495    |                  |  |   |                                           |   |  |                     |       |   |  |   | 5,495    |  
|Dividend from parent                                             |  |             |  |             |  |                          |   |         |                  |  |   | 60,377                                     |   |  |                     |       |   |  |   | 60,377   |  
|Stock based compensation                                         |  |             |  |             |  |                          |   | 99       |                  |  |   |                                           |   |  |                     |       |   |  |   | 99       |  
|Net income                                                       |  |             |  |             |  |                          |   |         |                  |  |   | 1,233                                      |   |  |                     |       |   |  |   | 1,233    |  
|Unrealized gain on pension                                       |  |             |  |             |  |                          |   |         |                  |  |   |                                           |   |  |                     | 58     |   |  |   | 58       |  
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|Change in fair value of fuel contract                            |  |             |  |             |  |                          |   |         |                  |  |   |                                           |   |  |                     | (55    | ) |  |   | (55      | )
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|Comprehensive income (loss)                                      |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   | 1,236    |  
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|Stockholders equity at December 25, 2005                        |  | 1            |  |             |  |                          |   | 78,005   |                  |  |   | 70,043                                     |   |  |                     | 74     |   |  |   | 148,122  |  
|Tax deficiency from exercise of stock options                    |  |             |  |             |  |                          |   | (1,289   | )                |  |   |                                           |   |  |                     |       |   |  |   | (1,289   | )
|Dividend to parent                                               |  |             |  |             |  |                          |   |         |                  |  |   | (16,704                                    | ) |  |                     |       |   |  |   | (16,704  | )
|Stock based compensation                                         |  |             |  |             |  |                          |   | 949      |                  |  |   |                                           |   |  |                     |       |   |  |   | 949      |  
|Net income                                                       |  |             |  |             |  |                          |   |         |                  |  |   | 75,916                                     |   |  |                     |       |   |  |   | 75,916   |  
|Change in fair value of fuel contract                            |  |             |  |             |  |                          |   |         |                  |  |   |                                           |   |  |                     | (74    | ) |  |   | (74      | )
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|Comprehensive income                                             |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   | 75,842   |  
|Adjustment to apply SFAS 158, net of tax                         |  |             |  |             |  |                          |   |         |                  |  |   |                                           |   |  |                     | (1,011 | ) |  |   | (1,011   | )
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  
|Stockholders equity at December 24, 2006                        |  | 1            |  | $           |  |                          | $ | 77,665   |                  |  | $ | 129,255                                    |   |  | $                   | (1,011 | ) |  | $ | 205,909  |  
|                                                                 |  |              |  |             |   |                          |   |          |                  |  |   |                                            |   |  |                     |        |   |  |   |          |  

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



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##### Table of Contents

HLines Finance Holding Corp. and Predecessor Company

Notes to Consolidated and Combined Financial
Statements

1. Basis of Presentation and Operations

On December 6, 2004, H-Lines Finance Holding Corp. (the Company) was formed by Horizon Lines, Inc. (the Parent), as a vehicle to issue 11% senior discount notes due 2013 (the 11%
senior discount notes) with an original $160.0 million aggregate principal amount at maturity. The Company is a wholly-owned subsidiary of Horizon Lines, Inc. (the Parent). The Company is the direct parent of Horizon Lines Holding
Corp. (HLHC), a Delaware corporation, which operates as a holding company for Horizon Lines, LLC (HL or Horizon Lines), a Delaware limited liability company and indirect wholly-owned subsidiary and Horizon Lines
of Puerto Rico, Inc. (HLPR), a Delaware corporation and indirect wholly-owned subsidiary of the Company. HL operates a domestic liner business with primary service to ports within the continental United States, Puerto Rico, Alaska,
Hawaii, and Guam. HL also offers terminal services and ground transportation services. HLPR operates as an agent for HL and also provides terminal services in Puerto Rico.

The Parent was formed on July 7, 2004 at the direction of Castle Harlan Partners I.V. L.P., a private equity investment fund managed by Castle
Harlan, Inc. (Castle Harlan) as an acquisition vehicle to acquire the equity interest in HLHC. The foregoing transactions included a merger, whereby HLHC became a wholly-owned subsidiary of the Parent. On December 6, 2004, the
Parent contributed all of its shares of the capital stock of HLHC to the Company. As a result, HLHC became a wholly-owned subsidiary of the Company and an indirect wholly-owned subsidiary of the Parent. The Company, during the period from
February 27, 2003 through July 6, 2004, is referred to as Predecessor A. During 2006, the Parent completed three secondary offerings, including a secondary offering (pursuant to a shelf registration) whereby CHP IV and other
affiliated private equity investment funds managed by Castle Harlan divested their ownership in the Parent.

The accompanying consolidated
and combined financial statements include the consolidated accounts of the Company and its majority owned subsidiaries as of December 24, 2006 and December 25, 2005 and the related consolidated statements of operations, stockholders
equity and cash flows commencing on July 7, 2004. All significant intercompany accounts and transactions have been eliminated.

On
July 7, 2004, the Company, H-Lines Subcorp., a wholly owned subsidiary of the Company, Predecessor A, a majority-owned subsidiary of Carlyle-Horizon Partners, L.P., and TC Group, LLC., an affiliate of Carlyle-Horizon Partners, L.P., amended and
restated a merger agreement dated as of May 22, 2004, between the same parties, and, pursuant to such amended and restated merger agreement, H-Lines Subcorp. merged, on such date, with and into Predecessor A, with Predecessor A as the surviving
corporation (such merger, the Merger). Upon the consummation of the Merger, the issued and outstanding shares of the common stock of Predecessor A and the outstanding options granted by Predecessor A to purchase shares of its common
stock were converted into the right to receive the applicable portion of the aggregate merger consideration of approximately $676.0 million, whereupon the Company became the holder of all of the outstanding common stock of Predecessor A. The Merger
was accounted for using the purchase method of accounting; accordingly, the consideration paid was allocated based on the estimated fair market values of the assets acquired and liabilities assumed. The excess of the consideration paid over the
estimated fair market value of the net assets acquired, including separately identifiable intangible assets, approximated $306.7 million, and was allocated to goodwill.

The following table sets forth the allocation of the purchase price in connection with the Merger (in thousands):



|                                  |  |   |          |  
|--------------------------------- |  | - | -------- | -
|Working capital                   |  | $ | 66,710   |  
|Property & equipment              |  |   | 188,863  |  
|Goodwill                          |  |   | 306,724  |  
|Customer contracts and trademarks |  |   | 201,475  |  
|Deferred financing costs          |  |   | 18,991   |  
|Long-term liabilities             |  |   | (126,184 | )
|Other, net                        |  |   | 19,421   |  
|                                  |  |   |          |  
|Purchase price                    |  | $ | 676,000  |  
|                                  |  |   |          |  



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##### Table of Contents

The following unaudited pro forma information presents the results of operations of the Company as if the
Merger had taken place at the beginning of each respective period. Pro forma adjustments have been made to reflect additional interest expense from debt associated with the Merger (in thousands):



|                                                                       |  |   |         |  
|---------------------------------------------------------------------- |  | - | ------- | -
|For the Period from December 22, 2003 through July 6, 2004 (Unaudited) |  |   |        
|Operating revenue                                                      |  | $ | 498,430 |  
|Operating income                                                       |  |   | 20,036  |  
|Net loss                                                               |  |   | (2,451  | )

The unaudited pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations that would have occurred had the Merger occurred at the beginning of the periods.

For the period from December 21, 2003 through July 7, 2004 the consolidated accounts and the condensed and consolidated statements of operations and cash flows represents that of Predecessor A. All significant intercompany
accounts and transactions have been eliminated.

2. Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents of the Company consist principally of cash held
in banks and temporary investments having a maturity of three months or less at the date of acquisition.

Allowance for Doubtful Accounts and Revenue
Adjustments

The Company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable
based upon its historical collection experience. The Company monitors its collection risk on an ongoing basis through the use of credit reporting agencies. The Company does not require collateral from its trade customers.

In addition, the Company maintains an allowance for revenue adjustments consisting of amounts reserved for billing rate changes that are not captured
upon load initiation. These adjustments generally arise: (1) when the sales department contemporaneously grants small rate changes (spot quotes) to customers that differ from the standard rates in the system; (2) when freight
requires dimensionalization or is reweighed resulting in a different required rate; (3) when billing errors occur; and (4) when data entry errors occur. When appropriate, permanent rate changes are initiated and reflected in the system.
These revenue adjustments are recorded as a reduction to revenue.

The allowance for doubtful accounts and revenue adjustments approximated
$5.0 million at December 24, 2006 and $6.1 million at December 25, 2005, respectively.

Materials and Supplies

Materials and supplies consist primarily of fuel inventory aboard vessels and inventory for maintenance of property and equipment. Fuel is carried at cost
on the first in, first out (FIFO) basis, while all other materials and supplies are carried at average cost.

Property and Equipment

Property and equipment are stated at cost. Certain costs incurred in the development of internal-use software are capitalized. Routine maintenance,
repairs, and removals other than vessel drydockings are charged to expense. Expenditures that materially increase values, change capacities or extend useful lives of the assets are capitalized. Depreciation and amortization is computed by the
straight-line method over the estimated useful lives of the assets or over the terms of capital leases. The estimated useful lives of the Companys assets are as follows:



|                              |  |            
|----------------------------- |  | -----------
|Buildings, chassis and cranes |  | 25 years   
|Containers                    |  | 15 years   
|Vessels                       |  | 20-40 years
|Software                      |  | 3 years    
|Other                         |  | 3-10 years 



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##### Table of Contents

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows will not be sufficient to recover the carrying amount of an asset, the asset is written down to its fair value.

Vessel Drydocking

Vessels must undergo regular
inspection, monitoring and maintenance, referred to as drydocking, to maintain the required operating certificates. United States Coast Guard regulations generally require that vessels be drydocked twice every five years. Because drydockings enable
the vessel to continue operating in compliance with U.S. Coast Guard requirements, the costs of these scheduled drydockings are customarily capitalized and are then amortized over a 30-month period beginning with the accounting period following the
vessels release from drydock.

