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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q



(Mark one)

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



For the quarterly period ended September 25, 2005



OR



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



For the transition period from
 to



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Commission File Number 333-123681



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HORIZON LINES HOLDING CORP.

(Exact name of registrant as specified in its
charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 55-0816583                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4064 Colony Road, Suite 200, Charlotte, North Carolina         |  | 28211                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(704) 973-7000

(Registrants telephone number, including area code)



NOT APPLICABLE

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



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such a period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes  x    No ̈



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No    x



Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).



Yes ̈No  x



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



As of November 2, 2005, 800,000 shares of common stock, par value
$.01 per share, were outstanding.



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1



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HORIZON LINES HOLDING CORP.



Index



|          |  |                       |  |                                                                                       |  |   
|--------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | --
|          |  | Page No.             
|          |  |                      
|Part I.   |  | Financial Information |  | 3                                                                                    
|          |  |                       | 
|          |  | 1.                    |  | Financial Statements                                                                  |  | 3 
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Balance Sheets                                       |  | 3 
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Statements of Operations                             |  | 4 
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Statements of Cash Flows                             |  | 5 
|          |  |                       | 
|          |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                        |  | 6 
|          |  |                       | 
|          |  | 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13
|          |  |                       | 
|          |  | 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30
|          |  |                       | 
|          |  | 4.                    |  | Controls and Procedures                                                               |  | 30
|          |  |                      
|Part II.  |  | Other Information     |  | 31                                                                                   
|          |  |                       | 
|          |  | 1.                    |  | Legal Proceedings                                                                     |  | 31
|          |  |                       | 
|          |  | 2.                    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 32
|          |  |                       | 
|          |  | 3.                    |  | Defaults Upon Senior Securities                                                       |  | 32
|          |  |                       | 
|          |  | 4.                    |  | Submission of Matters to a Vote of Security-Holders                                   |  | 32
|          |  |                       | 
|          |  | 5.                    |  | Other Information                                                                     |  | 32
|          |  |                       | 
|          |  | 6.                    |  | Exhibits                                                                              |  | 33
|          | 
|Signature |  | 34                   



2



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PART I. FINANCIAL INFORMATION



1.Financial Statements



Horizon Lines Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

($ in thousands)



|                                                                                                                                                            |  |                      |           |                    |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | --------- | ------------------ | - | --------- | -
|                                                                                                                                                            |  | December 26, 2004(1) |           | September 25, 2005 |  
|Assets                                                                                                                                                      |  |                      |           |                    |   |           |  
|Current assets                                                                                                                                              |  |                      |           |                    |   |           |  
|Cash and cash equivalents                                                                                                                                   |  | $                    | 56,264    |                    | $ | 63,059    |  
|Accounts receivable, net of allowance of $7,938 and $9,998 atDecember 26, 2004 and September 25, 2005,
respectively                                         |  |                      | 110,801   |                    |   | 136,896   |  
|Income taxes receivable                                                                                                                                     |  |                      | 9,354     |                    |   | 9,560     |  
|Current portion of deferred tax asset                                                                                                                       |  |                      | 4,055     |                    |   | 5,181     |  
|Materials and supplies                                                                                                                                      |  |                      | 21,680    |                    |   | 25,792    |  
|Other current assets                                                                                                                                        |  |                      | 7,019     |                    |   | 5,938     |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Total current assets                                                                                                                                        |  |                      | 209,173   |                    |   | 246,426   |  
|Property and equipment, net                                                                                                                                 |  |                      | 190,123   |                    |   | 197,402   |  
|Deferred tax assets                                                                                                                                         |  |                      | 80,280    |                    |   | 69,404    |  
|Intangible assets, net                                                                                                                                      |  |                      | 517,556   |                    |   | 500,984   |  
|Other long term assets                                                                                                                                      |  |                      | 15,640    |                    |   | 21,098    |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Total assets                                                                                                                                                |  | $                    | 1,012,772 |                    | $ | 1,035,314 |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Liabilities and Stockholders Equity                                                                                                                        |  |                      |           |                    |   |           |  
|Current liabilities                                                                                                                                         |  |                      |           |                    |   |           |  
|Accounts payable                                                                                                                                            |  | $                    | 25,275    |                    | $ | 23,609    |  
|Current portion of deferred tax liability                                                                                                                   |  |                      | 1,683     |                    |   | 1,965     |  
|Current portion of long term debt                                                                                                                           |  |                      | 2,500     |                    |   | 2,500     |  
|Other accrued liabilities                                                                                                                                   |  |                      | 114,167   |                    |   | 140,088   |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Total current liabilities                                                                                                                                   |  |                      | 143,625   |                    |   | 168,162   |  
|Long term debt, net of current                                                                                                                              |  |                      | 496,875   |                    |   | 499,514   |  
|Deferred tax liability                                                                                                                                      |  |                      | 136,538   |                    |   | 126,391   |  
|Deferred rent                                                                                                                                               |  |                      | 44,949    |                    |   | 41,594    |  
|Other long term liabilities                                                                                                                                 |  |                      | 2,429     |                    |   | 3,134     |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Total liabilities                                                                                                                                           |  |                      | 824,416   |                    |   | 838,795   |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Stockholders equity                                                                                                                                        |  |                      |           |                    |   |           |  
|Common stock, $.01 par value, 800,000 shares authorized and 800,000 shares issued and outstanding at December 26, 2004 and
September 25, 2005, respectively |  |                      | 8         |                    |   | 8         |  
|Additional paid in capital                                                                                                                                  |  |                      | 179,486   |                    |   | 179,789   |  
|Accumulated other comprehensive income (loss)                                                                                                               |  |                      | 71        |                    |   | (58       | )
|Retained earnings                                                                                                                                           |  |                      | 8,791     |                    |   | 16,780    |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Total stockholders equity                                                                                                                                  |  |                      | 188,356   |                    |   | 196,519   |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  
|Total liabilities and stockholders equity                                                                                                                  |  | $                    | 1,012,772 |                    | $ | 1,035,314 |  
|                                                                                                                                                            |  |                      |           |                    |   |           |  

