##### Table of Contents





UNITED STATES
    SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
 (Mark one)x


Annual Report Pursuant to Section 13 or 15(d) of the
    Securities Exchange Act  of 1934For the fiscal year ended
    December 21, 2008ORo


Transition report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934For the transition period
    from            toCommission File Number
    001-32627       HORIZON LINES, INC.
 (Exact name of registrant as
    specified in its charter)
      Delaware

74-3123672(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)
 (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:
  Title of each class

Name of each exchange on which registeredCommon stock, par value $0.01 per share

New York Stock Exchange   Securities registered pursuant to Section 12 (g) of
    the Act: None
       Yes o     No x
   Yes o     No x
  x o
  Regulation S-K Form 10-K Form 10-K o
  Rule 12b-2
 Large accelerated filer o

Accelerated filer x

Non-accelerated filero

Smaller reporting company o  (Do not check if a smaller
    reporting company)
  Rule 12b-2
 Yes o     No x
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




---



##### 





Horizon Lines,
    Inc.
  FORM 10-K
    INDEX
   
 PagePART IItem 1.


Business


1Item 1A.


Risk Factors


11Item 1B.


Unresolved Staff Comments


30Item 2.


Properties


31Item 3.


Legal Proceedings


31Item 4.


Submission of Matters to a Vote of Security
    Holders


33PART IIItem 5.


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


34Item 6.


Selected Financial Data


36Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


42Item 7A.


Quantitative and Qualitative Disclosures about
    Market Risk


66Item 8.


Financial Statements and Supplementary Data


67Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


67Item 9A.


Controls and Procedures


68Item 9B.


Other Information


68PART IIIItem 10.


Directors and Executive Officers of the
    Registrant


69Item 11.


Executive Compensation


69Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


69Item 13.


Certain Relationships and Related Transactions


69Item 14.


Principal Accountant Fees and Services


69PART IVItem 15.


Exhibits and Financial Statement Schedules


70EX-3.1.2EX-14EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2    Safe Harbor
    Statement
  Form 10-K
   (i)




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##### Table of Contents



start-up
  Form 10-K
  Form 10-K Form 10-K
 (ii)




---



##### Table of Contents



Part I.  Item 1.
    Business  Background
    Sea-Land (Sea-Land) Sea-Land Sea-Land,
  Operations
      Horizon
    Lines
  Overview
   1




---



##### Table of Contents



The Jones
    Act
    U.S.-organized U.S.-flagged U.S.-flagged U.S.-crewed, U.S.-built.
    Market Overview
    and Competition
   2




---



##### Table of Contents



pick-up ® ®
  pick-up
  Vessel
    Fleet
  52-year
 3




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##### Table of Contents



Year



Reefer

Max.

Owned/

CharterVessel Name

Market

Built

TEU(1)

Capacity(2)

Speed

Chartered

ExpirationHorizon Anchorage

Alaska

1987

1,668

280

20.0 kts

Chartered

Jan 2015Horizon Tacoma

Alaska

1987

1,668

280

20.0 kts

Chartered

Jan 2015Horizon Kodiak

Alaska

1987

1,668

280

20.0 kts

Chartered

Jan 2015Horizon Fairbanks(3)

Alaska

1973

1,476

140

22.5 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 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 Navigator

Puerto Rico

1972

2,386

100

21.0 kts

Owned

Horizon Trader

Puerto Rico

1972

2,386

100

21.0 kts

Owned

Horizon Discovery(4)



1968

1,442

70

21.2 kts

Owned

Horizon Consumer(4)



1973

1,751

170

22.0 kts

Owned

Horizon Crusader(4)



1969

1,376

70

21.2 kts

Owned

Horizon Hawaii(4)



1973

1,420

170

22.5 kts

Owned

Horizon Hunter

Transpacific

2006

2,824

586

23.0 kts

Chartered

Nov 2018Horizon Hawk

Transpacific

2007

2,824

586

23.0 kts

Chartered

Mar 2019Horizon Tiger

Transpacific

2006

2,824

586

23.0 kts

Chartered

May 2019Horizon Eagle

Transpacific

2007

2,824

586

23.0 kts

Chartered

Apr 2019Horizon Falcon

Transpacific

2007

2,824

586

23.0 kts

Chartered

Apr 2019     (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)
    
    Vessels are available for seasonal needs, dry-dock relief and to
    respond to potential new revenue opportunities, and thus are not
    specific to any given market. Given current economic conditions,
    if the new revenue opportunities fail to materialize we may make
    a decision to scrap one of more of the spare vessels. 4




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##### Table of Contents



Vessel
    Charters
      Container
    Fleet
    Container Type

Owned


Leased


Combined20 Standard Dry


22



393



41520 Flat Rack


2







220 High-Cube Reefer


72







7220 Miscellaneous


66







6620 Tank


1







140 Standard Dry


100



1,278



1,37840 Flat Rack


354



461



81540 High-Cube Dry


1,294



5,530



6,82440 Standard Insulated


17







1740 High-Cube Insulated


382







38240 Standard Opentop






101



10140 Miscellaneous


55







5540 Tank


1







140 Car Carrier


165







16540 Standard Reefer


3







340 High-Cube Reefer


950



4,424



5,37445 High-Cube Dry


1,259



2,856



4,11545 High-Cube Flatrack






25



2545 High-Cube Insulated


474







47445 High-Cube Reefer






325



32548 High-Cube Dry


180







180Total


5,397



15,393



20,790   Maersk
    Arrangements
  Sea-Land
 5




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##### Table of Contents



U.S.-flagged
  Capital
    Construction Fund
  U.S.-built U.S.-flagged U.S.-built U.S.-built U.S.-flagged U.S.-built
  U.S.-built U.S.-flagged U.S.-built 2003-2005, U.S.-built U.S.-flagged
   6




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##### Table of Contents



Horizon
    Logistics
      
    warehouse and distribution, consisting of centralized storage
    and other value-added distribution services including pick and
    pack;
    trucking, offering less-than-truckload and full-truck-load
    services utilizing both company-owned trucks and a nationwide
    network of vans, flatbeds and drop-deck trailers;
    expedited logistics, consisting of unique and expedited
    point-to-point service for customers with extremely time
    sensitive delivery requirements;
    rail, providing a cost-effective alternative for less time
    sensitive delivery requirements, and
    non-vessel operating common carrier, offering small to medium
    sized shippers a single source solution for ocean shipping
    worldwide.    Market Overview
    and Competition
     7




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##### Table of Contents



Sales and
    Marketing
      Customers
          Form 10-K,
 8




---



##### Table of Contents



Operations
    Overview
    e-mail
  and/or e-mail
  Insurance
    Security
   9




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##### Table of Contents



Employees
        Number ofCollective Bargaining


OurAgreement(s)


EmployeesUnion

Expiration Date


RepresentedInternational Brotherhood of Teamsters


March 31, 2013



260International Brotherhood of Teamsters, Alaska


June 30, 2011



110International Longshore & Warehouse Union (ILWU)


July 1, 2014



208International Longshore and Warehouse Union, Alaska (ILWU-Alaska)


June 30, 2011



100International Longshoremens Association, AFL-CIO (ILA)


September 30, 2010




(1)International Longshoremens Association, AFL-CIO, Puerto
    Rico


September 30, 2010



86Marine Engineers Beneficial Association (MEBA)


June 15, 2012



143International Organization of Masters, Mates & Pilots,
    AFL-CIO (MMP)


June 15, 2012



96Office & Professional Employees International Union,
    AFL-CIO


November 9, 2012



68Seafarers 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. 10




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##### Table of Contents



HawaiiandAlaska


Guam


Puerto Rico


HorizonMarket


Market


Market


Logistics


Corporate(a)


TotalSenior Management


1



2



2



2



10



17Operations


38



91



52



68



41



290Sales and Marketing


23



25



55



13



14



130Administration(b)


7



38



10



18



189



262Total Headcount


69



156



119



101



254



699     (a)
    
    Corporate headcount includes employees in both Charlotte, North
    Carolina (headquarters) and in Las Colinas, Texas and other
    locations.(b)
    
    Administration headcount includes customer service and
    documentation personnel.  Available
    Information
  (704) 973-7000. Form 10-K Form 10-K. 1-800-SEC-0330.
 Item 1A. Risk
    Factors  The Company
    Has Received a Subpoena From the Antitrust Division of the
    Department of Justice Regarding Possible Antitrust Violations in
    the Domestic Ocean Shipping Business, and Numerous Purported
    Class Action Lawsuits Have Been Filed Against the Company. The
    Government Investigation and the Related Antitrust Lawsuits
    Could Have a Material Effect on Our Business.
     11




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Recent
    Deterioration in the Economy and Credit Markets May Adversely
    Affect Our Future Results of Operations.
    The Recent
    Changes in General Economic Conditions, and the Impact on
    Consumer Confidence and Consumer Spending Could Result in a
    Decrease in Shipping Volume in Our Markets Which Would Adversely
    Affect Our Results of Operations.
   12




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Our Share
    Price Will Fluctuate.
    If We do not
    Meet the New York Stock Exchange Continued Listing Requirements,
    Our Common Stock May be Delisted, and We May be Required to
    Repurchase or Refinance Our 4.25% Convertible Notes Due
    2012.
    We are Subject
    to Certain Risks With Respect to Our Counterparties on
    Contracts, and Failure of Such Counterparties to Meet Their
    Obligations Could Cause us to Suffer Losses or Otherwise
    Adversely Affect Our Business.
    Further
    Economic Decline and Decrease in Market Demand For the
    Companys Services in the Jones Act and Guam Markets Will
    Adversely Affect the Companys Operating Results and
    Financial Condition.
   13




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Volatility in
    Fuel Prices May Adversely Affect Our Profits.
    Repeal,
    Substantial Amendment, or Waiver of the Jones Act or Its
    Application Could Have a Material Adverse Effect on Our
    Business.
  U.S.-citizen
    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.
      Our Failure to
    Renew Our Commercial Agreements With Maersk in the Future Could
    Have a Material Adverse Effect on Our Business.
   14




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##### Table of Contents



Our Industry
    is Unionized and Strikes By Our Union Employees or Others in the
    Industry May Disrupt Our Services and Adversely Affect Our
    Operations.
  10-day
  2010-2014.
  Our Employees
    are Covered By Federal Laws That May Subject Us to Job-Related
    Claims in Addition to Those Provided By State
    Laws.
    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.
   15




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##### Table of Contents



Compliance
    With Safety and Environmental Protection and Other Governmental
    Requirements May Adversely Affect Our Operations.
  U.S.-flagged
    We are Subject
    to Statutory and Regulatory Directives in the United States
    Addressing Homeland Security Concerns That May Increase Our
    Costs and Adversely Affect Our Operations.
     16




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Increased
    Inspection Procedures and Tighter Import and Export Controls
    Could Increase Costs and Disrupt Our Business.
  and/or
    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.
   17




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No Assurance
    Can Be Given That Our Insurance Costs Will Not
    Escalate.
    Catastrophic
    Losses and Other Liabilities Could Adversely Affect Our Results
    of Operations and Such Losses and Liability May Be Beyond
    Insurance Coverage.
             18




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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 Vessels
    Could Be Arrested By Maritime Claimants, Which Could Result in
    Significant Loss of Earnings and Cash Flow.
      We are
    Susceptible to Severe Weather and Natural
    Disasters.
   19




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##### Table of Contents



We may face
    new competitors.
  start-up
  non-U.S. originated non-U.S. originated U.S.-flagged U.S.-built
  We May Not
    Exercise Our Purchase Options For Our Chartered
    Vessels.
  U.S.-flag
  We May Face
    Significant Costs As the Vessels Currently in Our Fleet
    Age.
    We May Face
    Unexpected Substantial Dry-Docking Costs For Our
    Vessels.
   20




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##### Table of Contents



Loss of key
    personnel could adversely affect our business.
    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.
  and/or
  Our Cash Flows
    and Capital Resources May Be Insufficient to Make Required
    Payments on Our Substantial Indebtedness and Future
    Indebtedness.
      