The Company takes advantage of vessel drydockings to also perform normal repair and maintenance
procedures on the vessels. These routine vessel maintenance and repair procedures are charged to expense as incurred. In addition, the Company will occasionally during a vessel drydocking, replace vessel machinery or equipment and perform procedures
that materially enhance capabilities of a vessel. In these circumstances, the expenditures are capitalized and depreciated over the estimated useful lives.

Intangible Assets

Intangible assets consist of goodwill, customer contracts, trademarks, and deferred financing costs all
of which are related to the Merger on July 7, 2004. The Company amortizes customer contracts using the straight line method over the expected useful lives of 8 to 10 years. The Company also amortizes trademarks using the straight line method
over the expected life of the related trademarks of 15 years. The Company amortizes debt issue cost using the effective interest method over the term of the related debt.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets, goodwill and other intangible assets with indefinite useful lives are
not amortized but are subject to annual undiscounted cash flow impairment tests. At least annually, or sooner if there is an indicator of impairment, the fair value of the reporting unit is calculated. If the calculated fair value is less than the
carrying amount, an impairment loss is recognized.

Revenue Recognition

The Company accounts for transportation revenue based upon method two under Emerging Issues Task Force No. 91-9 Revenue and Expense Recognition
for Freight Services in Process. Under this method the Company records transportation revenue and an accrual for the corresponding costs to complete delivery when the cargo first sails from its point of origin. The Company believes this method
of revenue recognition does not result in a material difference in reported net income on an annual or quarterly basis as compared to recording transportation revenue between accounting periods based upon the relative transit time within each
respective period with expenses recognized as incurred.

Terminal and other service revenue and related costs of sales are recognized as
services are performed.

Casualty and Other Reserves

The Company maintains insurance for casualty, property and health claims. Most of the Companys insurance arrangements include a level of self-insurance. Reserves are established based on the value of cargo
damaged and the use of current trends and historical data for other claims. These estimates are based on historical information along with certain assumptions about future events.

Derivative Instruments

The Company accounts for derivative instruments in accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which requires all derivative instruments be recognized in the financial statements at fair value.

The Company occasionally utilizes derivative instruments tied to various indexes to hedge a portion of its exposure to bunker fuel price increases. These
instruments consist of fixed price swap agreements. The Company does not use derivative instruments for trading purposes. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit
standards for its counterparties.

Predecessor A used derivative financial instruments to manage its exposure to movements in interest
rates. The use of these financial instruments modified the exposure of these risks with the intent to reduce the risk to Predecessor A. Predecessor A did not use financial instruments for trading purposes, nor did it use leveraged financial
instruments. Credit risk related to the derivative financial instruments was considered minimal and was managed by requiring high credit standards for its counterparties and periodic settlements.



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##### Table of Contents

Changes in fair value of derivative financial instruments are recorded as adjustments to the assets or
liabilities being hedged in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the
effectiveness of the hedge.

Income Taxes

The Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which the assets and liabilities
are expected to be recovered or settled. The effects on deferred tax assets and liabilities of subsequent changes in the tax laws and rates are recognized in income during the year the changes are enacted. Deferred tax assets are reduced by a
valuation allowance when, in the judgment of management, it is more likely than not that some portion or all of the deferred tax assets will not be realizable.

The American Jobs Creation Act of 2004 (the Act) instituted an elective alternative tax on qualifying shipping activities (tonnage tax) for corporations operating U.S.-flag vessels in U.S.
foreign trade, as defined in the Act. During 2006, after evaluating the merits and requirements of the tonnage tax, the Company elected the application of the tonnage tax instead of the federal corporate income tax on income from its qualifying
shipping activities. As the Company expects to continue to qualify for application of the tonnage tax, deferred tax assets and liabilities relating to the qualifying shipping activities are measured using an effective tax rate of zero.

Stock-based Compensation

Horizon Lines, Inc.
Stock Options

On September 16, 2005, the Board of Directors of the Parent authorized the issuance of up to an aggregate of
3,088,668 shares of its common stock. The Company early adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R) in the fourth quarter of fiscal year 2005. Because the participants in this plan are generally
limited to employees of the Company, and therefore options were granted for services to be provided to the Company, the stock based compensation expense related to these options is being recorded on the Companys financial statements. SFAS 123R
covers a wide range of share-based compensation arrangements including stock options, restricted share plans, and employee stock purchase plans.

In applying SFAS 123R, the value of each equity-based award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model takes into account volatility in the price of the Parents stock, the
risk-free interest rate, the estimated life of the equity-based award, the closing market price of the Parents stock and the exercise price. Due to the lack of trading activity since the Parents stock became publicly traded, the
estimates of stock price volatility on the average of (i) the Parents historical stock price over the period in which it has been publicly traded and (ii) historical volatility of similar entities commensurate with the expected term
of the equity-based award; however, this estimate is neither predictive nor indicative of the future performance of the Parents. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of
management judgment. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those options expected to vest.



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##### Table of Contents

Predecessor A Stock Options

As permitted by SFAS No. 123, Accounting for Stock-based Compensation (SFAS 123), Predecessor A chose to continue to account
for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Accordingly,
compensation cost for stock options was measured as the excess, if any, of the quoted market price of Predecessor As stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation costs been
determined based on the fair value at the grant date consistent with provisions of SFAS 123, Predecessor As pro forma net income and earnings per share would have been impacted as follows (in thousands, except per share amounts):



|                                                                                                                 |  |                                                       |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ------ | -
|                                                                                                                 |  | For the Period December 22, 2003 through July 6, 2004 |       
|Net income as reported                                                                                           |  | $                                                     | 7,961  |  
|Deduct: total stock-based compensation expense determined under the fair value method net of related tax effects |  |                                                       | (2,055 | )
|Add: total stock-based compensation expense recorded under APB 25                                                |  |                                                       | 1,765  |  
|                                                                                                                 |  |                                                       |        |  
|Pro forma net income                                                                                             |  | $                                                     | 7,671  |  
|                                                                                                                 |  |                                                       |        |  
|Basic net income per share:                                                                                      |  |                                                       |        |  
|As reported                                                                                                      |  | $                                                     | 9.95   |  
|Pro forma                                                                                                        |  | $                                                     | 9.59   |  
|Diluted net income per share:                                                                                    |  |                                                       |        |  
|As reported                                                                                                      |  | $                                                     | 8.94   |  
|Pro forma                                                                                                        |  | $                                                     | 8.62   |  

The pro forma results reflect amortization of fair value of stock options over the vesting period.
The weighted average fair value of options granted in fiscal year 2003 was estimated to be $100, as determined by Predecessor-As Board of Directors. The fair value of options granted was estimated at the date of grant using the Black-Scholes
Option Pricing Model with the following weighted average assumptions:



|                             |  |         
|---------------------------- |  | --------
|Expected life of option      |  | 10 years
|Risk-free interest rate      |  | 5%      
|Expected volatility of stock |  | 0%      
|Expected dividend yield      |  | 0%      

On September 26, 2005, all options outstanding under Predecessor As option plan, as
amended on September 20, 2005, were exercised. There are no options outstanding or issuable under Predecessor As stock option plan, as amended.

Pension and Post-retirement Benefits

The Company has a noncontributory pension plan and a post-retirement benefit plan
covering certain union employees. Costs of these plans are charged to current operations and consist of several components that are based on various actuarial assumptions regarding future experience of the plans. In addition, certain other union
employees are covered by plans provided by their respective union organizations. The Company expenses amounts as paid in accordance with union agreements.

Amounts recorded for the pension plan and the post-retirement benefit plan reflect estimates related to future interest rates, investment returns, and employee turnover. The Company reviews all assumptions and
estimates on an ongoing basis.

As of December 24, 2006, we adopted Statement No. 158 (SFAS 158),
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of Statements No. 87, 88, 106, and 132(R), (SFAS 158), which requires the recognition of the overfunded or underfunded
status of its defined benefit and post-retirement benefit plans as an asset or liability, with changes in the funded status recognized as an adjustment to the ending balance of accumulated other comprehensive income in the year they occur. The
pension plan and the post-retirement benefit plan are in an underfunded status and upon adoption in December 2006, we recorded a decrease to accumulated other comprehensive income of $1.0 million, net of tax.



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##### Table of Contents

Fiscal Period

The fiscal period of the Company typically ends on the last Sunday before the last Friday in December. For fiscal year 2006, the fiscal period began on December 26, 2006 and ended on December 24, 2006. For fiscal year 2005, the
fiscal period began on December 27, 2004 and ended on December 25, 2005. For the 2004 period, the fiscal period of the Company began on July 7, 2004, the date of the Merger, and closed on December 26, 2004.

Reclassifications

Certain prior period balances have
been reclassified to conform with current period presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates, assumptions and to use judgment that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (the
FASB) issued SFAS 158. SFAS 158 does not change how pensions and other postretirement benefits are accounted for and reported in the income statement. The required transition method of adoption is a prospective application and
recognizing the funded status of a companys benefit plans requires an offsetting adjustment to the ending balance of accumulated other comprehensive income in shareholders equity. As discussed above, during the fourth quarter of 2006, the
Company recorded a decrease to accumulated other comprehensive income of $1.0 million to reflect the underfunded status of it post-retirement and pension plans.

In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements, which addresses how companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of SFAS 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the
measurement of fair value more consistent and comparable and improve disclosures about those measures. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS 157 will have a
material impact on its consolidated statement of operations or financial position.

In July 2006, the FASB issued Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 applies to all tax positions related to income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is in the process of determining the financial impact the adoption
of FIN 48 will have on its consolidated statement of operations or financial position.