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|(1) | The balance sheet at December 26, 2004 has been derived from the audited financial statements of Horizon Lines Holding Corp.
|--- | ----------------------------------------------------------------------------------------------------------------------------



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



3



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Horizon Lines Holding Corp. and Subsidiaries and Predecessor Company

Unaudited Condensed Consolidated
Statements of Operations

($ in thousands)



|                                                 |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        
|------------------------------------------------ |  | ---------------------------------------------- | ------ |  | -------------------------------------------------- | - | --------------------------------------------------- |  | - | -------------------------------------------------- |  |  | -------------------------------------------------- | ------- | ------------------------------------------------------- |  | - | ------- |  | - | -------
|                                                 |  | Predecessor-A                                  |        |  | Horizon Lines Holding Corp.                        |   | Horizon Lines Holding Corp.                         |  |   | Predecessor-A                                      |  |  | Horizon Lines Holding Corp.                        |         | Horizon Lines Holding Corp.                            
|                                                 |  | For the PeriodJune 21,2004 throughJuly 6, 2004 |        |  | For the PeriodJuly 7,2004 throughSeptember 19,2004 |   | For the PeriodJune 27,2005 throughSeptember 25,2005 |  |   | For the PeriodDecember 22,2003 throughJuly 6, 2004 |  |  | For the PeriodJuly 7, 2004throughSeptember 19,2004 |         | For the PeriodDecember 27,2004 throughSeptember 25,2005
|Operating revenue                                |  | $                                              | 42,581 |  |                                                    | $ | 208,524                                             |  | $ | 289,075                                            |  |  | $                                                  | 498,430 |                                                         |  | $ | 208,524 |  | $ | 817,181
|Operating expenses:                              |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        
|Operating expense                                |  |                                                | 33,942 |  |                                                    |   | 156,659                                             |  |   | 221,968                                            |  |  |                                                    | 402,875 |                                                         |  |   | 156,659 |  |   | 644,437
|Selling, general and administrative              |  |                                                | 5,280  |  |                                                    |   | 16,059                                              |  |   | 28,097                                             |  |  |                                                    | 43,323  |                                                         |  |   | 16,059  |  |   | 72,319 
|Depreciation and amortization                    |  |                                                | 1,152  |  |                                                    |   | 6,017                                               |  |   | 13,085                                             |  |  |                                                    | 20,937  |                                                         |  |   | 6,017   |  |   | 38,526 
|Amortization of vessel drydocking                |  |                                                | 532    |  |                                                    |   | 3,235                                               |  |   | 3,815                                              |  |  |                                                    | 8,743   |                                                         |  |   | 3,235   |  |   | 12,359 
|Miscellaneous expense, net                       |  |                                                | 20     |  |                                                    |   | 824                                                 |  |   | 585                                                |  |  |                                                    | 1,891   |                                                         |  |   | 824     |  |   | 1,805  
|                                                 |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        
|Total operating expenses                         |  |                                                | 40,926 |  |                                                    |   | 182,794                                             |  |   | 267,550                                            |  |  |                                                    | 477,769 |                                                         |  |   | 182,794 |  |   | 769,446
|                                                 |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        
|Operating income                                 |  |                                                | 1,655  |  |                                                    |   | 25,730                                              |  |   | 21,525                                             |  |  |                                                    | 20,661  |                                                         |  |   | 25,730  |  |   | 47,735 
|Other expense:                                   |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        
|Interest expense, net                            |  |                                                | 507    |  |                                                    |   | 7,634                                               |  |   | 9,588                                              |  |  |                                                    | 5,111   |                                                         |  |   | 7,634   |  |   | 29,333 
|Interest expense  preferred units of subsidiary |  |                                                | 302    |  |                                                    |   |                                                    |  |   |                                                   |  |  |                                                    | 2,686   |                                                         |  |   |        |  |   |       
|Other expense, net                               |  |                                                |       |  |                                                    |   | 8                                                   |  |   | 16                                                 |  |  |                                                    | 7       |                                                         |  |   | 8       |  |   | 17     
|                                                 |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        
|Income before income taxes                       |  |                                                | 846    |  |                                                    |   | 18,088                                              |  |   | 11,921                                             |  |  |                                                    | 12,857  |                                                         |  |   | 18,088  |  |   | 18,385 
|Income tax expense                               |  |                                                | 332    |  |                                                    |   | 7,272                                               |  |   | 4,731                                              |  |  |                                                    | 4,896   |                                                         |  |   | 7,272   |  |   | 7,356  
|                                                 |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        
|Net income                                       |  | $                                              | 514    |  |                                                    | $ | 10,816                                              |  | $ | 7,190                                              |  |  | $                                                  | 7,961   |                                                         |  | $ | 10,816  |  | $ | 11,029 
|                                                 |  |                                                |        |  |                                                    |   |                                                     |  |   |                                                    |  |  |                                                    |         |                                                         |  |   |         |  |   |        



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



4



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Horizon Lines Holding Corp. and Subsidiaries and Predecessor Company

Unaudited Condensed Consolidated
Statements of Cash Flows

($ in thousands)