    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. 21




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##### Table of Contents



Financial and
    Other Covenants Under Our Current and Future Indebtedness Could
    Significantly Impair Our Ability to Operate Our
    Business.
    
    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.  Form 10-K,
 22




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##### Table of Contents



Our
    Substantial Indebtedness and Future Indebtedness Could
    Significantly Impair Our Operating and Financial
    Condition.
    
    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.    Our Secured
    Credit Facility Exposes Us to the Variability of Interest
    Rates.
    If
    Non-U.S.
    Citizens Own More Than 19.9% of Our Stock, We May Not Have the
    Funds or the Ability to Redeem Any Excess Shares and We Could Be
    Forced to Suspend Our Jones Act Operations.
  non-U.S. citizens,
 23




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##### Table of Contents



non-U.S. citizen.
  non-U.S. citizens non-U.S. citizens
  We May Not
    Have the Necessary Funds to Pay Dividends on Our Common Stock or
    We May Elect Not to Pay Dividends on Our Common
    Stock.
    Environmental and
    Other Regulation
  200-mile
  and/or
   24




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##### Table of Contents



The United
    States Oil Pollution Act of 1990 and the Comprehensive
    Environmental Response, Compensation and Liability
    Act
  clean-up
  
    natural resources damages and the costs of assessment thereof;
    damages for injury to, or economic losses resulting from the
    destruction of, real and personal property;
    the net loss of taxes, royalties, rents, fees and profits by the
    United States government, and any state or political subdivision
    thereof;
    lost profits or impairment of earning capacity due to property
    or natural resources damage;
    the net costs of providing increased or additional public
    services necessitated by a spill response, such as protection
    from fire, safety or other hazards; and
    the loss of subsistence use of natural resources.     25




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The United
    States Clean Water Act
       26




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The National
    Invasive Species Act
  and/or
    The United
    States Clean Air Act
  and/or
 27




---



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17.0g-NOx/kW-hr.
    The Resource
    Conservation and Recovery Act
    Endangered
    Species Regulation
   28




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##### Table of Contents



Greenhouse Gas
    Regulation
    Vessel
    Security Regulations
    
    on-board installation of automatic information systems to
    enhance vessel-to-vessel and vessel-to-shore communications;
    on-board installation of ship security alert systems;
    the development of vessel and facility security plans;
    the implementation of a Transportation Workers Identification
    Credential program; and
    compliance with flag state security certification requirements.  non-United
   29




---



##### Table of Contents



Marine
    Environment
    Emissions
    Sustainability
    Carbon
    Offsets
    Item 1B.
    Unresolved
    Staff Comments   30




---



##### Table of Contents



Item 2.
    Properties    SquareLocation

Description of Facility

Footage(1)Anchorage, Alaska

Stevedoring building and various terminal and related property


1,429,425Atlanta, Georgia

Regional sales office


911Charlotte, North Carolina

Corporate headquarters


28,900Chicago, Illinois

Regional sales office


1,533Dedeo, Guam

Terminal and related property


108,425Dominican Republic

Operations office


1,500Dutch Harbor, Alaska

Office and various terminal and related property


723,641Elizabeth, New Jersey

Terminal supervision and sales office


4,994Honolulu, Hawaii

Terminal property and office


97,124
(2)Houston, Texas

Terminal supervision and sales office


497Las Colinas, Texas

Operations center


51,989Jacksonville, Florida

Terminal supervision and sales office


4,943Kenilworth, New Jersey

Ocean shipping services office


12,110Kodiak, Alaska

Office and various terminal and related property


265,232Laredo, Texas

Warehousing and office


56,800Lexington, North Carolina

Warehousing and office


23,984Compton, California

Terminal supervision office and warehouse


176,676Oakland, California

Office and various terminal and related property


279,131Piti, Guam

Office and various terminal and related property


24,837Renton, Washington

Regional sales office


9,010San Francisco, California

Warehousing and office


19,900San Juan, Puerto Rico

Office and various terminal and related property


3,521,102Tacoma, Washington

Office and various terminal and related property


794,314Phoenix, Arizona

Warehousing and office


1,751     (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     31




---



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32




---



##### Table of Contents



and/or
  Item 4.
    Submission
    of Matters to a Vote of Security Holders   33




---



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Part II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    2009

High


Low


Cash DividendFirst Quarter (through January 29, 2009)

$
4.19


$
2.44



   2008

High


Low


Cash DividendFirst Quarter

$
23.50


$
15.73


$
0.11Second Quarter

$
20.29


$
10.02


$
0.11Third Quarter

$
13.78


$
8.38


$
0.11Fourth Quarter

$
11.60


$
1.95


$
0.11   2007

High


Low


Cash DividendFirst Quarter

$
33.98


$
25.50


$
0.11Second Quarter

$
34.97


$
31.66


$
0.11Third Quarter

$
36.55


$
25.07


$
0.11Fourth Quarter

$
34.06


$
15.11


$
0.11     Rule 10b-18(a)(3)
  Equity
    Compensation Plan Information
   34




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Total Return
    Comparison Graph
    Comparison of
    Cumulative Total Return*
  
  Form 10-K,
    *
    Comparison graph is based upon $100 invested in the given
    average or index at the close of trading on September 26,
    2005 and $100 invested in the Companys stock by the
    opening bell on September 27, 2005, as well as the
    reinvestment of dividends.  9/27/2005


12/25/2005


12/24/2006


12/23/2007


6/22/2008


12/21/2008Horizon Lines, Inc.



100.00




125.90




281.50




200.00




131.70




50.60Dow Jones U.S. Industrial Transportation Index



100.00




118.30




122.52




132.05




146.91




98.98S&P 500 Index



100.00




104.36




116.05




122.11




108.42




73.04  35




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##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K, Form 10-K.
     36




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Horizon Lines, Inc.



PredecessorPeriod from



Period fromJuly 7,



December 22,Year Ended


Year Ended


Year Ended


Year Ended


Year Ended


2004 through



2003 throughDecember 21,


December 23,


December 24,


December 25,


December 26,


December 26,



July 6,2008


2007


2006


2005(1)


2004


2004



2004(In thousands)






(In thousands)Statement of Operations Data:Operating revenue

$
1,304,259


$
1,206,515


$
1,156,892


$
1,096,156


$
980,328


$
481,898



$
498,430Impairment of assets


25,415
























Restructuring costs


3,244
























Operating income


27,016



95,173



95,971



46,654



51,589



30,928




20,661Interest expense, net(2)


32,498



41,672



48,552



51,357



29,567



21,770




7,797Income tax (benefit) expense(3)


(8,479
)


(13,983
)


(25,332
)


438



8,439



3,543




4,896Loss on early extinguishment of debt






38,546



581



13,154












Net income (loss)


3,059



28,859



72,357



(18,321
)


13,561



5,600




7,961Accretion of preferred stock














5,073



6,756



6,756




Net income (loss) applicable to common stockholders


3,059



28,859



72,357



(23,394
)


6,805



(1,156
)



7,961Net income (loss) per share applicable to common stockholders:Basic

$
0.10


$
0.87


$
2.16


$
(1.05
)





$
(0.07
)


$
9.95Diluted

$
0.10


$
0.85


$
2.14


$
(1.05
)





$
(0.07
)


$
8.94Number of shares used in calculations:Basic


29,962,876



33,220,994



33,551,335



22,376,797







15,585,322




800,000Diluted


30,330,786



33,859,183



33,772,341



22,381,756







15,585,322




890,138Dividends declared

$
13,273


$
14,653


$
14,764


$
3,690Dividends declared per common share

$
0.44


$
0.44


$
0.44


$
0.11












  37




---



##### Table of Contents



Horizon Lines, Inc.December 21,


December 23,


December 24,


December 25,


December 26,2008


2007


2006


2005


2004(In thousands)Balance Sheet Data:Cash

$
5,487


$
6,276


$
93,949


$
41,450


$
56,766Working capital


35,135



58,979



97,563



67,111



67,252Total assets


887,107



926,441



945,029



927,319



937,792Long-term debt, including capital lease obligations, net of
    current portion(2)


563,916



572,561



503,850



527,905



610,201Total debt, including capital lease obligations


570,468



579,098



510,788



530,575



612,862Series A redeemable preferred stock(4)


















56,708Stockholders equity(4)(5)


113,657



154,578



208,277



151,760



25,608   Horizon Lines, Inc.



PredecessorPeriod



Periodfrom



fromJuly 7,



Dec. 22,Year


Year


Year


Year


Year


2004



2003Ended


Ended


Ended


Ended


Ended


through



throughDec. 21,


Dec. 23,


Dec. 24,


Dec. 25,


Dec. 26,


Dec. 26,



July 6,2008


2007


2006


2005


2004


2004



2004(In thousands)






(In thousands)Other Financial Data:EBITDA(6)

$
89,883


$
121,909


$
160,452


$
100,381


$
112,998


$
62,664



$
50,334Capital expenditures(7)


39,149



31,426



21,288



41,234



32,889



11,000




21,889Vessel dry-docking payments


13,913



21,414



16,815



16,038



12,273



2,075




10,198Cash flows provided by (used in):Operating activities


89,368



54,837



115,524



76,376



69,869



72,797




(2,928
)Investing activities(7)(8)


(38,847
)


(59,387
)


(19,340
)


(38,817
)


(694,563
)


(673,923
)



(20,640
)Financing activities(4)(8)


(51,310
)


(83,123
)


(43,685
)


(52,875
)


657,805



657,892




(87
)Ratio of earnings to fixed charges(9)






1.20
x


1.63
x






1.35
x


1.23
x



1.58x     (1)
    
    The Company completed an initial public offering during 2005 and
    used the proceeds to repurchase certain indebtedness, pay
    related premiums, redeem its outstanding preferred stock, and
    pay related transaction expenses.(2)
    
    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 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 2007, the Company completed a private
    placement of $330.0 million aggregate principal amount of
    4.25% convertible senior notes due 2012 and entered into a
    credit agreement providing for a $250.0 million five year
    revolving credit facility and a $125.0 million term loan
    with various financial lenders. The Company utilized a portion
    of the proceeds from these transactions to (i) repay the
    borrowings outstanding under the Prior Senior Credit Facility
    (as defined below) and (ii) purchase the outstanding
    principal and pay associated premiums of the 9% senior
    notes and 11% senior discount notes purchased in the
    Companys tender offer. 38




---



##### Table of Contents



(3)
    