Supplemental Cash Flow Information

Non-cash activities consist of the following (in thousands):



|                                                                                           |  |                                                         |   |                                                         |   |                                                    |  |   |        |                                                    |  |  |   |  
|------------------------------------------------------------------------------------------ |  | ------------------------------------------------------- | - | ------------------------------------------------------- | - | -------------------------------------------------- |  | - | ------ | -------------------------------------------------- |  |  | - | -
|                                                                                           |  | H-Lines Finance Holding Corp.                           |   |                                                         |   | Predecessor A                                     
|                                                                                           |  | For the periodDecember 26,2005
throughDecember 24, 2006 |   | For the periodDecember 27,2004
throughDecember 25, 2005 |   | For the periodJuly 7,
2004throughDecember 26, 2004 |  |   |        | For the periodDecember 22,2003 throughJuly 6, 2004
|Notes payable in conjunction with the acquisition of beneficial interest in vessel trusts  |  | $                                                       |  |                                                         | $ | 4,513                                              |  | $ |       |                                                    |  |  | $ | 
|Equity retained by management in connection with the initial capitalization of the Company |  |                                                         |  |                                                         |   |                                                   |  |   | 12,969 |                                                    |  |  |   | 



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##### Table of Contents

Cash payments (receipts) for interest and income taxes were as follows (in thousands):



|             |  |                                                         |        |                                                         |   |        |                                                    |  |                                                    |        |  |   |      
|------------ |  | ------------------------------------------------------- | ------ | ------------------------------------------------------- | - | ------ | -------------------------------------------------- |  | -------------------------------------------------- | ------ |  | - | -----
|             |  | H-Lines Finance Holding Corp.                           |        | Predecessor A                                          
|             |  | For the periodDecember 26,2005
throughDecember 24, 2006 |        | For the periodDecember 27,2004
throughDecember 25, 2005 |   |        | For the periodJuly 7,
2004throughDecember 26, 2004 |  | For the periodDecember 22,2003
throughJuly 6, 2004
|Interest     |  | $                                                       | 36,693 |                                                         | $ | 36,476 |                                                    |  | $                                                  | 13,288 |  | $ | 3,999
|Income taxes |  |                                                         | 868    |                                                         |   | (7,319 | )                                                  |  |                                                    | 4,070  |  |   | 154  

3. SFL Agreements

In April 2006, the Company completed a series of agreements with Ship Finance International Limited and certain of its subsidiaries (SFL) to charter five new non-Jones Act qualified container vessels, each
with a capacity of 2,824 twenty-foot equivalent units (TEUs) and capable of a service speed of up to 23 knots (the new vessels). All five of the new vessels are being built in a South Korean shipyard pursuant to contracts
between the shipyard and various third parties (the sellers). To date, two of the vessels have been delivered. One of the delivered vessels is being chartered by the seller until the second quarter 2007 when the vessel will be delivered
to the Company. The second vessel (the Horizon Hunter) was delivered to the Company on November 30, 2006 and the Company is currently sub-chartering this vessel until deployment in the Companys trade routes in March 2007. The
new vessels are expected to be deployed, over a five month period in 2007, on the Companys trade routes between the U.S. west coast and Asia and Guam. This deployment will enable the Company to redeploy Jones Act qualified active vessels to
other Jones Act routes. Upon the deployment of the new vessels, the redeployment of certain Jones Act qualified vessels, and the shifting of certain older vessels to the Companys standby fleet, the average age of an active vessel in the
Companys fleet, will by reduced from 31 years to 20 years.

The contractual arrangements with SFL and its subsidiaries include an
Agreement to Acquire and Charter to which HL is a party and pursuant to which SFL and its subsidiaries are required to acquire the new vessels from the sellers and then charter them to HL. SFL Holdings has entered into five separate memoranda of
agreement (the MoAs) with the sellers pursuant to which the new vessels will be acquired from the sellers following their completion. Upon the delivery of each vessel to SFL Holdings by the applicable seller, SFL Holdings will transfer
the vessel to one of its wholly-owned subsidiaries (the Shipowner). In connection with each such transfer, the transferred vessel will be reflagged as a U.S. vessel and bareboat chartered by the applicable Shipowner to HL. The bareboat
charter for each new vessel is a hell or high water charter, and the obligation of HL to pay charter hire thereunder for the vessel is absolute and unconditional. The estimated aggregate annual charter hire for all of the five new
vessels is approximately $32.0 million, based on certain assumptions with respect to final vessel price and applicable interest rates that will be adjusted on the date of the delivery of the particular vessel. Under the charters, HL is responsible
for crewing, insuring, maintaining, and repairing each vessel and for all other operating costs with respect to each vessel. The term of each of the bareboat charters is twelve years from the date of delivery of the related vessel, with a three year
renewal option exercisable by HL. In addition, HL has the option to purchase all of the new vessels following the five, eight, twelve, and, if applicable, fifteen year anniversaries of the date of delivery at pre-agreed purchase prices. If HL elects
to purchase all of the vessels after the five or eight year anniversary date, it will have the right to assume the outstanding debt under the Fortis Capital Corp. (Fortis) credit facility, and the amount of the debt so assumed will be
credited against the purchase price paid by it for the vessels. If HL elects not to purchase the new vessels at the end of the initial twelve-year period and the Shipowners sell the new vessels for less than a specified amount, HL is responsible for
paying the amount of such shortfall, which shall not exceed $3.8 million per new vessel. If the new vessels are to be sold by the Shipowners to an affiliated party for less than a different specified amount, HL has the right to purchase the new
vessels for that different specified amount.

In order to facilitate the charter of the new vessels, the contractual arrangements with SFL
and its subsidiaries include various agreements that support the obligations of SFL and its subsidiaries to the sellers under the memoranda of agreement and the syndicate of bank lenders led by Fortis that is providing the debt financing for the
acquisition. In order for HL to secure certain of its obligations to SFL, SFL Holdings, and the SFL Shipowners under the Reimbursement Agreement, HL delivered letters of credit to Fortis in an aggregate amount of $29.3 million. These letters of
credit were comprised of $25.5 million issued as collateral for SFLs obligations in respect of security deposits for three of the new vessels and $3.8 million was issued as collateral for SFLs obligations with respect to interest-rate
swap breakage fees. Letters of credit totaling $8.5 million and $0.8 million relating to collateral for SFLs obligations in respect of security deposits for the Horizon Hunter and collateral for SFLs obligations with respect to
interest-rate swap breakage fees, respectively, were cancelled upon delivery of the Horizon Hunter. The remaining letters of credit will be cancelled upon the return by the sellers to SFL Holdings of the security deposits that the sellers received
from SFL Holdings pursuant to certain of the memoranda of agreement.



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##### Table of Contents

Although HL is not the primary beneficiary of the variable interest entities created in conjunction with
the SFL transactions, HL has an interest in the variable interest entities. Certain contractual obligations and off-balance sheet obligations arising from this transaction include the annual operating lease obligations, the letters of credit, the
residual guarantee, and the security deposits guarantee. The Company will account for the leases as operating leases, and has included lease costs associated with the Horizon Hunter in its consolidated statement of operations for the periods after
delivery on November 30, 2006. The residual guarantee will be recorded at its fair value of approximately $0.2 million as a liability on the Companys balance sheet upon commencement of the bareboat charters. The security deposits
guarantee is currently recorded on the balance sheet and will be removed upon delivery of each vessel.

4. Property and Equipment

Property and equipment consist of the following (in thousands):



|                              |  |                   |         |   |                   |   |         |  
|----------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                              |  | December 24, 2006 |         |   | December 25, 2005 |  
|Vessels                       |  | $                 | 137,129 |   |                   | $ | 135,164 |  
|Containers                    |  |                   | 27,682  |   |                   |   | 27,420  |  
|Chassis                       |  |                   | 14,535  |   |                   |   | 13,453  |  
|Cranes                        |  |                   | 15,903  |   |                   |   | 13,997  |  
|Machinery & equipment         |  |                   | 19,716  |   |                   |   | 17,322  |  
|Facilities & land improvement |  |                   | 8,416   |   |                   |   | 5,508   |  
|Software                      |  |                   | 29,887  |   |                   |   | 30,149  |  
|Construction in progress      |  |                   | 7,715   |   |                   |   | 1,244   |  
|                              |  |                   |         |   |                   |   |         |  
|Total property and equipment  |  |                   | 260,983 |   |                   |   | 244,257 |  
|Accumulated depreciation      |  |                   | (72,331 | ) |                   |   | (43,660 | )
|                              |  |                   |         |   |                   |   |         |  
|Property and equipment, net   |  | $                 | 188,652 |   |                   | $ | 200,597 |  
|                              |  |                   |         |   |                   |   |         |  

The majority of our depreciation expense is related to our vessels and capitalized software.
Depreciation expense related to our vessels was $10.9 million, $9.3 million and $4.4 million for the years ended December 24, 2006 and December 25, 2005 and the twelve months ended December 26, 2004, respectively. Depreciation expense
related to capitalized software was $9.6 million, $9.7 million, and $9.6 million for the years ended December 24, 2006 and December 25, 2005 and the twelve months ended December 26, 2004, respectively.

5. Intangible Assets

Intangible assets consist of
the following (in thousands):



|                                      |  |                   |         |   |                   |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                      |  | December 24, 2006 |         |   | December 25, 2005 |  
|Customer contracts                    |  | $                 | 137,675 |   |                   | $ | 137,675 |  
|Trademarks                            |  |                   | 63,800  |   |                   |   | 63,800  |  
|Deferred finance costs                |  |                   | 23,075  |   |                   |   | 23,158  |  
|                                      |  |                   |         |   |                   |   |         |  
|Total intangibles with definite lives |  |                   | 224,550 |   |                   |   | 224,633 |  
|Less: accumulated amortization        |  |                   | (56,668 | ) |                   |   | (33,131 | )
|                                      |  |                   |         |   |                   |   |         |  
|Net intangibles with definite lives   |  |                   | 167,882 |   |                   |   | 191,502 |  
|Goodwill                              |  |                   | 306,724 |   |                   |   | 306,724 |  
|                                      |  |                   |         |   |                   |   |         |  
|Total intangible assets, net          |  | $                 | 474,606 |   |                   | $ | 498,226 |  
|                                      |  |                   |         |   |                   |   |         |  

In December 2006, the Company wrote off approximately $0.6 million of net deferred finance costs
in conjunction with a $25.0 million prepayment of its term loan. In 2005, the Company wrote off $1.9 million and $1.7 million in net deferred finance costs related to the 9% senior notes and the 11% senior discount notes, respectively, in
conjunction with the early redemption of indebtedness.