|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------- | - |  |  | --------------------------------------------------- | - | -------- | -------------------------------------------------------- |  | - | ------- | -
|                                                                                            |  | Predecessor-A                                      |         |   |  |  | Horizon Lines Holding Corp.                         |   |          | Horizon Lines Holding Corp.                              | 
|                                                                                            |  | For the PeriodDecember 22,2003 throughJuly 6, 2004 |         |   |  |  | For the PeriodJuly 7,2004 throughSeptember 19, 2004 |   |          | For the PeriodDecember 27,2004 throughSeptember 25, 2005 | 
|Cash flows from operating activities:                                                       |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Net income                                                                                  |  | $                                                  | 7,961   |   |  |  |                                                     | $ | 10,816   |                                                          |  | $ | 11,029  |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Depreciation                                                                                |  |                                                    | 19,385  |   |  |  |                                                     |   | 5,429    |                                                          |  |   | 23,855  |  
|Amortization of other intangible assets                                                     |  |                                                    | 1,552   |   |  |  |                                                     |   | 588      |                                                          |  |   | 14,671  |  
|Amortization of vessel drydocking                                                           |  |                                                    | 8,743   |   |  |  |                                                     |   | 3,235    |                                                          |  |   | 12,359  |  
|Amortization of deferred financing costs                                                    |  |                                                    | 550     |   |  |  |                                                     |   | 326      |                                                          |  |   | 2,071   |  
|Deferred income taxes                                                                       |  |                                                    | 2,968   |   |  |  |                                                     |   |         |                                                          |  |   | (115    | )
|Loss (gain) on equipment disposals                                                          |  |                                                    | 24      |   |  |  |                                                     |   |         |                                                          |  |   | (253    | )
|Stock-based compensation                                                                    |  |                                                    | 1,765   |   |  |  |                                                     |   |         |                                                          |  |   |         |  
|Accretion of preferred units of subsidiary                                                  |  |                                                    | 2,686   |   |  |  |                                                     |   |         |                                                          |  |   |        |  
|Changes in operating assets and liabilities:                                                |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Accounts receivable                                                                         |  |                                                    | (13,678 | ) |  |  |                                                     |   | 2,507    |                                                          |  |   | (26,095 | )
|Materials and supplies                                                                      |  |                                                    | (3,020  | ) |  |  |                                                     |   | 597      |                                                          |  |   | (4,112  | )
|Other current assets                                                                        |  |                                                    | (6,152  | ) |  |  |                                                     |   | 1,267    |                                                          |  |   | 875     |  
|Accounts payable                                                                            |  |                                                    | 200     |   |  |  |                                                     |   | (5,331   | )                                                        |  |   | (1,666  | )
|Accrued liabilities                                                                         |  |                                                    | (13,152 | ) |  |  |                                                     |   | 8,446    |                                                          |  |   | 22,958  |  
|Vessel drydocking payments                                                                  |  |                                                    | (10,198 | ) |  |  |                                                     |   | (595     | )                                                        |  |   | (12,621 | )
|Other assets/liabilities                                                                    |  |                                                    | (2,562  | ) |  |  |                                                     |   | (574     | )                                                        |  |   | (1,815  | )
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                                                    | (2,928  | ) |  |  |                                                     |   | 26,711   |                                                          |  |   | 41,141  |  
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Cash flows from investing activities:                                                       |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Purchases of property and equipment                                                         |  |                                                    | (21,889 | ) |  |  |                                                     |   | (860     | )                                                        |  |   | (29,481 | )
|Acquisition of Company                                                                      |  |                                                    |        |   |  |  |                                                     |   | (676,000 | )                                                        |  |   |        |  
|Proceeds from the sale of property and equipment                                            |  |                                                    | 1,399   |   |  |  |                                                     |   |         |                                                          |  |   | 904     |  
|Other investing activities                                                                  |  |                                                    | (150    | ) |  |  |                                                     |   |         |                                                          |  |   |        |  
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Net cash used in investing activities                                                       |  |                                                    | (20,640 | ) |  |  |                                                     |   | (676,860 | )                                                        |  |   | (28,577 | )
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Cash flows from financing activities:                                                       |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Initial capitalization of Company                                                           |  |                                                    |        |   |  |  |                                                     |   | 170,000  |                                                          |  |   |        |  
|Borrowing on term loans                                                                     |  |                                                    |        |   |  |  |                                                     |   | 250,000  |                                                          |  |   |        |  
|Issuance of 9% Senior Notes                                                                 |  |                                                    |        |   |  |  |                                                     |   | 250,000  |                                                          |  |   |        |  
|Borrowing under line of credit                                                              |  |                                                    |        |   |  |  |                                                     |   | 6,000    |                                                          |  |   |        |  
|Payment on line of credit                                                                   |  |                                                    |        |   |  |  |                                                     |   | (6,000   | )                                                        |  |   |        |  
|Principal payments on long term debt                                                        |  |                                                    |        |   |  |  |                                                     |   |         |                                                          |  |   | (1,875  | )
|Dividend to parent                                                                          |  |                                                    |        |   |  |  |                                                     |   |         |                                                          |  |   | (3,040  | )
|Payment of financing costs                                                                  |  |                                                    |        |   |  |  |                                                     |   |         |                                                          |  |   | (1,023  | )
|Capital contribution                                                                        |  |                                                    |        |   |  |  |                                                     |   |         |                                                          |  |   | 303     |  
|Payments on capital lease obligation                                                        |  |                                                    | (87     | ) |  |  |                                                     |   | (39      | )                                                        |  |   | (134    | )
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Net cash provided by (used in) financing activities                                         |  |                                                    | (87     | ) |  |  |                                                     |   | 669,961  |                                                          |  |   | (5,769  | )
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                                                    | (23,655 | ) |  |  |                                                     |   | 19,812   |                                                          |  |   | 6,795   |  
|Cash and cash equivalents at beginning of period                                            |  |                                                    | 41,811  |   |  |  |                                                     |   | 8,598    |                                                          |  |   | 56,264  |  
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Cash and cash equivalents at end of period                                                  |  | $                                                  | 18,156  |   |  |  |                                                     | $ | 28,410   |                                                          |  | $ | 63,059  |  
|                                                                                            |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Supplemental information: non-cash activities                                               |  |                                                    |         |   |  |  |                                                     |   |          |                                                          |  |   |         |  
|Notes payable in conjunction with the acquisition of beneficial interest in vessel trusts   |  | $                                                  |        |   |  |  |                                                     | $ |         |                                                          |  | $ | 4,514   |  



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



5



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1. Basis of Presentation and Operations



Unaudited Interim Financial Statements



The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included in the interim financial statements. Operating results for the three and nine month periods ended September 25, 2005 are not necessarily indicative of the results that may be expected for the year ending
December 25, 2005.