    During 2006, the Company elected the application of a 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 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 accounted 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
    $43.5 million during the year ended December 24, 2006.
    Approximately $11.0 million, or $0.33 per share, and
    $18.8 million, or $0.56 per share, 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 was (53.9%). 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 was 9.5%. The
    Company modified its trade routes between the U.S. west coast
    and Guam and Asia during 2007. As such, the Companys
    shipping activities associated with these modified trade routes
    became qualified shipping activities, and thus the income from
    these vessels is excluded from gross income in determining
    federal income tax liability. During 2007, the Company recorded
    a $7.7 million tax benefit due to the revaluation of
    deferred taxes related to the qualified shipping income expected
    to be generated by the new vessels and related to a change in
    estimate resulting from refinements in the methodology for
    computing secondary activities and cost allocations for tonnage
    tax purposes. This benefit was recorded in connection with the
    filing of the 2006 income tax return in September 2007.
    Excluding the loss on extinguishment and the related tax
    benefits, the benefit associated with the revaluation of
    deferred taxes related to activities qualifying for the
    application of tonnage tax and the benefits related to the
    refinements in methodology of applying tonnage tax, the
    Companys effective tax rate was 14.1% for the year ended
    December 23, 2007.(4)
    
    In connection with the financing of the Acquisition-Related
    Transactions, we issued and sold 8,391,180 shares of our
    Series A preferred stock in July 2004. No dividends accrued
    on these shares. During October 2004, an additional 1,898,730
    Series A preferred shares were issued and sold. During
    December 2004, 5,315,912 Series A preferred shares were
    redeemed for $53.2 million. In connection with the initial
    public offering, the Company redeemed all shares of its
    non-voting $.01 par value Series A Preferred Stock for
    $62.2 million.(5)
    
    Concurrent with the issuance of the 4.25% convertible senior
    notes, the Company entered into note hedge transactions whereby
    the Company has the option to receive shares of the
    Companys common stock when the share price is between
    certain amounts and the Company sold warrants to financial
    institutions whereby the financial institutions have the option
    to receive shares when the share price is above certain levels.
    The cost of the note hedge transactions to the Company was
    approximately $33.4 million, net of tax benefits, and the
    Company received proceeds of $11.9 million related to the
    sale of the warrants.(6)
    
    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, 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
    requires the Company to maintain certain interest expense
    coverage and leverage ratios, which contain EBITDA as a
    component, and restrict certain 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 Horizon
    Lines of certain targets, which contain EBITDA as a 39




---



##### Table of Contents



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):  Horizon Lines, Inc.



PredecessorPeriod



Periodfrom



fromJuly 7,



Dec. 22,Year


Year


Year


Year


Year


2004



2003Ended


Ended


Ended


Ended


Ended


through



throughDec. 21,


Dec. 23,


Dec. 24,


Dec. 25,


Dec. 26,


Dec. 26,



July 6,2008


2007


2006


2005


2004


2004



2004Net income (loss)

$
3,059


$
28,859


$
72,357


$
(18,321
)

$
13,561


$
5,600



$
7,961Interest expense, net


32,498



41,672



48,552



51,357



29,567



21,770




7,797Income tax (benefit) expense


(8,479
)


(13,983
)


(25,332
)


438



8,439



3,543




4,896Depreciation and amortization


62,805



65,361



64,875



66,907



61,431



31,751




29,680EBITDA

$
89,883


$
121,909


$
160,452


$
100,381


$
112,998


$
62,664



$
50,334     Horizon Lines, Inc.



PredecessorPeriod



Periodfrom



fromJuly 7,



Dec. 22,Year


Year


Year


Year


Year


2004



2003Ended


Ended


Ended


Ended


Ended


through



throughDec. 21,


Dec. 23,


Dec. 24,


Dec. 25,


Dec. 26,


Dec. 26,



July 6,2008


2007


2006


2005


2004


2004



2004Department of Justice antitrust investigation costs

$
10,711


$



$



$



$



$




$
Impairment of assets


25,415
























Restructuring costs


3,244
























Loss on extinguishment of debt






38,546



581



13,154












Transaction related expenses










2,032



2,200



2,934



692




2,242Compensation charges(a)














18,953












Management fees(b)














9,698



2,204



1,573




246     (a)
    
    The adjustment represents non-cash stock-based compensation
    charges which we incurred during the year ended
    December 25, 2005 related to the issuance and sale of
    common stock, including restricted common stock, to non-employee
    directors and to members of management. All of these shares
    vested in full upon the consummation of the initial public
    offering completed during 2005.(b)
    
    The adjustment represents management fees paid to Castle Harlan
    and to an entity that was associated with the party that was the
    primary stockholder of Horizon Lines Holding prior to the
    Acquisition-Related Transactions. Upon the completion of the
    Acquisition-Related Transactions, the Company, Horizon Lines and
    Horizon Lines Holding entered into a new management agreement
    with Castle Harlan. On September 7, 2005, as a result of an
    amendment of such agreement and a related payment to Castle
    Harlan of $7.5 million under such amended agreement, the
    provisions of such agreement were terminated, except as to
    expense reimbursement and indemnification and related
    obligations of the Company, Horizon Lines and Horizon Lines
    Holding. 40




---



##### Table of Contents



(7)
    
    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 and
    $7.7 million for the period from December 22, 2003
    through July 6, 2004 and the period from July 7, 2004
    through December 26, 2004, respectively.(8)
    
    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. Financing
    activities during 2005 included the proceeds from the initial
    public offering and the use of proceeds therefrom. The proceeds
    and cash generated from operations were used to redeem debt and
    preferred shares, and to pay associated redemption premiums and
    related transaction expenses. Investing activities during 2007
    include the acquisition of HSI and Aero Logistics. Financing
    activities during 2007 include the Companys private
    placement of $330.0 million aggregate principal amount of
    4.25% convertible senior notes due 2012 and credit agreement
    providing for a $250.0 million five year revolving credit
    facility and a $125.0 million term loan with various
    financial lenders. The Company utilized a portion of the
    proceeds from these transactions to (i) repay
    $192.8 million of borrowings outstanding under the Prior
    Senior Credit Facility (as defined below), (ii) purchase
    the outstanding principal and pay associated premiums of the
    9% senior notes and 11% senior discount notes
    purchased in the Companys tender offer and
    (iii) purchase 1,000,000 shares of the Companys
    common stock. Also during 2007, the Companys Board of
    Directors approved a stock repurchase program under which the
    Company acquired 1,172,000 shares of its common stock at a
    total cost of $20.6 million. During 2008, the Company
    completed its share repurchase program by acquiring an
    additional 1,627,500 at a total cost of $29.4 million.(9)
    
    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 ended December 2008 & 2005, earnings were
    insufficient to cover fixed charges by $5.2 million and
    $17.9 million, respectively. The calculation of the ratio
    of earnings to fixed charges is noted below (in thousands):  Horizon Lines, Inc.



PredecessorPeriod



Periodfrom



fromJuly 7,



Dec. 22,Year


Year


Year


Year


Year


2004



2003Ended


Ended


Ended


Ended


Ended


through



throughDec. 21,


Dec. 23,


Dec. 24,


Dec. 25,


Dec. 26,


Dec. 26,



July 6,2008


2007


2006


2005


2004


2004



2004Pretax (loss) income

$
(5,420
)

$
14,876


$
47,025


$
(17,883
)

$
22,000


$
9,143



$
12,857Interest expense


32,675



43,064



51,328



53,057



29,829



21,954




7,875Preferred stock accretion














5,073



6,756



6,756




Rentals


35,267



31,814



23,616



24,530



26,193



11,836




14,357Total fixed charges

$
67,942


$
74,878


$
74,944


$
82,660


$
62,778


$
40,546



$
22,232Pretax earnings plus fixed charges

$
62,522


$
89,754


$
121,969


$
64,777


$
84,778


$
49,689



$
35,089Ratio of earnings to fixed charges






1.20
x


1.63
x






1.35
x


1.23
x



1.58x  41




---



##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K. Form 10-K.
  Executive
    Overview
           42




---



##### Table of Contents



Year


Year


YearEnded


Ended


EndedDecember 21,


December 23,


December 24,2008


2007


2006(In thousands)Operating revenue

$
1,304,259


$
1,206,515


$
1,156,892Operating expense


1,277,243



1,111,342



1,060,921Operating income

$
27,016


$
95,173


$
95,971Operating ratio


97.9
%


92.1
%


91.7
%Revenue containers (units)


276,282



285,880



296,566   General
  U.S.-organized
  History and
    Transactions
  Sea-Land
  Sea-Land,
  Form 10-K
 43




---



##### Table of Contents



Basis of
    Presentation
    Fiscal
    Year
    Critical
    Accounting Policies
        Revenue
    Recognition
  No. 91-9
   44




---



##### Table of Contents



Allowance for
    Doubtful Accounts and Revenue Adjustments
      Casualty
    Claims
    Goodwill and
    Other Identifiable Intangible Assets
   45




---



##### Table of Contents



Vessel
    Dry-docking
  30-month
   46




---



##### Table of Contents



Deferred Tax
    Assets and Liabilities
    FIN 48
    Stock-Based
    Compensation
      Property and
    Equipment
     47




---



##### Table of Contents



Recent Accounting
    Pronouncements
  No. EITF 03-6-1, EITF 03-6-1). EITF 03-6-1 EITF 03-6-1 EITF 03-6-1
  14-1, 14-1). 14-1 14-1 14-1. 14-1
  Year Ended December 21, 2008


Year Ended December 23, 2007As





As


As





AsReported


Adjustments


Adjusted


Reported


Adjustments


AdjustedStatement of OperationsInterest expense, net

$
32,498


$
8,901


$
41,399


$
41,672


$
3,204


$
44,876Income tax (benefit) expense


(8,479
)


(3,249
)


(11,728
)


(13,983
)


(1,169
)


(15,152
)Net income (loss)


3,059



(5,652
)


(2,593
)


28,859



(2,034
)


26,825Net income (loss) per shareBasic


0.10



(0.19
)


(0.09
)


0.87



(0.06
)


0.81Diluted


0.10



(0.19
)


(0.09
)


0.85



(0.06
)


0.79Balance SheetIntangible assets, net

$
126,697


$
(1,155
)

$
125,542


$
152,031


$
(1,495
)

$
150,536Deferred tax assets


23,992



4,418



28,410



4,060



1,169



2,891Total assets


887,107



3,263



890,370



926,441



(326
)


926,115Long-term debt, net of current


563,916



(37,657
)


526,259



572,469



(46,898
)


525,571Additional paid in capital


168,779



48,606



217,385



163,760



48,606



212,366Retained earnings


29,780



(7,686
)


22,094



39,994



(2,034
)


37,960Total liabilities and stockholders equity


887,107



3,263



890,370



926,441



(326
)


926,115  48




---



##### Table of Contents



14-1
  Fiscal Year2009

$
10,0112010


11,0602011


11,7652012


4,821           instrument-by-instrument
 49




---



##### Table of Contents



Shipping
    Rates
    Seasonality
    Results of
    Operations
  Operating
    Revenue Overview
      Form 10-K,
 50