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##### Table of Contents

Estimated aggregate amortization expense for each of the succeeding five fiscal years is as follows (in
thousands):



|                   |  |   |       
|------------------ |  | - | ------
|Fiscal Year Ending |  |  
|2007               |  | $ | 22,451
|2008               |  |   | 22,439
|2009               |  |   | 22,317
|2010               |  |   | 22,080
|2011               |  |   | 21,076

6. Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):



|                                |  |                  |         |                  |   |        
|------------------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                                |  | December 24,2006 |         | December 25,2005
|Marine operations               |  | $                | 9,452   |                  | $ | 11,236 
|Terminal operations             |  |                  | 12,400  |                  |   | 9,537  
|Vessel and rolling stock rent   |  |                  | 26,649  |                  |   | 24,735 
|Vessel operations               |  |                  | 18,608  |                  |   | 22,049 
|Fuel                            |  |                  | 10,899  |                  |   | 9,043  
|Bonus                           |  |                  | 10,500  |                  |   | 8,347  
|Interest                        |  |                  | 7,219   |                  |   | 6,636  
|Other liabilities               |  |                  | 30,017  |                  |   | 26,806 
|                                |  |                  |         |                  |   |        
|Total other accrued liabilities |  | $                | 125,744 |                  | $ | 118,389
|                                |  |                  |         |                  |   |        

7. Long-Term Debt

Long-term debt consists of the following (in thousands):



|                                                                                                                              |  |                  |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                              |  | December 24,2006 |         |   | December 25,2005 |  
|Senior credit facility                                                                                                        |  | $                | 219,375 |   |                  | $ | 246,875 |  
|9% senior notes                                                                                                               |  |                  | 197,014 |   |                  |   | 197,014 |  
|11% senior notes                                                                                                              |  |                  | 89,564  |   |                  |   | 81,666  |  
|Notes issued by the owner trustees of the owner trusts and which are secured by mortgages on the vessels owned by such trusts |  |                  | 4,513   |   |                  |   | 4,513   |  
|                                                                                                                              |  |                  |         |   |                  |   |         |  
|Total debt obligations                                                                                                        |  |                  | 510,466 |   |                  |   | 530,068 |  
|Current portion                                                                                                               |  |                  | (6,758  | ) |                  |   | (2,500  | )
|                                                                                                                              |  |                  |         |   |                  |   |         |  
|Long-term debt, net of current                                                                                                |  | $                | 503,708 |   |                  | $ | 527,568 |  
|                                                                                                                              |  |                  |         |   |                  |   |         |  

Senior Credit Facility

On July 7, 2004, HL and HLHC entered into a senior credit facility with various financial lenders, which was amended and restated on April 7, 2005 and amended again on September 22, 2005.

In April 2006, the senior credit facility was further amended to (i) increase the aggregate amount of letters of credit permitted under the
Pre-Existing Horizon Credit Agreement to $41.0 million and (ii) to permit Horizon Lines or any of its subsidiaries to guarantee, directly or indirectly, up to $42.5 million of the obligations of SFL and/or any of its subsidiaries or affiliates
in connection with the charter by Horizon Lines of the Vessels from the Shipowners. The Horizon Letters of Credit were issued by UBS AG, Stamford Branch, pursuant to the Pre-Existing Horizon Credit Agreement, as amended by Amendment No. 2. The
Horizon Letters of Credit will be returned to Horizon Lines following the release to SFL Holdings of the SFL Security Deposits for the Vessels.

On December 12, 2006, the senior credit facility was further amended to include: 1) increasing the revolving credit facility to $75 million; 2) increasing the additional term loan borrowing availability to $75 million; 3) raising the
annual capital spending limit to $40 million, exclusive of vessel and equipment lease buyouts; 4) allowing for 100% carryover of unutilized permitted annual capital spending; 5) increasing maximum restricted payments on a rolling four quarters basis
to $36 million; 6) providing 100% credit for voluntary loan prepayments on the required annual excess cash flow sweep now commencing in 2007; and 7) increasing permitted acquisitions to $120 million annually and to $200 million over the life of the
facility.



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##### Table of Contents

The term loan matures on July 7, 2011 and the revolving credit facility matures on July 7,
2009. No amounts were outstanding under the revolving credit facility as of December 24, 2006 or December 25, 2005. However, $26.6 million and $6.9 million of availability under the revolving credit facility was utilized for outstanding
letters of credit as of December 24, 2006 and December 25, 2005, respectively.

Principal payments of approximately $0.6 million
are due quarterly on the term loan facility through June 30, 2010, at which point quarterly payments increase to $52.7 million until final maturity on July 7, 2011. In December 2006, the Company made a $25.0 million voluntary prepayment on
its term loan facility. Borrowings under the term loan facility bear interest at HL and HLHCs choice of LIBOR or the base rate, in each case, plus an applicable margin. The margin applicable to the term loan facility is equal to 1.25% for base
rate loans and 2.25% for LIBOR loans. The interest rate at December 24, 2006 approximated 7.6%. HL and HLHC are also charged a commitment fee on the daily unused amount of the revolving credit facility during the availability period based upon
a rate of 0.50%.

The senior credit facility requires HL and HLHC to meet a minimum interest coverage ratio and a maximum leverage ratio.
In addition, the senior credit facility contains restrictive covenants which will, among other things, limit the incurrence of additional indebtedness, capital expenditures, investments, dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. It also contains certain customary events of default, subject to grace periods, as
appropriate. HL and HLHC were in compliance with all such covenants as of December 24, 2006. The senior credit facility is secured by the assets of HL and HLHC.

Senior Notes

On July 7, 2004, HL and HLHC completed an offering of $250.0 million in principal
amount of 9% senior notes. The 9% senior notes mature on November 1, 2012. Interest on the 9% senior notes accrues at the rate of 9% per annum and is payable in cash semi-annually on May 1 and November 1 of each year. The 9%
senior notes are the general unsecured obligations of HL and HLHC and rank equally with the existing and future unsecured indebtedness and other obligations of HL and HLHC that are not, by their terms, expressly subordinated in right of payment to
the 9% senior notes and senior in right to any future subordinated debt. On or after November 1, 2008, November 1, 2009 and November 1, 2010, HL and HLHC may redeem the 9% senior notes, in whole or in part, at a redemption price
equal to 104.5%, 102.5% and 100.5%, respectively, of the principal amount. In addition, at any time prior to November 1, 2008, HL and HLHC can redeem all or a part of the notes at a redemption price equal to 100% of the principal amount of the
9% senior notes plus an applicable premium (as defined in the indenture), and accrued and unpaid interest to the redemption date. Also, at any time before November 1, 2007, HL and HLHC may, at their option, use net cash proceeds of one or more
qualified equity offerings to redeem up to 14% of the principal amount of the 9% senior notes issued under the indenture at a redemption price of 109% of the principal amount of the 9% senior notes, plus accrued and unpaid interest. HL and HLHC used
$57.8 million of the proceeds of the Parents Initial Shares and the Additional shares to redeem $53.0 million of the principal amount of the 9% senior notes and pay associated redemption premiums of $4.8 million.

Senior Discount Notes

On December 10, 2004, the
Company completed an offering of $160.0 million in principal amount of 11% senior discount notes. The 11% senior discount notes were issued at a discount from their principal amount at maturity and generated gross proceeds of approximately $112.3
million. The 11% senior discount notes mature on April 1, 2013. Until April 1, 2008, the notes will accrete at the rate of 11% per annum, compounded semiannually on April 1 and October 1 of each year, beginning
October 1, 2005, to but not including April 1, 2008. Beginning on April 1, 2008, cash interest will accrue at the rate of 11% per annum and will be payable in cash semi-annually in arrears on each April 1 and October 1,
commencing October 1, 2008. The 11% senior discount notes are the general unsecured obligations of the Company and rank equally with the existing and future unsecured indebtedness and other obligations of the Company that are not, by their
terms, expressly subordinated in right of payment to the 11% senior discount notes and senior in right to any future subordinated debt. On or after April 1, 2008, April 1, 2009 and April 1, 2010, The Company may redeem the 11%
senior discount notes, in whole or in part, at a redemption price equal to 105.5%, 102.75% and 100.0%, respectively, of the principal amount. In addition, at any time prior to April 1, 2008, HLFHC can redeem all or a part of the notes at a
redemption price equal to 100% of the principal amount of the 11% senior discount notes plus an applicable premium (as defined in the indenture). The Company used $48.0 million of the proceeds of the Parents Initial Shares and the Additional
Shares to redeem $56.0 million of the principal amount at maturity, or $43.2 million in accreted value, of the 11% senior discount notes and pay associated redemption premiums of $4.8 million. In addition, during 2006, the Company made a $1.3
million open market purchase of its 11% senior discount notes, which represented a $46 thousand premium to the accreted value at the date of purchase.



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##### Table of Contents

Other Debt

During fiscal year 2005, HL assumed outstanding indebtedness of approximately $4.5 million in connection with the acquisition of the rights and beneficial interests of the sole owner participant in two separate owner trusts, the assets of
which consist primarily of two vessels, the Horizon Enterprise and the Horizon Pacific. The outstanding indebtedness secured by mortgages on the Horizon Enterprise and the Horizon Pacific is $2.3 million and $2.2 million, respectively. Such
indebtedness accrued at 10.6% per annum, with interest payments semi-annually in January and July of each fiscal year until final maturity on January 1, 2007. Horizon Lines repaid the $4.5 million indebtedness assumed in connection with
this acquisition in January 2007.

Fair Value of Financial Instruments

The estimated fair values of the Companys debt as of December 24, 2006 and December 25, 2005 were $528.5 million and $545.9 million, respectively. The fair value of the senior notes and senior discount
notes are based on quoted market prices. The fair value of the other long-term debt approximates carrying value.