Operations



Horizon Lines Holding Corp. (the Company) operates as a holding
company for Horizon Lines, LLC (HL), a Delaware limited liability company and indirect wholly-owned subsidiary of the Company and for Horizon Lines of Puerto Rico, Inc. (HLPR), a Delaware corporation and direct wholly-owned
subsidiary of the Company. HL operates a domestic liner business with primary service to ports within the continental United States, Puerto Rico, Alaska, Hawaii and Guam. HL also offers terminal services and ground transportation services. HLPR
operates as an agent for HL and also provides terminal services in Puerto Rico. The Company, during the period from December 22, 2003 through July 6, 2004, is referred to as Predecessor-A. The Company is a direct wholly-owned
subsidiary of H-Lines Finance Holding Corp. (HLFHC) and HLFHC is a directly wholly owned subsidiary of Horizon Lines, Inc. (the Parent).



Basis of Presentation



The accompanying unaudited condensed consolidated financial statements include the consolidated accounts of the Company and its subsidiaries as of
December 26, 2004 and September 25, 2005, the related unaudited consolidated statement of operations for the period from July 7, 2004 through September 19, 2004, the period from June 27, 2005, through September 25,
2005, the period from December 27, 2004 through September 25, 2005 and the related unaudited statement of cash flows for the period from July 7, 2004 through September 19, 2004 and from December 27, 2004 through
September 25, 2005. The accompanying unaudited condensed consolidated financial statements include the related unaudited condensed consolidated statement of operations for the period June 21, 2004 through July 6, 2004 for
Predecessor-A and the period from December 22, 2003 through July 6, 2004 for Predecessor-A and the related unaudited statement of cash flows for the period December 22, 2003 through July 6, 2004 for Predecessor-A. All significant
intercompany accounts and transactions have been eliminated.



On July 7, 2004, the Parent, H-Lines Subcorp., a wholly owned subsidiary of the Parent Predecessor-A, a majority-owned subsidiary of Carlyle-Horizon Partners, L.P., and TC Group, L.L.C., an affiliate of Carlyle-Horizon Partners, L.P.,
amended and restated a merger agreement dated as of May 22, 2004, between the same parties, and, pursuant to such amended and restated merger agreement, H-Lines Subcorp. merged, on such date, with and into Predecessor-A, with Predecessor-A as
the surviving corporation (such merger, the Merger). Upon the consummation of the Merger, the issued and outstanding shares of the common stock of Predecessor-A and the outstanding options granted by Predecessor-A to purchase shares of
its common stock were converted into the right to receive the applicable portion of the aggregate merger consideration of approximately $650.0 million, whereupon the Parent became the holder of all of the outstanding common stock of Predecessor-A.
In lieu of receipt of all or a portion of the applicable portion of the aggregate merger consideration, certain members of the management of HL, an indirect subsidiary of Predecessor-A, who were stockholders or option holders of Predecessor-A
immediately prior to the Merger elected to receive shares of common stock and preferred stock of the Parent. or to retain their existing options for shares of the common stock in the Company. Under a certain put/call agreement dated July 7,
2004, as amended and restated on September 20, 2005 (the Put/Call Agreement), the shares of common stock issued by the Company upon the exercise of such retained options were subject to exchange, at the option of the Parent (or the
holders of such shares), with the Parent for shares of common stock and Series A redeemable preferred stock of the Parent. Approximately 92.4% of the equity of Predecessor-A was purchased pursuant to the Merger. The Merger was accounted for using
the purchase method of accounting; accordingly, the consideration paid was allocated based on the estimated fair market values of the assets acquired and liabilities assumed. The excess of the consideration paid over the estimated fair market value
of the net assets acquired, including separately identifiable intangible assets, approximated $306.4 million, and was allocated to goodwill.



6



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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



|                                  |  |   |          |  
|--------------------------------- |  | - | -------- | -
|Working capital                   |  | $ | 66,377   |  
|Property and equipment            |  |   | 188,863  |  
|Goodwill                          |  |   | 306,433  |  
|Customer contracts and trademarks |  |   | 201,475  |  
|Deferred financing costs          |  |   | 18,991   |  
|Long term liabilities             |  |   | (126,184 | )
|Other, net                        |  |   | 20,045   |  
|                                  |  |   |          |  
|Purchase price                    |  | $ | 676,000  |  
|                                  |  |   |          |  



Prior to the Merger on
July 7, 2004 and subsequent to the purchase transaction on February 27, 2003, the consolidated accounts and the condensed and consolidated statements of operations and cash flows represent that of Predecessor-A. All significant
intercompany accounts and transactions have been eliminated.



As a result of the Merger on July 7, 2004 and the application of purchase accounting, financial information for the period after July 7, 2004 represents that of the Company, which is presented on a different basis of accounting
than that of Predecessor-A.



Recent Accounting
Pronouncements



In December 2004, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation,
(SFAS 123) and supersedes Accounting Principles Board (APB) opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based upon their fair values in the first fiscal year beginning after June 15, 2005, with early adoption permitted. The pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the first quarter of fiscal year 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation costs and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options.



Reclassifications



Certain reclassifications have been made to the prior years
consolidated financial statements to conform to the 2005 presentation.



2.
Stock-Based Compensation



Predecessor-A was a party to a
stock option plan under which stock options were granted prior to July 7, 2004. All such options vested on or prior to July 7, 2004.



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



|                                                                                                                 |  |                                                   |     |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | --- | -
|                                                                                                                 |  | Predecessor-A                                     |    
|                                                                                                                 |  | For the Period June 21, 2004 through July 6, 2004 |    
|Net income as reported                                                                                           |  | $                                                 | 514 |  
|Deduct: total stock-based compensation expense determined under the fair value method net of related tax effects |  |                                                   | (24 | )
|                                                                                                                 |  |                                                   |     |  
|Pro forma net income                                                                                             |  | $                                                 | 490 |  
|                                                                                                                 |  |                                                   |     |  



7



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|                                                                                                                 |  |                                                       |       |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ----- | -
|                                                                                                                 |  | Predecessor-A                                         |      
|                                                                                                                 |  | For the Period December 22, 2003 through July 6, 2004 |      
|Net income as reported                                                                                           |  | $                                                     | 7,961 |  
|Deduct: total stock-based compensation expense determined under the fair value method net of related tax effects |  |                                                       | (290  | )
|                                                                                                                 |  |                                                       |       |  
|Pro forma net income                                                                                             |  | $                                                     | 7,671 |  
|                                                                                                                 |  |                                                       |       |  