---



##### Table of Contents



Cost of
    Services Overview
    Year Ended
    December 21, 2008 Compared to Year Ended December 23,
    2007
  Horizon Lines
    Segment
  U.S.-flag
  Year Ended


Year EndedDecember 21,


December 23,


%2008


2007


Change(In thousands)Operating revenue

$
1,265,789


$
1,190,922



6.3
%Operating expense:Vessel


439,552



368,728



19.2
%Marine


205,906



198,927



3.5
%Inland


205,866



197,642



4.2
%Land


148,448



132,284



12.2
%Rolling stock rent


44,075



45,284



2.7
%Cost of services


1,043,847



942,865



10.7
%Depreciation and amortization


42,413



41,669



1.8
%Amortization of vessel dry-docking


17,162



17,491



1.9
%Selling, general and administrative


98,110



85,638



14.6
%Impairment of assets


6,030







100.0
%Restructuring costs


3,126







100.0
%Miscellaneous expense, net


2,812



847



232.0
%Total operating expense


1,213,500



1,088,510



11.5
%Operating income

$
52,289


$
102,412



(48.9
)%Operating ratio


95.9
%


91.4
%


4.5
%Revenue containers (units)


276,282



285,880



(3.4
)%  51




---



##### Table of Contents



Operating Revenue.
  Bunker and intermodal fuel surcharges included in rates

$
63,711General rate increases


29,918Increase in other non-transportation services


9,462Revenue related to acquisitions


6,932Revenue container volume decrease


(35,156
)Total operating revenue increase

$
74,867     Cost of Services.
    Vessel fuel costs increase

$
64,231Vessel lease expense increase


8,394Labor and other vessel operating decreases


(1,801
)Total vessel expense increase

$
70,824      52




---



##### Table of Contents



Year Ended


Year EndedDecember 21,


December 23,2008


2007


% Change(In thousands)Land expense:Maintenance

$
53,691


$
50,440



6.4
%Terminal overhead


58,046



50,522



14.9
%Yard and gate


28,636



23,647



21.1
%Warehouse


8,075



7,675



5.2
%Total land expense

$
148,448


$
132,284



12.2
%     Depreciation and Amortization.
  Year Ended


Year EndedDecember 21,


December 23,2008


2007


% Change(In thousands)Depreciation and amortization:Depreciation  owned vessels

$
9,627


$
9,996



(3.7
)%Depreciation and amortization  other


12,481



11,743



(6.3
)%Amortization of intangible assets


20,305



19,930



1.9
%Total depreciation and amortization

$
42,413


$
41,669



1.8
%Amortization of vessel dry-docking

$
17,162


$
17,491



(1.9
)%   Amortization of Vessel
    Dry-docking.
 53




---



##### Table of Contents



Selling, General and Administrative.
  Impairment of Assets.
  Restructuring Costs.
  Miscellaneous Expense, Net.
  Horizon Logistics
    Segment
    Year Ended


Year EndedDecember 21,


December 23,


%2008


2007


Change(In thousands)Operating revenue

$
38,470


$
15,593



146.7
%Operating expense:Inland


27,446



8,373



227.8
%Land


2,998



2,671



12.2
%Rolling stock rent


384



97



295.9
%Cost of services


30,828



11,141



176.7
%Depreciation and amortization


3,230



6,201



(47.9
)%Selling, general and administrative


10,096



5,340



89.1
%Impairment of assets


19,385







100.0
%Restructuring costs


118







100.0
%Miscellaneous expense, net


86



150



(42.7
)%Total operating expense


63,743



22,832



179.2
%Operating loss

$
(25,273
)

$
(7,239
)


(249.1
)%   Operating Revenue.
  Cost of Services.
 54




---



##### Table of Contents



Depreciation and Amortization.
  Year Ended


Year EndedDecember 21,


December 23,2008


2007


% Change(In thousands)Depreciation and amortization:Depreciation  other

$
2,235


$
5,893



(62.0
)%Amortization of intangible assets


995



308



223.1
%Total depreciation and amortization

$
3,230


$
6,201



(47.9
)%   Selling, General and Administrative.
  Impairment of Assets.
  Unallocated
    Expenses
  Interest Expense, Net.
  Loss on Early Extinguishment of Debt.
  Income Tax Benefit.
 55




---



##### Table of Contents



Year Ended
    December 23, 2007 Compared to Year Ended December 24,
    2006
  Horizon Lines
    Segment
  Year Ended


Year EndedDecember 23,


December 24,


%2007


2006


Change(In thousands)Operating revenue

$
1,190,922


$
1,153,414



3.3
%Operating expense:Vessel


368,728



319,581



15.4
%Marine


198,927



192,242



3.5
%Inland


197,642



199,890



(1.1
)%Land


132,284



136,242



(2.9
)%Rolling stock rent


45,284



44,332



2.1
%Cost of services


942,865



892,287



5.7
%Depreciation and amortization


41,669



40,680



2.4
%Amortization of vessel dry-docking


17,491



14,652



19.4
%Selling, general and administrative


85,638



94,909



(9.8
)%Miscellaneous expense, net


847



736



(15.1
)%Total operating expense


1,088,510



1,043,264



4.3
%Operating income

$
102,412


$
110,150



(7.0
)%Operating ratio


91.4
%


90.5
%


0.9
%Revenue containers (units)


285,880



296,566



(3.6
)%   Operating Revenue.
  General rate increases

$
52,374Revenue related to acquisitions


10,092Bunker and intermodal fuel surcharges included in rates


6,216Increase in other non-transportation services


5,806Revenue container volume decrease


(36,980
)Total operating revenue increase

$
37,508    56




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##### Table of Contents



Cost of Services.
    Vessel fuel costs increase

$
7,877Vessel lease expense increase


24,166Labor and other vessel operating increases


17,104Total vessel expense increase

$
49,147           Year Ended


Year EndedDecember 23,


December 24,2007


2006


% Change(In thousands)Land expense:Maintenance

$
50,440


$
53,514



(5.7
)%Terminal overhead


50,522



48,585



4.0
%Yard and gate


23,647



26,549



(10.9
)%Warehouse


7,675



7,594



(1.1
)%Total land expense

$
132,284


$
136,242



(2.9
)%    57




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##### Table of Contents



Depreciation and Amortization.
  Year Ended


Year EndedDecember 23,


December 24,2007


2006


% Change(In thousands)Depreciation and amortization:Depreciation  owned vessels

$
9,996


$
10,893



(8.2
)%Depreciation and amortization  other


11,743



10,240



14.7
%Amortization of intangible assets


19,930



19,547



2.0
%Total depreciation and amortization

$
41,669


$
40,680



2.4
%Amortization of vessel dry-docking

$
17,491


$
14,652



19.4
%   Amortization of Vessel
    Dry-docking. dry-dockings
  Selling, General and Administrative.
 58




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##### Table of Contents



Horizon Logistics
    Segment
  Year Ended


Year EndedDecember 23,


December 24,


%2007


2006


Change(In thousands)Operating revenue

$
15,593


$
3,478



348.3
%Operating expense:Inland


8,373



2,073



303.9
%Land


2,671



1,951



36.9
%Rolling stock rent


97







100.0
%Cost of services


11,141



4,024



176.9
%Depreciation and amortization


6,201



9,543



(35.0
)%Selling, general and administrative


5,340



3,377



58.1
%Miscellaneous expense, net


150



713



(79.0
)%Total operating expense


22,832



17,657



29.3
%Operating loss

$
(7,239
)

$
(14,179
)


(48.9
)%   Operating Revenue.
  Cost of Services.
  Depreciation and Amortization.
  Year Ended


Year EndedDecember 23,


December 24,2007


2006


% Change(In thousands)Depreciation and amortization:Depreciation  other

$
5,893


$
9,543



(38.2
)%Amortization of intangible assets


308







100.0
%Total depreciation and amortization

$
6,201


$
9,543



(35.0
)%   Selling, General and Administrative.
  Unallocated
    Expenses
  Interest Expense, Net.
 59




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##### Table of Contents



Loss on Early Extinguishment of Debt.
  Income Tax Benefit.
  Liquidity and
    Capital Resources
   60




---



##### Table of Contents



Operating
    Activities
    Decrease in vessel rent payments in excess of accrual

$
21,130Decrease in performance incentive plan payments


10,537Decrease in accounts receivable


18,507Decrease in materials and supplies


15,004Earnings adjusted for non-cash charges


(39,300
)Other increases in working capital, net


8,653$
34,531     Investing
    Activities
      Financing
    Activities
   61




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##### Table of Contents



Stock Repurchase
    Program
    Capital
    Requirements and Liquidity
   62




---



##### Table of Contents



Contractual
    Obligations and Off-Balance Sheet Arrangements
    Total











AfterObligations


2009


2010-2011


2012-2013


2013Principal obligations:Senior credit facility

$
238,750


$
6,250


$
37,500


$
195,000


$
4.25% convertible senior notes


330,000











330,000



5.26% note payable


1,718



302



656



729



31Operating leases(1)


669,436



106,195



164,848



136,239



262,154Subtotal


1,239,904



112,747



203,004



661,968



262,185Interest obligations:(2)Senior credit facility


31,114



8,917



16,707



5,490



4.25% convertible senior notes


56,100



14,025



28,050



14,025



Subtotal


87,214



22,942



44,757



19,515



Total principal and interest

$
1,327,118


$
135,689


$
247,761


$
681,483


$
262,185Other commitments(3)

$
32,762


$
16,692


$
7,081


$



$
8,989     (1)
    
    The above contractual obligations table does not include the
    residual guarantee related to our transaction with Ship Finance
    Limited. 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 has been recorded at its fair value of
    approximately $0.2 million as a liability.(2)
    
    Included in contractual obligations are scheduled interest
    payments. Interest payments on the term loan portion of the
    senior credit facility are fixed and based on the interest rate
    swap (as defined below). Interest payments on the revolver
    portion of the senior credit facility are variable and are based
    as of December 21, 2008 upon the London Inter-Bank Offered
    Rate (LIBOR) plus 1.50%. The three-month LIBOR /swap curve has
    been utilized to estimate interest payments on the senior credit
    facility. Interest on the 4.25% convertible senior notes is
    fixed and is paid semi-annually on February 15 and
    August 15 of each year, beginning on February 15,
    2008, until maturity on August 15, 2012.(3)
    
    Other commitments include standby letters of credit, the
    purchase commitment related to the Anchorage, Alaska cranes, and
    other long term liabilities.   63




---



##### Table of Contents



Long-Term
    Debt
  Senior Credit
    Facility
        Derivative
    Instruments
     64




---



##### Table of Contents



4.25% Convertible
    Senior Notes
      
    Prior to May 15, 2012, if during any calendar quarter, and
    only during such calendar quarter, if the last reported sale
    price of our common stock for at least 20 trading days in a
    period of 30 consecutive trading days ending on the last trading
    day of the preceding calendar quarter exceeds 120% of the
    applicable conversion price in effect on the last trading day of
    the immediately preceding calendar quarter;
    During any five business day period prior to May 15, 2012,
    immediately after any five consecutive trading day period (the
    measurement period) in which the trading price per
    $1,000 principal amount of notes for each day of such
    measurement period was less than 98% of the product of the last
    reported sale price of our common stock on such date and the
    conversion rate on such date;
    If, at any time, a change in control occurs or if we are a party
    to a consolidation, merger, binding share exchange or transfer
    or lease of all or substantially all of its assets, pursuant to
    which our common stock would be converted into cash, securities
    or other assets; or
    At any time after May 15, 2012 through the fourth scheduled
    trading day immediately preceding August 15, 2012.    No. 00-19,
 65