Annual maturities of
long-term debt obligations are as follows (in thousands):



|           |  |   |         |  
|---------- |  | - | ------- | -
|2007       |  | $ | 6,757   |  
|2008       |  |   | 2,244   |  
|2009       |  |   | 2,244   |  
|2010       |  |   | 54,423  |  
|2011       |  |   | 158,220 |  
|Thereafter |  |   | 299,519 |  
|           |  |   |         |  
|           |  | $ | 523,407 | *
|           |  |   |         |  

---

|* | The annual maturities schedule includes the $102.5 million principal amount of the 11% senior discount notes.
|- | -------------------------------------------------------------------------------------------------------------

8. Preferred Stock/Units

Mandatorily Redeemable Preferred Units

In connection with the purchase transaction, Predecessor A issued 60,000 voting senior preferred units to CSX. The holders of the
outstanding senior preferred units were entitled to receive a preferential return equal to 10% per annum, which accrued and was compounded annually, before any distributions were made with respect to any other common units.

Predecessor A had the option to redeem the senior preferred units at any time after May 27, 2005, in whole at an amount equal to the unreturned
capital contribution of the senior preferred units plus accrued preferential returns. The senior preferred units were mandatorily redeemable by Predecessor A at an amount equal to the unreturned capital contribution of the senior preferred units
plus accrued preferential returns at the earliest of February 27, 2010 or a change in control of Predecessor A. After receiving appropriate approval, the Company redeemed $15.0 million of preferred units during the year ended December 21,
2003.

In connection with the Merger on July 7, 2004, the remaining preferred units of Predecessor A were redeemed at an amount equal
to the unreturned capital contribution plus accrued preferential returns totaling $58.9 million.

9. Derivative Financial Instruments

During 2006, 2005 and 2004, the Company entered into fuel swap contracts to fix the price of fuel. The contracts were accounted for as cash flow hedges.
Accordingly, the Company recorded the fair value of the hedge contracts in other current assets and accumulated other comprehensive income. There were no hedges outstanding as of December 24, 2006. The fair value of the hedges approximated $0.1
million and $0.2 million at December 25, 2005 and December 26, 2004, respectively.

10. Leases

The Company leases certain equipment and facilities under operating lease agreements. Non-cancelable, long-term leases generally include provisions for
maintenance, options to purchase at fair value and to extend the terms. Rent expense under operating lease agreements totaled $71.6 million, $74.3 million and $35.9 for the year ended December 24, 2006 and December 25, 2005 and the period
from July 7, 2004 through December 26, 2004, respectively. Predecessor A leased certain equipment and facilities under operating lease agreements. Non-cancelable, long-term leases generally included provisions for maintenance, options to
purchase at fair value and to extend the terms. Rent expense under operating lease agreements totaled $43.5 million for the period from December 22, 2003 through July 6, 2004.



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##### Table of Contents

The Company leases certain equipment under a capital lease agreement. This capital lease agreement was
assumed from Predecessor A. The net book value of this equipment totaled $0.3 million and $0.5 million at December 24, 2006 and December 25, 2005, respectively. Depreciation expense for equipment under the capital lease totaled $0.2
million for the year ended December 24, 2006, $0.2 million for the year ended December 25, 2005, $0.1 million for the period from July 7, 2004 through December 26, 2004 and $0.1 million for the period from December 22, 2003
through July 6, 2004.

Future minimum lease obligations at December 24, 2006 are as follows (in thousands):



|                                                 |  |                                 |         |               |   |    
|------------------------------------------------ |  | ------------------------------- | ------- | ------------- | - | ---
|Period Ending December                           |  | Non-Cancelable Operating Leases |         | Capital Lease
|2007                                             |  | $                               | 92,986  |               | $ | 193
|2008                                             |  |                                 | 47,343  |               |   | 161
|2009                                             |  |                                 | 45,891  |               |   |   
|2010                                             |  |                                 | 44,505  |               |   |   
|2011                                             |  |                                 | 27,587  |               |   |   
|Thereafter                                       |  |                                 | 164,207 |               |   |   
|                                                 |  |                                 |         |               |   |    
|Total future minimum lease obligation            |  | $                               | 422,519 |               |   | 354
|                                                 |  |                                 |         |               |   |    
|Less: amounts representing interest              |  |                                 |         |               |   | 18 
|                                                 |  |                                 |         |               |   |    
|Present value of future minimum lease obligation |  |                                 |         |               |   | 336
|Current portion of capital lease obligation      |  |                                 |         |               |   | 180
|                                                 |  |                                 |         |               |   |    
|Long-term portion of capital lease obligation    |  |                                 |         |               | $ | 156
|                                                 |  |                                 |         |               |   |    

The above operating lease amounts do not include anticipated payments of $20.7 million during
2007, $25.4 million during each year from 2008 to 2011 and $182.7 thereafter for the four new vessels in which the Company has not yet taken delivery.

11. Related Parties

During 2005 and the period July 7, 2004 through December 26, 2004, the Company recorded $2.2
million and $1.5 million, respectively in selling, general, and administrative expenses related to a management agreement with Castle Harlan. In addition, in connection with the Parents initial public offering in 2005, the Company recorded a
charge of $7.5 million related to the termination of the ongoing management services and fee related provisions of the management agreement. During 2004, the Company recorded $0.5 million in fees to Castle Harlan related to the issuance of the 11%
senior discount notes.

For the period December 22, 2003 through July 6, 2004 Predecessor A recorded $0.3 million in management
fees within selling, general, and administrative expenses to its equity sponsor, the Carlyle Group.

Predecessor A was a lessee in an
operating sublease agreement with CSX. Predecessor A leased containers and vessels under these agreements. Lease expense during the period December 22, 2003 through July 6, 2004 totaled $16.6 million.

12. Employee Benefit Plans

Savings Plans

The Company provides a 401(k) Savings Plan for substantially all of its employees who are not part of collective bargaining agreements. Under
provisions of the savings plan, an employee is immediately vested with respect to Company contributions. The Company matches employee contributions up to 6% of qualified compensation. The cost for this benefit totaled $2.1 million, $1.9 million and
$0.8 million for the year ended December 24, 2006 and December 25, 2005 and for the period July 7, 2004 through December 26, 2004, respectively. Prior to July 7, 2004 Predecessor A maintained the plan. The total cost to Predecessor A for the period
from December 22, 2003 through July 6, 2004 totaled $1.0 million. The Company also administers a 401(k) plan for certain union employees with no Company match.



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##### Table of Contents

Pension Plan

The Company sponsors a defined benefit plan covering approximately 30 union employees as of December 24, 2006. The plan provides for retirement benefits based only upon years of service. Employees whose terms and conditions of
employment are subject to or covered by the collective bargaining agreement between Horizon Lines and the International Longshore & Warehouse Union Local 142 are eligible to participate once they have completed one year of service. Contributions
to the plan are based on the projected unit credit actuarial method and are limited to the amounts that are currently deductible for income tax purposes. The Company recorded net periodic benefit costs of $0.4 million during the year ended December
24, 2006, the year ended December 25, 2005 and the twelve months ended December 26, 2004. The plan was underfunded by $1.4 million and $1.3 million at December 24, 2006 and December 25, 2005, respectively.

Post-retirement Benefit Plan

In addition to
providing pension benefits, the Company provides certain healthcare (both medical and dental) and life insurance benefits for eligible retired members (post-retirement benefits). For eligible employees hired on or before July 1, 1996,
the healthcare plan provides for post-retirement health coverage for an employee who, immediately preceding his/her retirement date, was an active participant in the retirement plan and has attained age 55 as of his/her retirement date. For eligible
employees hired after July 1, 1996, the plan provides post-retirement health coverage for an employee who, immediately preceding his/her retirement date, was an active participant in the retirement plan and has attained a combination of age and
service totaling 75 years or more as of his/her retirement date. The Company recorded net periodic benefit costs of $1.8 million during the year ended December 24, 2006. The post-retirement benefit plan was underfunded by $2.2 million and $1.9
million at December 24, 2006 and December 25, 2005, respectively.



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##### Table of Contents

Other Plans

Under collective bargaining agreements, the Company participates in a number of union-sponsored, multi-employer benefit plans. Predecessor A also participated in a number of union-sponsored, multi-employer benefit plans. Payments to these
plans are made as part of aggregate assessments generally based on hours worked, tonnage moved, or a combination thereof. Expense for these plans is recognized as contributions are funded. The Company made contributions of $9.7 million, $10.0
million and $5.0 million during the years ended December 24, 2006 and December 25, 2005 and the period from July 7, 2004 through December 26, 2004, respectively. Predecessor A made contributions of $5.2 million during the period December 22, 2003
through July 6, 2004. A decline in the value of assets held by these plans, caused by performance of the investments in the financial markets in recent years, may result in higher contributions to these plans. Moreover, if the Company exits these
markets, it may be required to pay a potential withdrawal liability if the plans are underfunded at the time of the withdrawal. However, the Company is unable to determine the potential amount of liability, if any, at this time. Any adjustments
would be recorded when it is probable that a liability exists and it is determined that markets will be exited.

13. Stock Based Compensation

Horizon Lines, Inc.

On
December 24, 2006, the Parent has two share-based compensation plans, which are described in more detail below. Because the participants in this plan are generally limited to employees of the Company, and therefore options were granted for
services to be provided to the Company, the stock based compensation expense related to these options is being recorded on the Companys financial statements. The Company recorded expense of $0.9 million in the year ended December 24,
2006, related to all stock-based compensation. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $0.1 million

Stock Options

The Parent maintains a stock plan for the grants of stock options and restricted stock
awards to officers and employees of the Company. On September 16, 2005, the Board of Directors of Horizon Lines Inc. authorized the issuance of up to an aggregate of 3,088,668 shares of its common stock. As of December 24, 2006, there were
1,657,993 shares of common stock reserved for issuance under the stock plan. Stock options granted under these plans have been granted at an option price equal to the closing market value of the stock on the date of the grant. Options granted under
this plan have 10-year contractual terms and typically become exercisable after one or three years after the grant date, subject to continuous service with the Company.