The pro forma results
reflect amortization of fair value of stock options over the vesting period. The weighted average fair value of options granted in the first quarter of the twelve months ended December 22, 2003 was estimated to be $100. There were no options
issued prior to February 27, 2003. The fair value of options granted is estimated at the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions:



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



3. Other Comprehensive Income



Other comprehensive income is as follows ($ in
thousands):



|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  
|------------------------------------------------- |  | ----------------------------------------------------- | ----- | ------------------------------------------------------ | - | ----------------------------------------------------------- |  | - | ------ | -
|                                                  |  | Predecessor-A                                         |       | Horizon Lines Holding Corp.                            |   | Horizon Lines Holding Corp.                                 | 
|                                                  |  | For the Period June 21, 2004 through July 6, 2004     |       | For the Period July 7, 2004 through September 19, 2004 |   | For the Period June 27, 2005 through September 25, 2005     | 
|Net income                                        |  | $                                                     | 514   |                                                        | $ | 10,816                                                      |  | $ | 7,190  |  
|Change in fair value of interest rate contract    |  |                                                       | 302   |                                                        |   |                                                            |  |   |       |  
|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  
|Comprehensive income                              |  | $                                                     | 816   |                                                        | $ | 10,816                                                      |  | $ | 7,190  |  
|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  
|                                                  |  |                                                       |      
|                                                  |  | Predecessor-A                                         |       | Horizon Lines Holding Corp.                            |   | Horizon Lines Holding Corp.                                 | 
|                                                  |  | For the Period December 22, 2003 through July 6, 2004 |       | For the Period July 7, 2004 through September 19, 2004 |   | For the Period December 27, 2004 through September 25, 2005 | 
|Net income                                        |  | $                                                     | 7,961 |                                                        | $ | 10,816                                                      |  | $ | 11,029 |  
|Change in fair value of interest rate contract    |  |                                                       | 286   |                                                        |   |                                                            |  |   |       |  
|Change in fair value of fixed price fuel contract |  |                                                       |      |                                                        |   |                                                            |  |   | (129   | )
|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  
|Comprehensive income                              |  | $                                                     | 8,247 |                                                        | $ | 10,816                                                      |  | $ | 10,900 |  
|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  



8



---

HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



4. Property and Equipment



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



|                                |  |                   |         |   |                    |   |         |  
|------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                |  | December 26, 2004 |         |   | September 25, 2005 |  
|Vessels                         |  | $                 | 106,686 |   |                    | $ | 135,262 |  
|Containers                      |  |                   | 25,366  |   |                    |   | 24,642  |  
|Chassis                         |  |                   | 13,443  |   |                    |   | 13,457  |  
|Cranes                          |  |                   | 13,284  |   |                    |   | 13,917  |  
|Machinery and equipment         |  |                   | 11,569  |   |                    |   | 13,507  |  
|Facilities and land improvement |  |                   | 4,250   |   |                    |   | 4,364   |  
|Software                        |  |                   | 29,099  |   |                    |   | 29,911  |  
|Other                           |  |                   | 1,613   |   |                    |   | 528     |  
|                                |  |                   |         |   |                    |   |         |  
|Total property and equipment    |  |                   | 205,310 |   |                    |   | 235,588 |  
|Accumulated depreciation        |  |                   | (15,187 | ) |                    |   | (38,186 | )
|                                |  |                   |         |   |                    |   |         |  
|Property and equipment, net     |  | $                 | 190,123 |   |                    | $ | 197,402 |  
|                                |  |                   |         |   |                    |   |         |  



During the third
quarter of fiscal year 2005, HL acquired with available cash, for $25.2 million, the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of two vessels, the Horizon Enterprise
and the Horizon Pacific, and the charters related thereto under which HL operates such vessels. Title to each of the two vessels is held by the respective owner trustee of the relevant trust for the use and benefit of the owner participant and the
vessels are subject to a mortgage securing non-recourse indebtedness of the respective owner trustees. HL charters each vessel from the relevant owner trustee. By acquiring the beneficial interests of the owner participant of each trust estate, HL
obtained the right to the corpus of such estate remaining after required payments on the aforementioned indebtedness are made. Further, upon the repayment of such indebtedness at maturity on January 1, 2007, HL will be able to obtain title to
the two vessels from the respective owner trustees and terminate the charter. The outstanding indebtedness secured by mortgages on the Horizon Enterprise and the Horizon Pacific is $2.3 million and $2.2 million, respectively.



5. Intangible Assets



Intangible assets consist of the following ($ in thousands):



|                                      |  |                   |         |   |                    |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                      |  | December 26, 2004 |         |   | September 25, 2005 |  
|Customer contracts                    |  | $                 | 137,675 |   |                    | $ | 137,675 |  
|Trademarks                            |  |                   | 63,800  |   |                    |   | 63,800  |  
|Deferred financing costs              |  |                   | 20,077  |   |                    |   | 21,100  |  
|                                      |  |                   |         |   |                    |   |         |  
|Total intangibles with definite lives |  |                   | 221,552 |   |                    |   | 222,575 |  
|Accumulated amortization              |  |                   | (10,676 | ) |                    |   | (27,464 | )
|                                      |  |                   |         |   |                    |   |         |  
|Net intangibles with definite lives   |  |                   | 210,876 |   |                    |   | 195,111 |  
|Goodwill                              |  |                   | 306,680 |   |                    |   | 305,873 |  
|                                      |  |                   |         |   |                    |   |         |  
|Intangible assets, net                |  | $                 | 517,556 |   |                    | $ | 500,984 |  
|                                      |  |                   |         |   |                    |   |         |  



The $0.8 million
decrease in goodwill in the nine months ended September 25, 2005 is due to the finalization of the Companys purchase accounting, for tax purposes, related to the merger transaction.