---



##### Table of Contents



No. 00-19). No. 00-19.
   Item 7A.
    Quantitative and Qualitative Disclosures about Market
    Risk               66




---



##### Table of Contents



Fair ValueDecember 21,2009


2010


2011


2012


2013


Thereafter


Total


2008(1)LiabilitiesLong-term Debt:Fixed rate

$
302


$
319


$
337


$
330,355


$
374


$
31


$
331,718


$
150,944Average interest rate


4.3
%


















5.3
%Variable rate

$
6,250


$
18,750


$
18,750


$
195,000


$



$



$
238,750


$
238,750Average interest rate


4.2
%Interest Rate DerivativesInterest Rate Swap:Variable to Fixed

$
112,500


$
96,094


$
73,828


$
18,750


$



$



$
118,750


$
118,750Average pay rate


3.2
%


3.2
%


3.2
%


3.2
%Average receive rate


1.9
%


1.7
%


1.7
%


1.9
%     (1)
    
    We receive the arithmetic average of the reference price
    calculated using the unweighted method of averaging. Item 8.
    Financial Statements and Supplementary Data  Form 10-K.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure   67




---



##### Table of Contents



Item 9A.
    Controls
    and Procedures  Disclosure
    Controls and Procedures
    Rule 13a-15(b)
  Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f)
    page F-2 Form 10-K.
  Changes in
    Internal Control over Financial Reporting
    Item 9B.
    Other
    Information   68




---



##### Table of Contents



Part III  Item 10.
    Directors
    and Executive Officers of the Registrant    and/or Form 10-K
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accountant Fees and Services   69




---



##### 



Part IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements:
  Horizon Lines,
    Inc.
    Index to Consolidated Financial Statements
   
 PageReports of Independent Registered Public
    Accounting Firm


F-1Consolidated Financial Statements for the fiscal year ended
    December 21, 2008:Consolidated Balance Sheets


F-3Consolidated Statements of Income


F-4Consolidated Statements of Cash Flows


F-5Consolidated Statements of Changes In
    Stockholders Equity


F-6Notes to Consolidated Financial Statements


F-7Schedule II  Valuation and Qualifying
    Accounts


F-42    Exhibits:
  Incorporated by ReferenceExhibit







Date of First

Exhibit

FiledNumber

Description

Form

File No.

Filing

Number

Herewith3
.1

Amended and Restated Certificate of Incorporation of the
    Registrant.

S-1

333-123073

9/22/05

3.13
.1.1

Certificate of Amendment of Amended and Restated Certificate of
    Incorporation

8-K

001-32627

6/5/07

3.13
.1.2

Certificate of Amendment of Amended and Restated Certificate of
    Incorporation









X3
.2

Amended and Restated Bylaws of the Registrant.

8-K

001-32627

2/4/09

3.23
.3

Certificate of Amendment of Amended and Restated Certificates of
    Incorporation of the Registrant.

8-K

001-32627

6/5/07

3.14
.1

Specimen of Common Stock Certificate.

S-1

333-123073

9/19/05

4.84
.2

Indenture, dated August 8, 2007, by and among Horizon Lines,
    Inc. and The Bank of New York Trust Company, N.A., as Trustee.

8-K

001-32627

8/13/07

4.34
.3

Form of Note (included in Exhibit 4.7).

8-K

001-32627

8/13/07

4.410
.1

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.

S-1

333-123073

3/2/05

10.10 70




---



##### Table of Contents



Incorporated by ReferenceExhibit







Date of First

Exhibit

FiledNumber

Description

Form

File No.

Filing

Number

Herewith10
.2

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.

S-1

333-123073

3/2/05

10.26*10
.3

Amended and Restated Put/Call Agreement, dated as of September
    20, 2005, by and among Horizon Lines, Inc. and other parties
    thereto.

8-K

001-32627

10/24/05

99.4*10
.4

Form of Restricted Stock Award Agreement.

8-K

001-32627

4/30/08

10.110
.5

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.

S-4

333-123681

6/23/05

10.1410
.6

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.

S-4

333-123681

3/30/05

10.1510
.7

TP1 Space Charter and Transportation Service Contract, dated May
    9, 2004, between A.P. Møller-Maersk A/S and Horizon Lines,
    LLC.

S-4

333-123681

6/23/05

10.1610
.8.1

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.

10-K

001-32627

3/2/07

10.12.110
.8.2

Amendment No. 2 to TP1 Space Charter and Transportation Service
    Contract, dated July 2, 2007 between A.P. Møller-Maersk A/S
    and Horizon Lines, LLC.

10-Q

001-32627

7/27/07

10.12.210
.9

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.

S-4

333-123681

3/20/05

10.17 71




---



##### Table of Contents



Incorporated by ReferenceExhibit







Date of First

Exhibit

FiledNumber

Description

Form

File No.

Filing

Number

Herewith10
.9.1

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.

10-K

001-32627

3/2/07

10.13.110
.10

Stevedoring and Terminal Services Agreement, dated May 9, 2004,
    between APM Terminals, North America, Inc., Horizon Lines, LLC
    and Horizon Lines of Alaska, LLC.

S-4

333-123681

3/30/05

10.1810
.10.1

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.

10-K

001-32627

3/2/07

10.14.110
.11.1

Assignment and Assumption Agreement dated as of September 2,
    1999, by and between Sea-Land Service, Inc. and Sea-Land
    Domestic Shipping, LLC.

S-4

333-123681

3/30/05

10.2110
.12

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.

S-1

333-123073

3/2/05

10.3610
.13

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.

S-1

333-123073

3/2/05

10.3710
.14

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.

S-1

333-123073

3/2/05

10.3810
.15

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.

S-1

333-123073

3/2/05

10.3910
.16

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).

S-1

333-123073

3/2/05

10.40 72




---



##### Table of Contents



Incorporated by ReferenceExhibit







Date of First

Exhibit

FiledNumber

Description

Form

File No.

Filing

Number

Herewith10
.16.1

Port of Kodiak Preferential Use Agreement dated January 1, 2005,
    between the City of Kodiak, Alaska and Horizon Lines of Alaska,
    LLC.

S-1

333-123073

7/29/05

10.40.110
.17

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).

S-1

333-123073

3/2/05

10.4110
.17.1

Terminal Operation Contract dated January 1, 2005, between the
    City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.

S-1

333-123073

7/29/05

10.41.110
.18

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.

S-1

333-123073

3/2/05

10.4210
.18.1

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).

S-1

333-123073

7/29/05

10.42.1*10
.19

Form of Directors and Officers Indemnification
    Agreement.

S-1

333-123073

9/19/05

10.4310
.19.1

Form of Non-management Directors Indemnification Agreement

8-K

001-32627

7/18/08

10.1*10
.20

Employment Agreement dated as of September 16, 2005, between
    Horizon Lines, LLC and John V. Keenan.

S-1

333-123073

9/19/05

10.44*10
.21.1

First Amendment to Employment Agreement dated as of December 20,
    2003, between Horizon Lines and John V. Keenan.

8-K

001-32627

12/21/05

10.44.1*10
.22.1

Amended and Restated Equity Incentive Plan.

8-K

001-32627

12/19/08

10.1*10
.23

Horizon Lines, Inc., Employee Stock Purchase Plan.

S-1

333-123073

9/19/05

10.46*10
.24

Stock Option Award Agreement.

8-K

001-32627

4/11/06

10.110
.25

Bareboat Charter Agreement dated as of April 7, 2006, by and
    among Horizon Lines Eagle and Horizon Lines, LLC.

S-1

333-134270

5/19/06

10.5210
.26

Bareboat Charter Agreement dated as of April 7, 2006, by and
    among Horizon Lines  Falcon and Horizon Lines, LLC.

S-1

333-134270

5/19/06

10.5310
.27

Bareboat Charter Agreement dated as of April 7, 2006, by and
    among Horizon Lines  Hunter and Horizon Lines, LLC.

S-1

333-134270

5/16/06

10.54 73




---



##### Table of Contents



Incorporated by ReferenceExhibit







Date of First

Exhibit

FiledNumber

Description

Form

File No.

Filing

Number

Herewith10
.28

Bareboat Charter Agreement dated as of April 7, 2006, by and
    among Horizon Lines  Tiger and Horizon Lines, LLC.

S-1

333-134270

5/19/06

10.5510
.29

Bareboat Charter Agreement dated as of April 7, 2006, by and
    among Horizon Lines  Hawk and Horizon Lines, LLC.

S-1

333-134270

5/19/06

10.5610
.30

Restricted Stock Agreement dated as of February 1, 2006, among
    Horizon Lines, Inc. and John Handy.

S-1

333-134270

5/19/06

10.5910
.31

Purchase Agreement, dated August 1, 2007, by and among Horizon
    Lines, Inc. and Goldman, Sachs & Co., as representatives of
    the Initial Purchasers.

8-K

001-32627

8/13/07

10.110
.32

Registration Rights Agreement, dated August 8, 2007, by and
    among Horizon Lines, Inc. and Goldman, Sachs & Co., as
    representatives of the Initial Purchasers.

8-K

001-32627

8/13/07

10.210
.33

Confirmation of Convertible Bond Hedge Transaction, dated as of
    August 1, 2007, by and among Horizon Lines, Inc. and Goldman,
    Sachs & Co.

8-K

001-32627

8/13/07

10.310
.34

Confirmation of Convertible Bond Hedge Transaction, dated as of
    August 1, 2007, by and among Horizon Lines, Inc. and Bank of
    America, N.A.

8-K

001-32627

8/13/07

10.410
.35

Confirmation of Convertible Bond Hedge Transaction, dated as of
    August 1, 2007, by and among Horizon Lines, Inc. and Wachovia
    Capital Markets, LLC, solely as agent of Wachovia Bank, National
    Association.

8-K

001-32627

8/13/07

10.510
.36

Confirmation of Issuer Warrant Transaction, dated as of August
    1, 2007, by and among Horizon Lines, Inc. and Goldman, Sachs
    & Co.

8-K

001-32627

8/13/07

10.610
.37

Confirmation of Issuer Warrant Transaction, dated as of August
    1, 2007, by and among Horizon Lines, Inc. and Bank of America,
    N.A.

8-K

001-32627

8/13/07

10.710
.38

Confirmation of Issuer Warrant Transaction, dated as of August
    1, 2007, by and among Horizon Lines, Inc. and Wachovia Capital
    Markets, LLC, solely as agent of Wachovia Bank, National
    Association.

8-K

001-32627

8/13/07

10.810
.39

Amendment to Confirmation of Issuer Warrant Transaction dated as
    of August 3, 2007, by and among Horizon Lines, Inc. and Goldman,
    Sachs & Co.

8-K

001-32627

8/13/07

10.910
.40

Amendment to Confirmation of Issuer Warrant Transaction dated as
    of August 3, 2007, by and among Horizon Lines, Inc. and Bank of
    America, N.A.