On July 27, 2006, the Compensation Committee of the Board of Directors of the Parent (the Board of Directors) approved the grant by the Parent, pursuant to its Amended and Restated Equity Incentive
Plan, of nonqualified stock options to certain employees of the Company and its subsidiaries to purchase an aggregate of 38,075 shares of its common



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stock at a price of $15.97 per share. These options were granted on such date. No such option is currently vested or exercisable. Each such option is
scheduled to cliff vest and become fully exercisable on July 27, 2009, provided the employee who was granted such option is employed by the Company and its subsidiaries on such date. The Company recorded $22 thousand of compensation expense
during the year ended December 24, 2006 related to the options.

On April 7, 2006, the Board of Directors approved the grant by
the Parent, pursuant to its Amended and Restated Equity Incentive Plan, of nonqualified stock options to certain employees of the Company and its subsidiaries to purchase an aggregate of 617,500 shares of its common stock at a price of $12.54 per
share. No option is currently vested or exercisable. These options were granted on such date. Each such option is scheduled to cliff vest and become fully exercisable on April 7, 2009, provided the employee who was granted such option is
employed by the Company and its subsidiaries on such date. The Company recorded $0.4 million of compensation expense during the year ended December 24, 2006 related to the options. None of these options were exercised and 19,198 of these
options were forfeited during the year ended December 24, 2006.

The weighted average grant date fair values of options granted during
2006 and 2005 were $1.51 and $2.87, respectively. The total fair value of shares vested during 2006 was $0.1 million. In connection with the adoption of SFAS 123R, the Company estimates the fair value of each stock option on the date of grant using
a Black-Scholes option-pricing model, applying the following assumptions, and amortizes the expense over the options vesting period using the straight-line attribution approach:



|                                         |  |             |  |      
|---------------------------------------- |  | ----------- |  | -----
|                                         |  | 2006        |  | 2005 
|Expected dividend yield                  |  | 2.8%-3.5%   |  | 4.7% 
|Expected stock price volatility          |  | 24.7%-26.2% |  | 22.6%
|Weighted average risk-free interest rate |  | 4.92%-5.00% |  | 4.11%
|Expected life of options (years)         |  | 6.5         |  | 6.4  

Significant assumptions used to estimate the fair value of the share-based compensation awards are
as follows:

Expected Life: The Company determined the expected life of the options utilizing the short-cut method due to the
lack of historical evidence regarding employees expected exercise behavior. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.

Expected Volatility: Due to the lack of trading activity since the Parents stock became publicly traded, the Company bases its
estimates of stock price volatility on the average of (i) the Parents historical stock price over the period in which it has been publicly traded and (ii) historical volatility of similar entities commensurate with the expected term
of the stock options.

The Company recognized approximately $0.7 million, or $0.02 per share, in compensation costs within selling,
general, and administrative expenses on the consolidated statement of operations and a deferred tax asset of approximately $0.1 million during fiscal 2006. The Company will recognize an additional $1.8 million in compensation costs using the
straight line method over a weighted average period of 1.9 years.



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A summary of option activity under the Parents stock plan as of December 24, 2006 and the
changes during 2006 are presented below:



|                                                |  |                 |   |  |                               |       |                                                  |      |                                |   |       
|----------------------------------------------- |  | --------------- | - |  | ----------------------------- | ----- | ------------------------------------------------ | ---- | ------------------------------ | - | ------
|Options                                         |  | Number ofShares |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm (years) |      | AggregateIntrinsicValue(000s)
|Outstanding at December 26, 2004                |  |                |   |  |                               |       |                                                  |      |                                |   |       
|Granted                                         |  | 705,100         |   |  | $                             | 10.00 |                                                  |      |                                |   |       
|Exercised                                       |  |                |   |  |                               |       |                                                  |      |                                |   |       
|Forfeited                                       |  |                |   |  |                               |       |                                                  |      |                                |   |       
|                                                |  |                 |   |  |                               |       |                                                  |      |                                |   |       
|Outstanding at December 25, 2005                |  | 705,100         |   |  |                               | 10.00 |                                                  |      |                                |   |       
|Granted                                         |  | 655,575         |   |  |                               | 12.74 |                                                  |      |                                |   |       
|Exercised (a)                                   |  | (31,938         | ) |  |                               | 10.00 |                                                  |      |                                |   |       
|Forfeited                                       |  | (37,700         | ) |  |                               | 11.29 |                                                  |      |                                |   |       
|                                                |  |                 |   |  |                               |       |                                                  |      |                                |   |       
|Outstanding at December 24, 2006                |  | 1,291,037       |   |  | $                             | 11.35 |                                                  | 9.16 |                                | $ | 20,975
|                                                |  |                 |   |  |                               |       |                                                  |      |                                |   |       
|Vested or expected to vest at December 24, 2006 |  | 1,229,805       |   |  | $                             | 11.35 |                                                  | 9.16 |                                | $ | 19,983
|                                                |  |                 |   |  |                               |       |                                                  |      |                                |   |       
|Exercisable at December 24, 2006                |  | 55,562          |   |  | $                             | 10.00 |                                                  | 8.89 |                                | $ | 978   
|                                                |  |                 |   |  |                               |       |                                                  |      |                                |   |       

---

|(a) | The aggregate intrinsic value of stock options exercised during the year ended December 24, 2006 was $0.5 million
|--- | -----------------------------------------------------------------------------------------------------------------

Cash received from the exercise of stock options under the Parents stock plan for the year ended December 24, 2006 was $0.1 million.

Restricted Stock

On February 1,
2006, the Parent entered into a restricted stock agreement for 70,000 shares with a member of management that cliff vest in full on February 1, 2011.

A summary of the status of the Parents restricted stock awards as of December 24, 2006 and the changes during 2006 is presented below:



|                               |  |                 |  |                                        |      
|------------------------------ |  | --------------- |  | -------------------------------------- | -----
|Restricted Shares              |  | Number ofShares |  | Weighted-AverageFair Valueat GrantDate
|Nonvested at December 25, 2005 |  |                |  |                                        |      
|Granted                        |  | 70,000          |  | $                                      | 12.57
|Vested                         |  |                |  |                                        |      
|Forfeited                      |  |                |  |                                        |      
|                               |  |                 |  |                                        |      
|Nonvested at December 24, 2006 |  | 70,000          |  | $                                      | 12.57
|                               |  |                 |  |                                        |      

The Company recorded $0.1 million of compensation expense related to restricted stock during the
year ended December 24, 2006. As of December 24, 2006, there was $0.7 million of total unrecognized compensation expense related to restricted stock awards. That cost is expected to be recognized over a weighted-average period of 4.1
years. No restricted stock awards vested during 2006.

Employee Stock Purchase Plan

On April 19, 2006, the Board of Directors voted to implement an employee stock purchase plan (as amended, the ESPP) effective
July 1, 2006. The Parent has reserved 308,866 shares of its common stock for issuance under the ESPP. Employees generally are eligible to participate in the ESPP if they are employed before the beginning of the applicable purchase period, are
customarily employed more than five months in a calendar year and more than twenty hours per week, and are not, and would not become as a result of being granted an option under the ESPP, 5% stockholders of the Company or any of its designated
subsidiaries. Participation in the ESPP will end automatically upon termination of employment.



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Eligible employees are permitted to acquire shares of common stock through payroll deductions within a percentage range of their salary as determined by the
Companys Compensation Committee. Such employee purchases are subject to maximum purchase limitations.

The ESPP is intended to
qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP will terminate on July 1, 2016 unless it terminates earlier under the terms of the ESPP. The Board of
Directors and the Compensation Committee have the authority to amend, terminate or extend the term of the ESPP, except that no action may adversely affect any outstanding options previously granted under the plan and stockholder approval is required
to increase the number of shares issued or to change the terms of eligibility. The Board of Directors and the Compensation Committee are able to make amendments to the ESPP as it determines to be advisable if the financial accounting treatment for
the ESPP changes from the financial accounting treatment in effect on the date the ESPP was adopted by the Board of Directors.

In
connection with the adoption of SFAS 123R, the Company estimates the fair value of each share of stock using a Black-Scholes option-pricing model, applying the following assumptions, and amortizes the expense over the plan purchase period using the
straight-line attribution approach:



|                                         |  |            
|---------------------------------------- |  | -----------
|                                         |  | 2006       
|Expected dividend yield                  |  | 2.6%-2.7%  
|Expected stock price volatility          |  | 26.7%-35.9%
|Weighted average risk-free interest rate |  | 4.88%-5.08%
|Expected term (years)                    |  | 0.25       
|Fair value at grant date                 |  | $2.17-$2.43

The Company recorded $0.1 million of compensation expense during the year ended December 24,
2006 related to participation in the ESPP. As of December 24, 2006, there was no unrecognized compensation expense related to the ESPP.

Predecessor A

Predecessor A had a stock option plan under which options to purchase common stock were granted to officers,
key employees and directors at prices equal to fair market value on the date of grant. Prior to the Merger on July 7, 2004, there were 90,138 shares of common stock reserved for options under the plan. Thirty percent of stockholder options
vested over a period of five years commencing on December 31, 2003. The remaining seventy percent vested fourteen percent per year over five years, if predetermined financial targets (as defined in the agreement) were met in the respective
years by the Company. All options vested in full in connection with the merger on July 7, 2004. Options granted and the weighted average price of those options totaled as follows prior to the Merger on July 7, 2004:



|                                                           |  |                |  |                               |    
|---------------------------------------------------------- |  | -------------- |  | ----------------------------- | ---
|                                                           |  | Shares Granted |  | Weighted Average Option Price
|For the period December 22, 2003 through July 7, 2004      |  | 13,333         |  | $                             | 199
|For the period February 27, 2003 through December 21, 2003 |  | 76,805         |  | $                             | 100

On September 26, 2005, all options outstanding under Predecessor As option plan, as
amended on September 20, 2005, were exercised. This exercise resulted in the net issuance (after the surrender by such persons of 155,012 shares in the aggregate of our common stock in payment in full of the exercise price for such options) of
952,325 shares in the aggregate of our common stock and 731,448 shares in the aggregate of our Series A preferred stock. The tax benefit realized from the exercise of these stock options was $4.1 million. As a result, there are no options
outstanding or issuable under Predecessor As stock option plan, as amended as of December 24, 2006.