9



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



6. Accrued Liabilities



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



|                                |  |                   |         |                    |   |        
|------------------------------- |  | ----------------- | ------- | ------------------ | - | -------
|                                |  | December 26, 2004 |         | September 25, 2005
|Marine operations               |  | $                 | 12,301  |                    | $ | 16,267 
|Terminal operations             |  |                   | 10,842  |                    |   | 13,328 
|Vessel and rolling stock rent   |  |                   | 24,024  |                    |   | 21,092 
|Vessel operations               |  |                   | 20,452  |                    |   | 23,279 
|Fuel                            |  |                   | 7,537   |                    |   | 10,486 
|Bonus                           |  |                   | 10,200  |                    |   | 8,905  
|Interest                        |  |                   | 6,306   |                    |   | 12,671 
|Other liabilities               |  |                   | 22,505  |                    |   | 34,060 
|                                |  |                   |         |                    |   |        
|Total other accrued liabilities |  | $                 | 114,167 |                    |   | 140,088
|                                |  |                   |         |                    |   |        



7. Long-Term Debt



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



|                                                                                                                              |  |                   |         |   |                    |   |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                                                              |  | December 26, 2004 |         |   | September 25, 2005 |  
|Senior credit facility                                                                                                        |  | $                 | 249,375 |   |                    | $ | 247,500 |  
|9% senior notes                                                                                                               |  |                   | 250,000 |   |                    |   | 250,000 |  
|Notes issued by the owner trustees of the owner trusts and which are secured by mortgages on the vessels owned by such trusts |  |                   |        |   |                    |   | 4,514   |  
|                                                                                                                              |  |                   |         |   |                    |   |         |  
|Total long-term debt                                                                                                          |  |                   | 499,375 |   |                    |   | 502,014 |  
|Current portion                                                                                                               |  |                   | (2,500  | ) |                    |   | (2,500  | )
|                                                                                                                              |  |                   |         |   |                    |   |         |  
|Long-term debt, net of current                                                                                                |  | $                 | 496,875 |   |                    | $ | 499,514 |  
|                                                                                                                              |  |                   |         |   |                    |   |         |  



During the third
quarter of fiscal year 2005, HL assumed outstanding indebtedness of approximately $4.5 million in connection with the acquisition of the rights and beneficial interests of the sole owner participant in two separate owner trusts, the assets of which
consist primarily of two vessels, the Horizon Enterprise and the Horizon Pacific. The outstanding indebtedness secured by mortgages on the Horizon Enterprise and the Horizon Pacific is $2.3 million and $2.2 million, respectively. Such indebtedness
is payable at maturity on January 1, 2007.



8. Commitments and
Contingencies



Environmental Contingency



During 2001, the Alaska State Department of Environmental
Conservation (the Department) notified a predecessor company about contaminants from an underground storage tank in Anchorage. A $0.9 million reserve was established by such predecessor company and the Company has maintained this reserve
balance through September 25, 2005 as no further action has been taken by the Department. Current exposure is estimated to range from $0.9 million to $1.0 million. The Company has recently engaged a third party to remove and dispose of the
underground storage tanks, supply and place all back fill material, and conduct testing of soils. The Company can not be assured that the Department will deem the Company free of any future exposure upon completion of this project. The Company
anticipates that the third party will complete the engagement sometime in the first quarter of fiscal year 2006. The period over which the estimated accrual will be paid out cannot be estimated at this time.



Legal Proceedings



In the ordinary course of our business, from time to time, the Company and its subsidiaries, including, without limitation,
HL, become involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo, employees personal injury



10



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



claims, and claims for loss or damage to the person or property of third parties. The Company and its subsidiaries generally maintain insurance, subject to
customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company and its subsidiaries also, from time to time, become involved in routine employment-related disputes and disputes with parties with which
they have contracts.



There are two actions currently pending
before the Surface Transportation Board (referred to herein as the STB) involving HL. The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against HL and Matson Navigation Co. (referred to
herein as Matson), seeks a ruling from the STB that HLs Guam shipping rates, which are based on published tariff rates, during 1996-1998 were unreasonable under the ICC Termination Act of 1995 (referred to herein as the
ICCTA), and an order awarding reparations to Guam and its citizens. The STB is addressing this matter in three phases. During the first phase, which has been completed, the STB reviewed the allegations set forth in the complaints that
were filed by the Government of Guam and dismissed certain complaints while allowing certain other complaints to be addressed in phase two. During the currently on-going second phase, at the request of the STB, the parties fully briefed, in 2002,
the threshold issue of what methodology should be applied in determining rate reasonableness under the ICCTA, and the STB is expected to issue a ruling in 2005 that sets forth a standard for determining whether the rates charged during
1996-1998 were reasonable. During the third phase, the STB will apply the standard that it adopts in the second phase to the rates in effect during 1996-1998. If the STB determines that the rates charged by HL during 1996-1998 were unreasonable, the
STB will issue an additional ruling to determine the persons entitled to damages and in what amounts. On June 8, 2005, upon the motion of HL, the STB issued a decision which ordered the Government of Guam to show cause by June 28, 2005 why
the action should not be dismissed. The Government of Guam has responded to this decision by asserting their intent to participate in the proceeding and attending oral argument in the second phase of the case at the STB. HL has filed a response
thereto asserting that the Government of Guams response is not sufficient to show cause. The STB issued a further order on September 15, 2005 canceling its show cause order and notified the parties that it has scheduled oral argument on
the merits of the phase two issues on November 16, 2005. No assurance can be given that the final decision with respect to this matter will be favorable to us.