8-K

001-32627

8/13/07

10.10 74




---



##### Table of Contents



Incorporated by ReferenceExhibit







Date of First

Exhibit

FiledNumber

Description

Form

File No.

Filing

Number

Herewith10
.41

Amendment to Confirmation of Issuer Warrant Transaction dated as
    of August 3, 2007, by and among Horizon Lines, Inc. and Wachovia
    Capital Markets, LLC, solely as agent of Wachovia Bank, National
    Association.

8-K

001-32627

8/13/07

10.1110
.42

Credit Agreement, dated August 8, 2007, by and among Horizon
    Lines, Inc., as Borrower; certain subsidiaries of the Borrower
    for time to time parties thereto, as Guarantors; the Lenders
    parties thereto; Wachovia Bank, National Association, as
    Administrative Agent; Bank of America, N.A., as Syndication
    Agent; and Goldman Sachs Credit Partners, L.P., LaSalle Bank,
    National Association and JP Morgan Chase Bank, N.A., as Joint
    Documentation Agents.

8-K

001-32627

8/13/07

10.12*10
.43

Restricted Stock Agreement between the Registrant and Charles G.
    Raymond dated June 28, 2007.

8-K

001-32627

7/3/07

10.114


Code of Ethics.









X21


List of Subsidiaries of Horizon Lines, Inc.









X23
.1

Consent of Independent Registered Public Accounting Firm.









X31
.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.









X31
.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.









X32
.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.









X32
.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.









X     *
    
    Exhibit represents a management contract or compensatory plan.
    
    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. 75




---



##### Table of Contents



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
    4th day

    of February 2009.
    By:
    /s/  Charles
    G. Raymond  Charles 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
    4th day

    of February 2009.
  Signature

Title/s/  Charles
    G. RaymondCharles
    G. Raymond

Chairman, Chief Executive Officer and President
    (Principal Executive Officer)/s/  Michael
    T. AvaraMichael
    T. Avara

Senior Vice President and Chief Financial
    Officer (Principal Financial Officer
    and Principal Accounting Officer)/s/  James
    G. CameronJames
    G. Cameron

Director/s/  Vernon
    E. ClarkVernon
    E. Clark

Director/s/  Dan
    A. ColussyDan
    A. Colussy

Director/s/  James
    W. DownJames
    W. Down

Director/s/  William
    J. FlynnWilliam
    J. Flynn

Director/s/  Alex
    J. MandlAlex
    J. Mandl

Director/s/  Norman
    Y. MinetaNorman
    Y. Mineta

Director/s/  Thomas
    P. StorrsThomas
    P. Storrs

Director  76




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm  
        Accounting for Uncertainty in Income Taxes, an
    interpretation of Financial Accounting Standard No. 109
        F-1




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
  
                  F-2




---



##### Table of Contents



Horizon Lines,
    Inc.
  Consolidated
    Balance Sheets
  December 21,


December 23,2008


2007(In thousands, exceptper share data)ASSETSCurrent assets:Cash

$
5,487


$
6,276Accounts receivable, net of allowance


135,299



140,820Deferred tax asset


7,450



13,792Prepaid vessel rent


4,471



4,361Materials and supplies


23,644



31,576Other current assets


10,424



10,446Total current assets


186,775



207,271Property and equipment, net


208,453



194,679Goodwill


317,068



334,671Intangible assets, net


126,697



152,031Deferred tax asset


23,992



4,060Other long-term assets


24,122



33,729Total assets

$
887,107


$
926,441LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
41,947


$
40,225Current portion of long-term debt


6,552



6,537Accrued vessel rent


5,421



6,503Other accrued liabilities


97,720



95,027Total current liabilities


151,640



148,292Long-term debt, net of current portion


563,916



572,469Deferred rent


27,058



31,531Other long-term liabilities


30,836



19,571Total liabilities


773,450



771,863Stockholders equity:Preferred stock, $.01 par value, 30,500 authorized; no
    shares issued or outstanding






Common stock, $.01 par value, 100,000 shares
    authorized, 33,808 shares issued and 30,008 shares
    outstanding at December 21, 2008 and 50,000 shares
    authorized, 33,674 shares issued and 31,502 shares
    outstanding at December 23, 2007


338



337Treasury stock, 3,800 and 2,172 shares at cost as of
    December 21, 2008 and December 23, 2007, respectively


(78,538
)


(49,208
)Additional paid in capital


168,779



163,760Retained earnings


29,780



39,994Accumulated other comprehensive loss


(6,702
)


(305
)Total stockholders equity


113,657



154,578Total liabilities and stockholders equity

$
887,107


$
926,441    F-3




---



##### Table of Contents



Horizon Lines,
    Inc.
  Consolidated
    Statements of Income
  Fiscal Years EndedDecember 21,


December 23,


December 24,2008


2007


2006(In thousands, except per share amounts)Operating revenue

$
1,304,259


$
1,206,515


$
1,156,892Operating expense:Cost of services (excluding depreciation expense)


1,074,675



954,006



896,311Depreciation and amortization


45,643



47,870



50,223Amortization of vessel dry-docking


17,162



17,491



14,652Selling, general and administrative


108,206



90,978



98,286Impairment of assets


25,415







Restructuring costs


3,244







Miscellaneous expense


2,898



997



1,449Total operating expense


1,277,243



1,111,342



1,060,921Operating income


27,016



95,173



95,971Other expense (income):Interest expense, net


32,498



41,672



48,552Loss on early extinguishment of debt






38,546



581Other (income) expense, net


(62
)


79



(187
)(Loss) income before income taxes


(5,420
)


14,876



47,025Income tax benefit


(8,479
)


(13,983
)


(25,332
)Net income

$
3,059


$
28,859


$
72,357Net income per share:Basic

$
0.10


$
0.87


$
2.16Diluted

$
0.10


$
0.85


$
2.14Number of shares used in calculations:Basic


29,963



33,221



33,551Diluted


30,331



33,859



33,772Cash dividends per share

$
0.44


$
0.44


$
0.44    F-4




---



##### Table of Contents



Horizon Lines,
    Inc.
  Consolidated
    Statements of Cash Flows
  Fiscal Years EndedDecember 21,


December 23,


December 24,2008


2007


2006(In thousands)Cash flows from operating activities:Net income

$
3,059


$
28,859


$
72,357Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation


24,343



27,631



30,676Amortization of intangibles


21,300



20,239



19,547Amortization of vessel dry-docking


17,162



17,491



14,652Impairment of assets


25,415







Restructuring costs


3,244







Amortization of deferred financing costs


2,693



2,973



3,990Deferred income taxes


(8,479
)


(13,983
)


(25,088
)(Gain) loss on equipment disposals


(24
)


(171
)


242Loss on early extinguishment of debt






38,546



581Accretion on 11% senior discount notes






6,062



9,174Stock-based compensation


3,651



3,769



949Tax benefit (deficiency) from exercise of stock options






101



(1,289
)Changes in operating assets and liabilities:Accounts receivable, net


5,854



(12,653
)


(894
)Materials and supplies


7,636



(7,368
)


1,819Other current assets


23



(3,340
)


(664
)Accounts payable


1,625



11,106



5,954Accrued liabilities


(2,721
)


(15,305
)


1,395Vessel rent


(4,883
)


(26,013
)


(1,973
)Vessel dry-docking payments


(13,913
)


(21,414
)


(16,815
)Other assets/liabilities


3,383



(1,693
)


911Net cash provided by operating activities


89,368



54,837



115,524Cash flows from investing activities:Purchases of equipment


(39,149
)


(31,426
)


(21,288
)Purchases of businesses, net of cash acquired


(198
)


(31,323
)


Proceeds from sale of equipment


500



3,362



2,192Other investing activities










(244
)Net cash used in investing activities


(38,847
)


(59,387
)


(19,340
)Cash flows from financing activities:Borrowing under revolving credit facility


78,000



163,500



Payments on revolving credit facility


(80,000
)


(41,500
)


Purchase of treasury stock


(29,330
)


(49,208
)


Payments of long-term debt


(6,538
)


(517,167
)


(28,776
)Dividend to stockholders


(13,273
)


(14,653
)


(14,764
)Payment of financing costs


(139
)


(12,912
)


(1,182
)Payments on capital lease obligation


(81
)


(152
)


(195
)Proceeds from exercise of stock options


13



216



101Proceeds from issuance of common stock


38



29



Tax (deficiency) benefit from exercise of stock options






(101
)


1,289Proceeds from issuance of convertible notes






330,000



Borrowing of term loan






125,000



Purchase of call options






(52,541
)


Sale of common stock warrants






11,958



Redemption premiums






(25,592
)


Costs associated with initial public offering










(158
)Net cash used in financing activities


(51,310
)


(83,123
)


(43,685
)Net (decrease) increase in cash


(789
)


(87,673
)


52,499Cash at beginning of year


6,276



93,949



41,450Cash at end of year

$
5,487


$
6,276


$
93,949    F-5




---



##### Table of Contents



Horizon Lines,
    Inc.
  Consolidated
    Statements of Changes in Stockholders Equity
  AccumulatedAdditional


Retained


OtherCommon


Common


Treasury


Paid in


Earnings


Comprehensive


StockholdersShares


Stock


Stock


Capital


(Loss)


Income (Loss)


Equity(In thousands)Stockholders equity at December 25, 2005


33,544


$
336


$



$
179,590


$
(28,240
)

$
74


$
151,760Exercise of stock options


24











101











101Costs associated with initial public offering














(221
)










(221
)Tax deficiency from exercise of stock options














(1,289
)










(1,289
)Dividend to shareholders


















(14,764
)






(14,764
)Stock-based compensation














949











949Stock issued under Employee Stock Purchase Plan


23











469











469Net income


















72,357







72,357Change in fair value of fuel contract






















(74
)


(74
)Comprehensive income


























72,283Adjustment to apply SFAS 158, net of tax






















(1,011
)


(1,011
)Stockholders equity at December 24, 2006


33,591



336







179,599



29,353



(1,011
)


208,277Effect of the adoption of FIN 48


















(3,530
)






(3,530
)Effects of changing pension plan measurement date pursuant to
    FAS 158


















(35
)


8



(27
)Exercise of stock options


21











216











216Purchase of call spread options, net of tax benefits of $19,179














(33,362
)










(33,362
)Sale of common stock warrants














11,958











11,958Tax deficiency from exercise of stock options














101











101Dividend to shareholders


















(14,653
)






(14,653
)Stock-based compensation














3,769











3,769Stock issued under Employee Stock Purchase Plan


62



1







1,479











1,480Common stock repurchases


(2,172
)






(49,208
)














(49,208
)Net income


















28,859







28,859Unrecognized actuarial gains, net of tax






















597



597Amortization of pension and post-retirement benefit transition
    obligation, net of tax






















101



101Comprehensive income


























29,557Stockholders equity at December 23, 2007


31,502



337



(49,208
)


163,760



39,994



(305
)


154,578Exercise of stock options


1











13











14Vesting of restricted stock


15











(34
)










(34
)Dividend to shareholders


















(13,273
)






(13,273
)Stock-based compensation














3,651











3,651Stock issued under Employee Stock Purchase Plan


118



1







1,389











1,389Common stock repurchases


(1,628
)






(29,330
)