14. Income Taxes

During 2006, after evaluating the merits and requirements of the tonnage tax, the Parent elected the application of the tonnage tax instead of the federal
corporate income tax on income from its qualifying shipping activities. This 2006 election of the tonnage tax was made in connection with the filing of the Parents 2005 federal corporate income tax return and will also apply to all subsequent
federal income tax returns unless the Company revokes this alternative tonnage tax treatment. The Parent does not intend to revoke its election of the tonnage tax in the foreseeable future. The Company is accounting for this election as a change in
the tax status of its qualifying shipping activities. The impact of this tonnage tax election resulted in a decrease in income tax expense of approximately $44.1 million during the year ended December 24, 2006. Approximately $11.4 million and
$18.8 million relate to the 2005 reduction in income tax expense and revaluation of the deferred taxes related to the application of tonnage tax to qualifying activities, respectively. The Companys effective tax rate for the year ended
December 24, 2006 is (49.8%). Excluding the 2005 income tax impact and revaluation of the deferred taxes related to qualifying activities, the Companys effective tax rate for the year ended December 24, 2006 would be 9.8%.



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Income tax (expense) benefits are as follows (in thousands):



|                                 |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|-------------------------------- |  | ----------------------------- | ------- | - | --------------------------- | ------------- | ------ | ----------------------------------------------------- |  | - | ----- | ----------------------------------------------------- |  |  | - | -----
|                                 |  | H-Lines Finance Holding Corp. |         |   |                             | Predecessor A
|                                 |  | Year Ended December 24, 2006  |         |   | Year EndedDecember 25, 2005 |               |        | For the period July 7, 2004
through December 26, 2004 |  |   |       | For the period December 22, 2003
through July 6, 2004
|Income tax expense (benefit):    |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|Current:                         |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|Federal                          |  | $                             | (975    | ) |                             | $             | 7,168  |                                                       |  | $ | 477   |                                                       |  |  | $ | 1,587
|State/territory                  |  |                               | 608     |   |                             |               | 845    |                                                       |  |   | 67    |                                                       |  |  |   | 341  
|                                 |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|Total current                    |  |                               | (367    | ) |                             |               | 8,013  |                                                       |  |   | 544   |                                                       |  |  |   | 1,928
|                                 |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|Deferred:                        |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|Federal                          |  |                               | (23,993 | ) |                             |               | (6,302 | )                                                     |  |   | 4,359 |                                                       |  |  |   | 2,806
|State/territory                  |  |                               | (888    | ) |                             |               | (151   | )                                                     |  |   | 265   |                                                       |  |  |   | 162  
|                                 |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|Total deferred                   |  |                               | (24,881 | ) |                             |               | (6,453 | )                                                     |  |   | 4,624 |                                                       |  |  |   | 2,968
|                                 |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      
|Net income tax (benefit) expense |  | $                             | (25,248 | ) |                             | $             | 1,560  |                                                       |  | $ | 5,168 |                                                       |  |  | $ | 4,896
|                                 |  |                               |         |   |                             |               |        |                                                       |  |   |       |                                                       |  |  |   |      

The Company joins in the filing of a consolidated Federal corporate income tax return with Horizon
Lines, Inc. and its other subsidiaries. Furthermore, the Company joins in the filing of several consolidated state income tax returns with Horizon Lines, Inc., in which these state taxing jurisdictions permit combined filings for unitary business
activities. The allocation of the HLFHC current consolidated federal income tax to its subsidiaries is in accordance with SFAS No. 109, Accounting for Income Taxes. HLFHC uses the parent company down approach in allocating the
consolidated amount of current and deferred tax expense to its subsidiaries. As part of a tax sharing agreement with Horizon Lines, Inc. and its other subsidiaries, the losses generated by the Company has reduced taxable income generated by
certain of its affiliates. As such the Company has recorded an intercompany payable attributable to federal and state income taxes due to its affiliates in the amount of $3.2 million for the year ended December 24, 2006.

The difference between the income tax expense and the amounts computed by applying the statutory federal income tax rates to earnings before income taxes
are as follows (in thousands):



|                                                     |  |                               |         |   |                             |               |                                                       |  |   |       |                                                       |  |  |   |      
|---------------------------------------------------- |  | ----------------------------- | ------- | - | --------------------------- | ------------- | ----------------------------------------------------- |  | - | ----- | ----------------------------------------------------- |  |  | - | -----
|                                                     |  | H-Lines Finance Holding Corp. |         |   |                             | Predecessor A
|                                                     |  | Year Ended December 24, 2006  |         |   | Year EndedDecember 25, 2005 |               | For the period July 7, 2004
through December 26, 2004 |  |   |       | For the period December 22, 2003
through July 6, 2004
|Income tax expense (benefit) at statutory rates:     |  | $                             | 17,734  |   |                             | $             | 978                                                   |  | $ | 4,761 |                                                       |  |  | $ | 4,500
|State/territory, net of federal income tax benefit   |  |                               | (200    | ) |                             |               | 451                                                   |  |   | 332   |                                                       |  |  |   | 258  
|Qualified shipping income                            |  |                               | (25,320 | ) |                             |               |                                                      |  |   |      |                                                       |  |  |   |     
|Revaluation of deferred taxes for tonnage tax regime |  |                               | (18,801 | ) |                             |               |                                                      |  |   |      |                                                       |  |  |   |     
|Transaction costs                                    |  |                               | 34      |   |                             |               |                                                      |  |   |      |                                                       |  |  |   |     
|Other Items                                          |  |                               | 1,305   |   |                             |               | 131                                                   |  |   | 75    |                                                       |  |  |   | 138  
|                                                     |  |                               |         |   |                             |               |                                                       |  |   |       |                                                       |  |  |   |      
|Net income tax (benefit) expense                     |  | $                             | (25,248 | ) |                             | $             | 1,560                                                 |  | $ | 5,168 |                                                       |  |  | $ | 4,896
|                                                     |  |                               |         |   |                             |               |                                                       |  |   |       |                                                       |  |  |   |      

In accordance with the provisions of SFAS 109 and APB No. 25, the Company recorded a tax
benefit attributable to the recognition of certain tax benefits derived from the exercise of non-qualified stock options in the amount of $0.1 million and $4.1 million as an increase directly to additional paid-in capital for the years ended
December 24, 2006 and December 25, 2005, respectively.



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The components of deferred tax assets and liabilities are as follows (in thousands):



|                                           |  |                   |         |   |                   |   |         |  
|------------------------------------------ |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                           |  | December 24, 2006 |         |   | December 25, 2005 |  
|Deferred tax assets:                       |  |                   |         |   |                   |   |         |  
|Leases                                     |  | $                 | 22,272  |   |                   | $ | 22,990  |  
|Allowance for doubtful accounts            |  |                   | 677     |   |                   |   | 2,198   |  
|Net operating losses and AMT carryforwards |  |                   | 13,797  |   |                   |   | 12,563  |  
|Valuation allowances                       |  |                   | (1,262  | ) |                   |   | (2,852  | )
|Post retirement benefits                   |  |                   | 822     |   |                   |   |        |  
|Other                                      |  |                   | 4,966   |   |                   |   | 4,652   |  
|                                           |  |                   |         |   |                   |   |         |  
|Total deferred assets                      |  |                   | 41,272  |   |                   |   | 39,551  |  
|Deferred tax liabilities:                  |  |                   |         |   |                   |   |         |  
|Depreciation                               |  |                   | (19,968 | ) |                   |   | (21,333 | )
|Capital construction fund                  |  |                   | (14,124 | ) |                   |   | (14,117 | )
|Intangibles                                |  |                   | (27,915 | ) |                   |   | (47,407 | )
|Other                                      |  |                   | (1,836  | ) |                   |   | (4,804  | )
|                                           |  |                   |         |   |                   |   |         |  
|Total deferred tax liabilities             |  |                   | (63,843 | ) |                   |   | (87,661 | )
|                                           |  |                   |         |   |                   |   |         |  
|Net deferred tax liability                 |  | $                 | (22,571 | ) |                   | $ | (48,110 | )
|                                           |  |                   |         |   |                   |   |         |  

The Company has net operating loss carryforwards for federal income tax purposes in the amount of
$31.3 million and $30.2 million for the years ended December 24, 2006 and December 25, 2005, respectively. In addition, the Company has net operating loss carryforwards for state tax purposes in the amount of $36.3 million and $46.4
million for the years ended December 24, 2006 and December 25, 2005, respectively. The Federal and state net operating loss carryforwards begin to expire in 2026 and 2021, respectively. Furthermore, the Company has an alternative minimum
tax credit carryover with no expiration period in the amount of $1.7 million for the years ended December 24, 2006 and December 25, 2005.

Net operating loss credits generated from tax losses in Guam begin to expire in 2023. In conjunction with the merger, the Company recorded a valuation allowance against the deferred tax asset attributable to the net operating loss generated
in Guam in the amount of $3.6 million. As such, to the extent the Company reverses a portion of the valuation allowance, such adjustment would be recorded as a reduction to goodwill.

15. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, from time to time, the Company and its subsidiaries become involved in various legal proceedings. These relate
primarily to claims for loss or damage to cargo, employees personal injury claims, and claims for loss or damage to the person or property of third parties. The Company and its subsidiaries generally maintain insurance, subject to customary
deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company and its subsidiaries also, from time to time, become involved in routine employment-related disputes and disputes with parties with which they have
contracts.

There are two actions currently pending before the Surface Transportation Board (STB) involving Horizon Lines. The
first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against Horizon Lines and Matson Navigation Co. (Matson), seeks a ruling from the STB that Horizon Lines Guam shipping rates, which are
based on published tariff rates, during 1996-1998 were unreasonable under the Interstate Commerce Commission Termination Act of 1995 (ICCTA), and an order awarding reparations to Guam and its citizens. The STB is addressing
this matter in three phases. During the first phase, which has been completed, the STB reviewed the allegations set forth in the complaints that were filed by the Government of Guam and dismissed certain complaints while allowing certain other
complaints to be addressed in phase two. In phase two, the STB was to determine the methodology by which it would determine rate reasonableness under the ICCTA for the respondents rates during the relevant 1996-1998 time periods.
By decision dated February 2, 2007, the STB has now addressed that issue and has adopted the following methodology:

First,
the STB will conduct a hearing on the issue of whether the US/Guam trade is a market characterized by Effective Competition. At this hearing the burden of proof will be on Horizon Lines and Matson. If the STB finds this market is
sufficiently competitive to preclude a carrier from exercising significant market power, it will dismiss the action brought by the Government of Guam.