An adverse ruling by the STB in this action could result in significant damages. We are unable to quantify the amount of
these damages. In the event that the STB were to issue a ruling whereby it accepted the Government of Guams proposed standard for the determination of rate reasonableness under the ICCTA, the STB would then need to determine
whether rates charged by HL during 1996-1998 were reasonable under such standard. However, the business of HL that provided marine container shipping to and from Guam during 1996-1998 was, at the time, part of a larger business. During 1996-1998,
the Guam-related business of HL was part of the business of Sea-Land Service, Inc., which included transportation, logistics and terminal services between and at ports in Asia, Guam, Hawaii and the U.S. west coast. Separate financial statements were
not prepared for the operations of Sea-Land Service that related to marine container shipping to and from Guam. Accordingly, we believe that the actual rates of return that were earned by HLs business with respect to marine container shipments
to and from Guam during 1996-1998 cannot be determined. Consequently, the absence of such actual rates of return would preclude the calculation of a reasonable rate of return based on the standard proposed by the Government of Guam in the pending
action. Even if each of these matters were determined adversely to HL, we are unable at the present time to determine how many citizens of Guam, on whose behalf the pending action has been brought by the Government of Guam, paid such rates during
1996-1998, or the amounts of their related claims, because the requisite discovery proceedings for that phase of the dispute have not yet begun. Apart from potential damages, an adverse ruling by the STB could affect HLs current and future
rate structure for its Guam shipping by requiring it to reduce its current base tariff rates and limit future rate increases to amounts determined to be within the zone of reasonableness contained in the ICCTA, as determined in such
ruling. An adverse STB decision could also affect the rates that HL would be permitted to charge on its other routes where rates must be reasonable under the ICCTA.



The second action currently pending before the STB involving HL, brought by DHX, Inc. in 1999 against HL and Matson,
challenges the reasonableness of certain rates and practices of HL and Matson. DHX is a major freight forwarder in the domestic Hawaii trade. Freight forwarders typically accept less than full container loads of cargo, consolidate these loads into
full container loads, and offer the full container load to the ocean carriers. Some freight forwarders, including DHX, also solicit full container loads from shippers. Among other things, DHX charged that HL and Matson took actions that were
intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for the full container load business. DHX is seeking $11.0 million in damages. In addition to the award of damages, an adverse ruling could affect
HLs current and future rate structure for its Hawaii shipping. An adverse STB decision could also affect the rates that HL would be permitted to charge on its other routes.



On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHXs complaint;
(ii) found that HL met all of its tariff filing obligations; and (iii) reaffirmed the STBs earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which was repealed by the ICCTA, are no longer
applicable to our business. On June 13, 2005, the STB issued a decision that denied DHXs motion for reconsideration and denied the alternative request by DHX for clarification of the STBs December 13, 2004 decision. On
August 5, 2005, DHX filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit challenging the STBs order dismissing its complaint. HL has filed a Motion to Intervene, which has been granted, so it can
participate directly in the appellate process. No assurance can be given that the final decision with respect to this matter will be favorable to us.



Standby Letters of Credit



The Company has standby letters of credit, primarily related to its property and casualty insurance programs. On September 25, 2005, amounts
outstanding on these letters of credit totaled $6.7 million.



11



---

HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



9. Subsequent Events



On September 26, 2005, all options outstanding under the option plan, as amended on September 20, 2005, were exercised and all of the
resulting shares of common stock of the Company were exchanged for shares of capital stock of the Parent pursuant to the provisions of the Put/Call Agreement. Immediately following such exchange, all of the shares of the common stock of the Company
that were so acquired by the Parent were contributed to HLFHC and, in turn, HLFHC contributed such shares to the Company. As of the date hereof, all of the outstanding shares of the common stock of the Company are directly owned by HLFHC and no
options are outstanding or issuable under Predecessor-As stock option plan, as amended.



On September 30, 2005, the Parent issued and sold 12,500,000 shares (the Initial Shares) of its common stock, in an initial public offering (referred to herein as the initial public
offering), at a price to the public of $10.00 per share. The net proceeds to the Parent from the sale of these shares were $116.5 million (net of underwriter discounts and commissions). Other fees and expenses associated with the initial
public offering totaled approximately $5.7 million, of which approximately $4.5 million was paid prior to or on September 30, 2005. On September 30, 2005, $44.7 million of these net proceeds were contributed to HLFHC and $43.6 million of
these net proceeds were contributed, via HLFHC, to the Company. Immediately thereafter, the Company paid a dividend, out of cash flows generated from operations, of $40.0 million to HLFHC, which then remitted such funds, as a dividend, to the
Parent, which, using such funds and a portion of the proceeds of the initial public offering, redeemed, for a total redemption price of $62.2 million, all of its outstanding shares of its Series A redeemable preferred stock. In addition, on
September 30, 2005, the Company and HL submitted a redemption notice to the indenture trustee for the 9% senior notes for the voluntary redemption, on November 2, 2005, of $40.0 million of the then-outstanding aggregate principal amount of
the 9% senior notes with the proceeds from the issuance and sale of the Initial Shares.



On October 14, 2005, the Parent issued and sold an additional 1,875,000 shares (the Additional Shares) of its common stock to the underwriters of its initial public offering at a net price of $9.30
per share, representing the initial public offering price to the public of $10.00 per share, less the underwriters discount of 7% per share. These shares were issued and sold pursuant to the exercise in full by the underwriters of their
option to purchase additional shares from the Parent granted to them with respect to the initial public offering. The net proceeds to the Parent from the sale of these shares were $17.4 million (net of underwriter discounts and commissions). On
October 14, 2005, $3.2 million of these net proceeds were contributed to HLFHC and $14.2 million of these net proceeds were contributed, via HLFHC to the Company. On October 20, 2005, the Company and HL submitted a redemption notice to the
indenture trustee for the 9% senior notes for the voluntary redemption, on November 21, 2005, of $2.9 million of the then-outstanding aggregate principal amount of the 9% senior notes with the proceeds from the issuance and sale of the
Additional Shares.



On October 18, 2005, the Board of
Directors of the Parent approved the grant by HL of merit awards, in the aggregate amount of $2,500,000 and payable in cash, to certain employees of HL. These merit awards have been paid by HL.



On October 25, 2005, the Parent announced that its Board of Directors
has voted to declare a cash dividend (referred to herein as the HLI Dividend) on its outstanding shares of common stock of $0.11 per share, payable on December 15, 2005 to all stockholders of record as of the close of business on
December 1, 2005. The aggregate amount of the HLI Dividend is $3.7 million. The Company declared a cash dividend of $3.7 million, payable to its sole stockholder, HLFHC, on December 14, 2005, and HLFHC declared a cash dividend of
$3.7 million, payable to its sole stockholder, the Parent, on December 14, 2005.