(29,330
)Net income


















3,059







3,059Unrecognized actuarial losses, net of tax






















(4,095
)


(4,095
)Fair value of interest rate swap, net of tax






















(2,402
)


(2,402
)Amortization of pension and post-retirement benefit transition
    obligation, net of tax






















100



100Comprehensive loss


























(3,338
)Stockholders equity at December 21, 2008


30,008


$
338


$
(78,538
)

$
168,779


$
29,780


$
(6,702
)

$
113,657    F-6




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes
    to Consolidated Financial Statements
  1.
    Basis of
    Presentation and Operations      2.
    Significant
    Accounting Policies  Cash
    Allowance for
    Doubtful Accounts and Revenue Adjustments
    70-90 days
 F-7




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Materials and
    Supplies
    Property and
    Equipment
    Buildings, chassis and cranes


25 yearsContainers


15 yearsVessels


20-40 yearsSoftware


3 yearsOther


3-10 years     Vessel
    Dry-docking
  30-month
   F-8




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Intangible
    Assets
      Revenue
    Recognition
  No. 91-9
    Casualty and
    Other Reserves
    Derivative
    Instruments
     F-9




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Income
    Taxes
    U.S.-flag
  Stock-based
    Compensation
      Pension and
    Post-retirement Benefits
   F-10




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
        Computation of
    Net Income (Loss) per Share
    Fiscal
    Period
    Use of
    Estimates
    Recent
    Accounting Pronouncements
  No. EITF 03-6-1, EITF 03-6-1). EITF 03-6-1 EITF 03-6-1
 F-11




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  EITF 03-6-1
  14-1, 14-1). 14-1 14-1 14-1. 14-1
  Year Ended December 21, 2008


Year Ended December 23, 2007As





As


As





AsReported


Adjustments


Adjusted


Reported


Adjustments


AdjustedStatement of OperationsInterest expense, net

$
32,498


$
8,901


$
41,399


$
41,672


$
3,204


$
44,876Income tax (benefit) expense


(8,479
)


(3,249
)


(11,728
)


(13,983
)


(1,169
)


(15,152
)Net income (loss)


3,059



(5,652
)


(2,593
)


28,859



(2,034
)


26,825Net income (loss) per shareBasic


0.10



(0.19
)


(0.09
)


0.87



(0.06
)


0.81Diluted


0.10



(0.19
)


(0.09
)


0.85



(0.06
)


0.79Balance SheetIntangible assets, net

$
126,697


$
(1,155
)

$
125,542


$
152,031


$
(1,495
)

$
150,536Deferred tax assets


23,992



4,418



28,410



4,060



1,169



2,891Total assets


887,107



3,263



890,370



926,441



(326
)


926,115Long-term debt, net of current


563,916



(37,657
)


526,259



572,469



(46,898
)


525,571Additional paid in capital


168,779



48,606



217,385



163,760



48,606



212,366Retained earnings


29,780



(7,686
)


22,094



39,994



(2,034
)


37,960Total liabilities and stockholders equity


887,107



3,263



890,370



926,441



(326
)


926,115  F-12




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  14-1
  Fiscal Year2009

$
10,0112010


11,0602011


11,7652012


4,821           instrument-by-instrument
 F-13




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Supplemental
    Cash Flow Information
      Fiscal Years EndedDecember 21,


December 23,


December 24,2008


2007


2006Interest

$
29,116


$
33,277


$
36,693Income taxes


711



444



868   3.
    Restructuring
    Charge   F-14




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Balance at








Balance atDecember 23,








December 21,2007


Provision


Payments


2008Personnel related costs

$



$
3,132


$



$
3,132Other associated costs






112



(47
)


65Total

$



$
3,244


$
(47
)

$
3,197     4.
    Impairment
    Charge    Goodwill

$
17,650Customer relationships


1,735Vessels


3,292Equipment


2,738Total

$
25,415   Goodwill
    Customer
    Relationships
   F-15




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Vessels
    Equipment
    5.
    Acquisitions     F-16




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Fiscal Years EndedDecember 23,


December 24,2007


2006Operating revenue

$
1,233,749


$
1,198,109Net income


28,865



71,182Earnings per share (basic)


0.87



2.12Earnings per share (diluted)


0.85



2.11   6.
    Segment
    Reporting  U.S.-flag
       F-17




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Fiscal Years EndedDecember 21,


December 23,


December 24,2008


2007


2006Operating revenue:Horizon Lines

$
1,268,418


$
1,190,922


$
1,153,414Horizon Logistics


227,668



190,607



183,6771,496,086



1,381,529



1,337,091Inter-segment revenue


(191,827
)


(175,014
)


(180,199
)Consolidated operating revenue

$
1,304,259


$
1,206,515


$
1,156,892Depreciation and amortization:Horizon Lines

$
59,575


$
59,160


$
55,332Horizon Logistics


3,260



6,201



9,54368,835



65,361



64,875Eliminations


(30
)






Consolidated depreciation and amortization

$
62,805


$
65,361


$
64,875Segment operating income (loss):Horizon Lines

$
52,289


$
102,412


$
110,150Horizon Logistics


(25,273
)


(7,239
)


(14,179
)Consolidated operating income


27,016



95,173



95,971Unallocated interest expense, net


32,498



41,672



48,552Loss on early extinguishment of debt






38,546



581Unallocated other (income) expense, net


(62
)


79



(187
)Consolidated (loss) income before income tax (benefit) expense

$
(5,420
)

$
14,876


$
47,025Capital expenditures:Horizon Lines

$
35,604


$
29,314


$
20,031Horizon Logistics


3,545



2,112



1,257Consolidated capital expenditures

$
39,149


$
31,426


$
21,288   December 21,


December 23,2008


2007Segment assets:Horizon Lines

$
897,699


$
922,376Horizon Logistics


22,297



36,954919,996



959,330Eliminations


(32,889
)


(32,889
)Consolidated assets

$
887,107


$
926,441  F-18




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  7.
    Property and
    Equipment    December 21,


December 23,2008


2007Vessels

$
149,557


$
141,776Containers


24,099



24,522Chassis


14,713



14,923Cranes


26,852



25,179Machinery & equipment


26,127



23,923Facilities & land improvement


20,718



10,847Software


20,875



30,214Construction in progress


34,382



20,275Total property and equipment


317,323



291,659Accumulated depreciation


(108,870
)


(96,980
)Property and equipment, net

$
208,453


$
194,679         8.
    Intangible
    Assets    December 21,


December 23,2008


2007Customer contracts/relationships

$
142,475


$
144,824Trademarks


63,800



63,800Deferred financing costs


13,011



12,872Non-compete agreements


262



262Total intangibles with definite lives


219,548



221,758Less: accumulated amortization


(92,851
)


(69,727
)Net intangibles with definite lives


126,697



152,031Goodwill


317,068



334,671Total intangible assets, net

$
443,765


$
486,702  F-19




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Fiscal Year Ending2009

$
23,2892010


23,2622011


23,0662012


19,1312013


12,158     Horizon


HorizonLines


Logistics


TotalBalance at December 23, 2007

$
314,149


$
20,522


$
334,671Impairment loss recognized






(17,650
)


(17,650
)Other






47



47Balance at December 21, 2008

$
314,149


$
2,919


$
317,068   9.
    Other Accrued
    Liabilities    December 21,


December 23,2008


2007Vessel operations

$
18,681


$
23,064Payroll and employee benefits


13,943



12,722Marine operations


12,162



9,682Terminal operations


11,847



9,278Fuel


7,443



14,885Interest


6,437



6,986Restructuring costs


3,069



Other liabilities


24,138



18,410Total other accrued liabilities

$
97,720


$
95,027  F-20




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  10.
    Long-Term
    Debt    December 21,


December 23,2008


2007Term loan

$
118,750


$
125,000Revolving credit facility


120,000



122,0004.25% convertible senior notes


330,000



330,000Other


1,718



2,006Total long-term debt


570,468



579,006Current portion


(6,552
)


(6,537
)Long-term debt, net of current

$
563,916


$
572,469   Senior Credit
    Facility
        4.25% Convertible
    Senior Notes
   F-21




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      
    Prior to May 15, 2012, if during any calendar quarter, and
    only during such calendar quarter, if the last reported sale
    price of the Companys common stock for at least 20 trading
    days in a period of 30 consecutive trading days ending on the
    last trading day of the preceding calendar quarter exceeds 120%
    of the applicable conversion price in effect on the last trading
    day of the immediately preceding calendar quarter;
    During any five business day period prior to May 15, 2012,
    immediately after any five consecutive trading day period (the
    measurement period) in which the trading price per
    $1,000 principal amount of notes for each day of such
    measurement period was less than 98% of the product of the last
    reported sale price of the Companys common stock on such
    date and the conversion rate on such date;
    If, at any time, a change in control occurs or if the Company is
    a party to a consolidation, merger, binding share exchange or
    transfer or lease of all or substantially all of its assets,
    pursuant to which the Companys common stock would be
    converted into cash, securities or other assets; or
    At any time after May 15, 2012 through the fourth scheduled
    trading day immediately preceding August 15, 2012.     F-22




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  No. 00-19, No. 00-19).The No. 00-19.
    Other
    Debt
    Fair Value of
    Financial Instruments
      2009

$
6,5522010


19,0692011


19,0872012


525,3552013


374Thereafter


31$
570,468   11.
    Fair Value
    Measurement    Level 1:
    observable inputs such as quoted prices in active marketsLevel 2:
    inputs other than the quoted prices in active markets that are
    observable either directly or indirectlyLevel 3:
    unobservable inputs in which there is little or no market data,
    which requires the Company to develop its own assumptions F-23




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
       12.
    Net Income Per
    Common Share    Fiscal Years EndedDecember 21,


December 23,


December 24,2008


2007


2006Numerator:Net income

$
3,059


$
28,859


$
72,357Denominator:Denominator for basic income per common share:Weighted average shares outstanding


29,963



33,221



33,551Effect of dilutive securities:Stock-based compensation


368



638



221Denominator for diluted net income per common share


30,331



33,859



33,772Basic net income per common share

$
0.10


$
0.87


$
2.16Diluted net income per common share

$
0.10


$
0.85


$
2.14     13.
    Derivative
    Financial Instruments   F-24




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
        14.
    Shelf
    Registration and Secondary Offerings    15.
    Leases   F-25




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Non-CancelableFiscal Year Ending

OperatingDecember

Leases2009

$
106,1952010


101,7442011


63,1042012


64,7702013


71,469Thereafter


262,154Total future minimum lease obligation

$
669,436   16.
    Employee Benefit
    Plans  Savings
    Plans
    Pension and
    Post-Retirement Benefit Plans
    Pension
    Plans
     F-26




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Post-retirement
    Benefit Plans
  his/her his/her his/her his/her
  his/her his/her his/her his/her
 F-27




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Obligations
    and Funded Status
  Pension


Post-retirementPlans


Benefit Plans2008


2007


2008


2007(In thousands)Change in Benefit ObligationBeginning obligations

$
(9,107
)

$
(2,541
)

$
(7,377
)

$
(2,225
)Obligation assumed as a result of acquisition






(6,433
)






(5,359
)Service cost


(273
)


(277
)


(425
)


(394
)Interest cost


(553
)