Second, if the action is not dismissed, the STB will hold a further hearing at which the Government of Guam will have the burden of proof to determine if the rates of Horizon Lines during 1996-1998 were
reasonable using the STBs Constrained Market Pricing standards found in its rail rate Guidelines.

Third, the STB ruled that it will apply the 7.5% zone of reasonableness statutory guidelines to the base rates of Horizon Lines after 1996 to determine whether those rates are reasonable.



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##### Table of Contents

During the third phase, the STB will apply these standards to the rates in effect during 1996-1998. If
the STB determines that the rates charged by Horizon Lines during 1996-1998 were unreasonable, the STB will issue an additional ruling to determine the persons entitled to damages and in what amounts. No assurance can be given that the final
decision with respect to this matter will be favorable to us. An adverse ruling by the STB in this action could result in significant damages. We are unable to quantify the amount of these damages. The business of Horizon Lines that provided marine
container shipping to and from Guam during 1996-1998 was, at the time, part of a larger business. During 1996-1998, the Guam-related business of Horizon Lines was part of the business of Sea-Land Service, Inc. (Sea-Land), which included
transportation, logistics, and terminal services between and at ports in Asia, Guam, Hawaii and the U.S. west coast. Separate financial statements were not prepared for the operations of Sea-Land that related to marine container shipping to and from
Guam. Accordingly, we believe that the actual rates of return that were earned by Horizon Lines business with respect to marine container shipments to and from Guam during 1996-1998 cannot be determined. Consequently, the absence of such
actual rates of return would preclude the calculation of a reasonable rate of return based on the standard proposed by the Government of Guam in the pending action. Even if each of these matters were determined adversely to Horizon Lines, we are
unable at the present time to determine how many citizens of Guam, on whose behalf the pending action has been brought by the Government of Guam, paid such rates during 1996-1998, or the amounts of their related claims, because the requisite
discovery proceedings for that phase of the dispute have not yet begun. Apart from potential damages, an adverse ruling by the STB could affect Horizon Lines current and future rate structure for its Guam shipping by requiring it to reduce its
current base tariff rates and limit future rate increases to amounts determined to be within the zone of reasonableness as defined in the ICCTA, as determined in such ruling. An adverse STB decision could also affect the rates that
Horizon Lines would be permitted to charge on its other routes where rates must be reasonable under the ICCTA. We have not accrued a liability relating to this litigation because we do not believe that an unfavorable outcome is probable
nor can we reasonably estimate the Companys exposure in the event there is an unfavorable outcome.

The second action currently
pending before the STB involving Horizon Lines, brought by DHX, Inc. (DHX) in 1999 against Horizon Lines and Matson, challenges the reasonableness of certain rates and practices of Horizon Lines and Matson. DHX is a major freight
forwarder in the domestic Hawaii trade. Freight forwarders typically accept less than full container loads of cargo, consolidate these loads into full container loads, and offer the full container load to the ocean carriers. Some freight forwarders,
including DHX, also solicit full container loads from shippers. Among other things, DHX charged that Horizon Lines and Matson took actions that were intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for
the full container load business. DHX is seeking $11.0 million in damages. In addition to the award of damages, an adverse ruling could affect Horizon Lines current and future rate structure for its Hawaii shipping. An adverse STB decision
could also affect the rates that Horizon Lines would be permitted to charge on its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHXs complaint; (ii) found that Horizon Lines
met all of its tariff filing obligations; and (iii) reaffirmed the STBs earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which were repealed by the ICCTA, are no longer applicable to our business. On
June 13, 2005, the STB issued a decision that denied DHXs motion for reconsideration and denied the alternative request by DHX for clarification of the STBs December 13, 2004 decision. On August 5, 2005, DHX filed a Notice of Appeal with
the United States Court of Appeals for the Ninth Circuit challenging the STBs order dismissing its complaint. DHX filed an appellate brief on November 10, 2005. Horizon Lines submitted its response to the DHX brief on January 25, 2006, and all
parties are waiting for the court to schedule oral argument. No assurance can be given that the final decision with respect to this matter will be favorable to us. We have not accrued a liability relating to this litigation because we do not believe
than an unfavorable outcome is probable.

Environmental Contingency

During 1999, the Alaska State Department of Environmental Conservation (the Department) notified the predecessor company about contaminants from an underground storage tank in Anchorage. A $0.9 million
reserve was established by such predecessor company. In September 2005, HL engaged a third party to remove and dispose of the underground storage tanks, supply and place all back fill material, and conduct testing of soils. During 2006, the third
party completed the engagement, the required sampling of the wells and additional bio-venting quality sampling, and submitted such results and a proposed monitoring plan to the Department. During 2006, the Department reviewed the results and the
proposed monitoring plan and requested that HL (i) sample the wells and perform bio-venting monitoring twice a year, (ii) install two monitoring wells in the fall of 2006 and (iii) provide reports on an annual basis detailing the
results of such monitoring and sampling. In conjunction with the approval by the Department of HLs monitoring plan, HL reduced its reserve from $0.8 million to $0.2 million, the expected costs to perform such monitoring. The Company installed
the two monitoring wells in the fall of 2006 and believes it is in compliance with all Department requests.

Standby Letters of Credit

Horizon Lines, LLC has standby letters of credit, primarily related to its agreements with SFL and its property and casualty insurance programs. On
December 24, 2006 and December 25, 2005, these letters of credit totaled $26.6 million and $6.9 million, respectively.



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##### Table of Contents

Labor Relations

Approximately 67.6% of the Companys total work force is covered by collective bargaining agreements. Two collective bargaining agreements, covering approximately 8.7% of the workforce will be under renegotiation
during 2007.

16. Quarterly Financial Data (Unaudited)

Set forth below are unaudited quarterly financial data (in thousands, except per share amounts):



|                   |  |                  |         |               |   |               |  |                |         |  |   |        
|------------------ |  | ---------------- | ------- | ------------- | - | ------------- |  | -------------- | ------- |  | - | -------
|                   |  | Fiscal Year 2006
|                   |  | FirstQuarter     |         | SecondQuarter |   | Third Quarter |  | Fourth Quarter
|Operating revenue  |  | $                | 274,934 |               | $ | 289,847       |  | $              | 304,657 |  | $ | 287,454
|Operating income   |  |                  | 15,984  |               |   | 23,899        |  |                | 36,402  |  |   | 23,335 
|                   |  |                  |         |              
|Net income (1) (2) |  |                  | 2,395   |               |   | 7,323         |  |                | 53,941  |  |   | 12,257 



|                      |  |                  |         |   |               |   |               |  |                |         |  |   |         |  
|--------------------- |  | ---------------- | ------- | - | ------------- | - | ------------- |  | -------------- | ------- |  | - | ------- | -
|                      |  | Fiscal Year 2005 |        
|                      |  | FirstQuarter     |         |   | SecondQuarter |   | Third Quarter |  | Fourth Quarter |        
|Operating revenue     |  | $                | 257,562 |   |               | $ | 270,544       |  | $              | 289,075 |  | $ | 278,975 |  
|Operating income      |  |                  | 10,253  |   |               |   | 15,957        |  |                | 21,525  |  |   | 19,611  |  
|Net income (loss) (3) |  |                  | (1,587  | ) |               |   | 1,332         |  |                | 5,069   |  |   | (3,581  | )

---

|(1) | The third and fourth quarters of 2006 results were positively impacted by the adoption of the tonnage tax.
|--- | ----------------------------------------------------------------------------------------------------------

|(2) | The fourth quarter of 2006 results include a $1.8 million adjustment reflecting the cumulative effect of the periodic costs related to the Companys post-retirement benefit
plan. This amount was not material to any affected prior quarter or annual reporting period and as such, was recorded in the fourth quarter of 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The fourth quarter of 2005 results include charges related to loss on extinguishment of debt related to redemption premiums and the write-off of deferred financing costs associated
with the early retirement of a portion of our 9% senior notes and 11% senior discount notes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Schedule II

H-Lines Finance Holding Corp.

Valuation and Qualifying Accounts

Years Ended December 2006, 2005 and 2004

(in thousands)



|                                                      |  |                  |        |                           |   |            |  |   |                         |   |               |   |   |  |   |       
|----------------------------------------------------- |  | ---------------- | ------ | ------------------------- | - | ---------- |  | - | ----------------------- | - | ------------- | - | - |  | - | ------
|                                                      |  | BeginningBalance |        | Chargedto CostandExpenses |   | Deductions |  |   | Chargedto otherAccounts |   | EndingBalance
|Accounts receivable reserve:                          |  |                  |        |                           |   |            |  |   |                         |   |               |   |   |  |   |       
|Predecessor A                                         |  |                  |        |                           |   |            |  |   |                         |   |               |   |   |  |   |       
|For the period December 22, 2003 through July 6, 2004 |  | $                | 11,049 |                           | $ | 6,266      |  | $ | (4,885                  | ) |               | $ |  |  | $ | 12,430
|                                                      |  |                  |        |                           |   |            |  |   |                         |   |               |   |   |  |   |       
|Horizon Lines, Inc.                                   |  |                  |        |                           |   |            |  |   |                         |   |               |   |   |  |   |       
|For the period July 7, 2004 through December 26, 2004 |  | $                | 12,430 |                           | $ | 6,087      |  | $ | (10,580                 | ) |               | $ |  |  | $ | 7,937 
|For the year ended December 25, 2005                  |  | $                | 7,937  |                           | $ | 9,057      |  | $ | (10,931                 | ) |               | $ |  |  | $ | 6,063 
|For the year ended December 24, 2006                  |  | $                | 6,063  |                           | $ | 8,633      |  | $ | (9,724                  | ) |               | $ |  |  | $ | 4,972 



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