(338
)


(442
)


(285
)Amendments


(1,526
)






(406
)


Actuarial (loss) gain


(680
)


344



(1,861
)


702Transition entry to change measurement date






(27
)






Benefits paid


351



165



388



184Ending obligations


(11,788
)


(9,107
)


(10,123
)


(7,377
)Change in PlansAssetsBeginning fair value


5,742



1,136







Assets of acquired plan






4,034







Actual return on plans assets


(1,592
)


161







Employer contributions


901



576







Benefits paid


(351
)


(165
)






Ending fair value


4,700



5,742







Funded status at end of year

$
(7,088
)

$
(3,365
)

$
(10,123
)

$
(7,377
)   Net Periodic
    Benefit Cost
  Pension


Post-retirementPlans


Benefit Plans2008


2007


2008


2007(In thousands)Service cost

$
273


$
277


$
425


$
394Interest cost


553



338



442



285Expected return on plan assets


(449
)


(250
)






Amortization of prior service cost










59



59Amortization of transition obligation


102



103















(21
)


Net periodic benefit cost

$
479


$
468


$
905


$
738  F-28




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Rate
    Assumptions
  Pension


Post-retirementBenefits


Benefits2008


2007


2008


2007Weighted-average discount rate used in determining net periodic
    cost


6.2
%


5.8
%


6.2
%


5.8
%Weighted-average expected long-term rate of return on
    plans assets in determination of net periodic costs


7.5
%


7.5
%


0.0
%


0.0
%Weighted-average rate of compensation increase(1)


0.0
%


0.0
%


0.0
%


0.0
%Weighted-average discount rate used in determination of
    projected benefit obligation


5.5
%


6.2
%


5.5
%


6.2
%Assumed health care cost trend:Initial trend


N/A



N/A



9.00
%


7.00
%Ultimate trend rate


N/A



N/A



5.00
%


5.00
%     (1)
    
    The defined benefit plan benefit payments are not based on
    compensation, but rather on years of service.    Pension


Post-retirementFiscal Year Ending

Benefits


Benefits2009

$
382


$
4282010


413



4502011


450



4652012


530



4972013


553



5052014-2018


3,487



2,710$
5,815


$
5,055     Pension Benefits atDecember 21,Asset Category

2008Cash


5
%Equity securities


58
%Debt securities


37
%100
%    F-29




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  time-to-time
    Other
    Plans
  union-sponsored,
  17.
    Stock-Based
    Compensation    1 2
  Fiscal Years EndedDecember 21,


December 23,


December 24,2008


2007


2006Stock options

$
1,585


$
1,667


$
790Restricted stock


1,779



1,875



159Employee stock purchase plan


287



227



Total

$
3,651


$
3,769


$
949    F-30




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Stock
    Options
  10-year
      1 2
       F-31




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2008

2007

2006Expected dividend yield

3.4%-4.7%

1.3%

2.8%-3.5%Expected stock price volatility

33.3%-35.7%

27.0%

24.7%-26.2%Weighted average risk-free interest rate

3.44%-3.69%

4.51%

4.92%-5.00%Expected life of options (years)

6.5

6.5

6.5     Expected Life:
  Expected Volatility:
      Weighted-Weighted-


Average


AggregateAverage


Remaining


IntrinsicNumber of


Exercise


Contractual


ValueOptions

Shares


Price


Term (Years)


(000s)Outstanding at December 25, 2005


705,100


$
10.00



9.75


$
1,678Granted


655,575



12.74Exercised


(31,938
)


10.00Forfeited


(37,729
)


11.30Outstanding at December 24, 2006


1,291,008



11.35



9.16


$
20,975Granted


329,000



33.51Exercised


(21,000
)


10.00Forfeited






Outstanding at December 23, 2007


1,599,008



15.93



8.40


$
9,696Granted


209,000



14.38Exercised(a)


(1,312
)


10.00Forfeited


(172,754
)


15.57Outstanding at December 21, 2008


1,633,942


$
15.77



7.55


$
Vested or expected to vest at December 21, 2008


1,599,538


$
15.65



7.53


$
Exercisable at December 21, 2008


565,139


$
10.00



6.77


$
  F-32




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    (a)
    
    The aggregate intrinsic value of stock options exercised during
    the years ended December 21, 2008, December 23, 2007
    and December 24, 2006 was $2 thousand, $0.3 million
    and $0.5 million, respectively.    Restricted
    Stock
     F-33




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Weighted-AverageFair ValueNumber of


at GrantRestricted Shares

Shares


DateNonvested at December 25, 2005





$
Granted


70,000



12.57Vested






Forfeited






Nonvested at December 24, 2006


70,000



12.57Granted


237,559



31.96Vested






Forfeited






Nonvested at December 23, 2007


307,559



27.54Granted


182,827



31.96Vested


(17,440
)


34.42Forfeited


(44,134
)


27.70Nonvested at December 21, 2008


428,812


$
21.39     Employee Stock
    Purchase Plan
     F-34




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      2008

2007Expected dividend yield

2.4%-12.6%

1.4%-2.4%Expected stock price volatility

66.4%-86.7%

23.0%-51.0%Weighted average risk-free interest rate

0.85%-3.92%

3.92%-5.07%Expected term (years)

0.25

0.25Fair value at grant date

$0.78-$3.78

$3.25-$4.42     18.
    Income
    Taxes      Fiscal Year EndedDecember 21,


December 23,


December 24,2008


2007


2006Income tax benefit:Current:Federal

$
1,096


$



$
(842
)State/territory


161







598Total current


1,257







(244
)Deferred:Federal


(9,606
)


(12,720
)


(24,127
)State/territory


(130
)


(1,263
)


(961
)Total deferred


(9,736
)


(13,983
)


(25,088
)Net income tax benefit

$
(8,479
)

$
(13,983
)

$
(25,332
)  F-35




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Fiscal Year EndedDecember 21,


December 23,


December 24,2008


2007


2006Income tax (benefit) expense at statutory rates:

$
(1,897
)

$
5,207


$
16,459State/territory, net of federal income tax benefit


(262
)


(124
)


(255
)Qualifying shipping income


(6,725
)


(11,837
)


(24,702
)Revaluation of deferred taxes for tonnage tax regime






(7,702
)


(18,801
)Transaction costs










711Other Items


405



473



1,256Net income tax benefit

$
(8,479
)

$
(13,983
)

$
(25,332
)       December 21,


December 23,2008


2007Deferred tax assets:Leases

$
10,968


$
13,063Convertible note hedge


15,288



17,935Allowance for doubtful accounts


975



1,029Net operating losses and AMT carryforwards


34,292



33,804Post retirement benefits


970



848Other


12,229



6,942Valuation allowances


(1,262
)


(1,262
)Total deferred tax assets


73,460



72,359Deferred tax liabilities:Depreciation


(17,628
)


(18,301
)Capital construction fund


(12,907
)


(13,126
)Intangibles


(9,223
)


(19,629
)Other


(2,260
)


(3,451
)Total deferred tax liabilities


(42,018
)


(54,507
)Net deferred tax asset

$
31,442


$
17,852    F-36




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      2008


2007Beginning balance

$
8,482


$
3,530Additions based on tax positions related to the current year


2,196



3,550Additions for tax positions of prior years






2,049Reductions for tax positions of prior years


(1,689
)


(647
)Ending balance

$
8,989


$
8,482       non-U.S. income 2004-2008.
   F-37




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  19.
    Commitments and
    Contingencies  Legal
    Proceedings
             F-38




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    and/or
  SFL
    Agreements
     F-39




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Standby
    Letters of Credit
    Labor
    Relations
  2010-2014.
  20.
    Quarterly
    Financial Data (Unaudited)    Fiscal Year 2008First


Second


Third


FourthQuarter


Quarter


Quarter


QuarterOperating revenue

$
305,947


$
330,958


$
352,638


$
314,716Operating income (loss)(1)(2)


11,601



16,684



21,788



(23,057
)Net income (loss) (1)(2)


2,091



7,235



12,528



(18,795
)Basic net income (loss) per share


0.07



0.24



0.42



(0.63
)Diluted net income (loss) per share


0.07



0.24



0.42



(0.63
)   Fiscal Year 2007First


Second


Third


FourthQuarter


Quarter


Quarter


QuarterOperating revenue

$
273,664


$
295,701


$
321,145


$
316,005Operating income


16,479



22,905



35,283



20,506Net income(3)(4)


7,052



9,560



1,570



10,677Basic net income per share


0.21



0.28



0.05



0.33Diluted net income per share


0.21



0.28



0.05



0.32     (1)
    
    The second, third, and fourth quarter of 2008 include expenses
    of $2.4 million, $4.6 million, and $3.7 million,
    respectively, related to legal and professional fees associated
    with the DOJ investigation and the antitrust related litigation.(2)
    
    The fourth quarter of 2008 includes a $3.2 million charge
    related to the Companys restructuring plan, an impairment
    charge totaling $25.4 million, and a supplementary premium
    call totaling $1.3 million related the Companys
    protection and indemnity insurance policies for the three year
    period ended December 21, 2008.(3)
    
    The first quarter of 2007 includes a $2.5 million tax
    benefit related to the revaluation of deferred taxes associated
    with the qualified shipping income expected to be generated by
    the vessels in the Companys modified trade routes between
    the U.S. west cost and Guam and Asia.(4)
    
    The third quarter of 2007 includes a $23.9 million loss,
    net of tax benefits, on extinguishment related to the
    refinancing of the Companys long term debt. F-40




---



##### Table of Contents



Horizon Lines,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   21.
    Subsequent
    Event   F-41




---



##### Table of Contents



Schedule II



Horizon Lines,
    Inc.



Valuation and
    Qualifying Accounts

Years Ended
    December 2008, 2007 and 2006  Chargedto Cost





ChargedBeginning


and





to other


EndingBalance


Expenses


Deductions


Accounts


Balance(In thousands)Accounts receivable reserve:Year ended December 21, 2008:Allowance for doubtful accounts

$
5,091


$
2,970


$
(944
)

$



$
7,117Allowance for revenue adjustments


1,100



4,796



(4,796
)






1,100$
6,191


$
7,766


$
(5,740
)

$



$
8,217Year ended December 23, 2007:Allowance for doubtful accounts

$
3,472


$
2,700


$
(1,081
)

$



$
5,091Allowance for revenue adjustments


1,500



4,974



(5,374
)






1,100$
4,972


$
7,674


$
(6,455
)

$



$
6,191For the year ended December 24, 2006:Allowance for doubtful accounts

$
4,563


$
1,758


$
(2,849
)

$



$
3,472Allowance for revenue adjustments


1,500



6,875



(6,875
)






1,500$
6,063


$
8,633


$
(9,724
)

$



$
4,972Restructuring costs:For the year ended December 21, 2008

$



$
3,244


$
(47
)

$



$
3,197Deferred tax assets valuation allowance:For the year ended December 21, 2008

$
1,262


$



$



$



$
1,262For the year ended December 23, 2007

$
1,262


$



$



$



$
1,262For the year ended December 24, 2006

$
3,881


$



$
(711
)

$
(1,908
)(1)

$
1,262     (1)
    
    As a result of the removal of certain deferred tax assets and
    the related valuation allowances. F-42