Upon the redemption of $40.0 million in aggregate principal amount of the 9% senior notes, the margin applicable to the term loan portion of the senior credit facility will decrease from 1.50% to 1.25% for base rate
loans and from 2.50% to 2.25% for LIBOR loans and the revolving credit facility commitment will increase from $25.0 million to $50.0 million.



12



---

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



The following discussion of the results of operations and financial condition of Horizon Lines Holding Corp., a Delaware corporation (referred to herein
as the Company) should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this quarterly report. In this quarterly report, unless the context otherwise requires references to
we, us, and our mean the Company, together with its subsidiaries, on a consolidated basis. This quarterly report contains forward-looking statements. Discussions containing forward-looking statements may be found
in the material set forth above, in the material set forth below, as well as in this quarterly report generally. Forward looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement
that may predict, forecast, indicate or imply future results, performance, achievements or events. Words such as, but not limited to, believe, expect, anticipate, estimate, intend,
plan, targets, projects, likely, will, would, could and similar expressions or phrases identify forward-looking statements.



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



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



All of these forward-looking statements are based on estimates and assumptions made by our management which, although
believed to be reasonable, are inherently uncertain. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or
referred to in this section. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in this quarterly report might not occur.



Executive Overview



|                           |  |                                 |         |   |                                 |   |         |                                      |  |   |                                      |   |  |   |         |  
|-------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | - | ------- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ------- | -
|                           |  | QuarterEnded September 19, 2004 |         |   | QuarterEnded September 25, 2005 |   |         | Nine Months Ended September 19, 2004 |  |   | Nine Months Ended September 25, 2005 |  
|                           |  | ($ in thousands)                |        
|Operating revenue          |  | $                               | 251,105 |   |                                 | $ | 289,075 |                                      |  | $ | 706,954                              |   |  | $ | 817,181 |  
|Operating expense          |  |                                 | 223,720 |   |                                 |   | 267,550 |                                      |  |   | 660,563                              |   |  |   | 769,446 |  
|                           |  |                                 |         |   |                                 |   |         |                                      |  |   |                                      |   |  |   |         |  
|Operating income           |  | $                               | 27,385  |   |                                 | $ | 21,525  |                                      |  | $ | 46,391                               |   |  | $ | 47,735  |  
|                           |  |                                 |         |   |                                 |   |         |                                      |  |   |                                      |   |  |   |         |  
|Operating ratio            |  |                                 | 89.1    | % |                                 |   | 92.6    | %                                    |  |   | 93.4                                 | % |  |   | 94.2    | %
|Revenue containers (units) |  |                                 | 77,970  |   |                                 |   | 80,316  |                                      |  |   | 225,172                              |   |  |   | 233,341 |  



Operating revenue
increased by $38.0 million or 15.1% from the quarter ended September 19, 2004 to the quarter ended September 25, 2005. This revenue growth is primarily attributable to an increase in revenue containers shipped, increased bunker fuel
surcharges, other rate improvements resulting from favorable changes in cargo mix and general rate increases, and revenue increases from non-transportation and other revenue services.



Operating expense increased by $43.8 million or 19.6% from the quarter ended September 19, 2004 to the quarter ended
September 25, 2005, primarily as a result of higher costs associated with the growth in total revenue container volume and increases in non-transportation and other revenue services. Other factors contributing to the increase in operating
expense included higher vessel fuel costs and higher rail and truck transportation costs as a result of higher fuel prices, and higher depreciation and amortization due to the purchase price accounting step-up in basis of customer contracts and
trademarks related to the consummation on July 7, 2004 of the acquisition transaction (which is described in History and Transactions below), in addition to higher selling, general, and



13



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administrative costs, including a $7.5 million charge related to the termination of the ongoing management services and related fee provisions of a
management agreement with Castle Harlan, Inc. (referred to herein as Castle Harlan).



Operating income decreased by $5.9 million or 21.4% from the quarter ended September 19, 2004 to the quarter ended September 25, 2005. This
decrease in operating income is primarily due to the increased operating expenses during the quarter ended September 25, 2005, primarily as a result of a $7.5 million charge related to the termination of the ongoing management services and
related fee provisions of a management agreement with Castle Harlan, additional amortization of intangible assets, and higher fuel costs. These increased operating expenses were partially offset by increased operating revenue.



Operating revenue increased by $110.2 million or 15.6% from the nine months
ended September 19, 2004 to the nine months ended September 25, 2005. This revenue growth is primarily attributable to an increase in revenue containers shipped, increased bunker fuel surcharges, other rate improvements resulting from
increases in other surcharges, favorable changes in cargo mix and general rate increases and revenue increases from non-transportation and other revenue services.



Operating expense increased by $108.9 million or 16.5% from the nine months ended September 19, 2004 to the nine months
ended September 25, 2005, primarily as a result of higher costs associated with the growth in total revenue container volume and increases in non-transportation and other revenue services. Other factors contributing to the increase in operating
expense included higher vessel fuel costs and higher rail and truck transportation costs as a result of higher fuel prices, higher depreciation and amortization due to the purchase price accounting step-up in basis of customer contracts and
trademarks related to the consummation on July 7, 2004 of the acquisition transaction, in addition to higher selling, general, and administrative costs, including a $7.5 million charge related to the termination of the ongoing management
services and related fee provisions of a management agreement with Castle Harlan.



Operating income increased by $1.3 million or 2.9% from the nine months ended September 19, 2004 to the nine months ended September 25, 2005. This improvement in operating income is primarily due to the
substantial increase in operating revenue during the nine months ended September 25, 2005, which was partially offset by expenses associated with the growth in total revenue containers shipped, higher selling, general, and administrative
expenses, additional amortization of intangible assets, and higher fuel costs.



General



We believe that we are the
nations leading Jones Act container shipping and integrated logistics company, accounting for approximately 37% of total U.S. marine container shipments from the continental U.S. to Alaska, Puerto Rico and Hawaii, constituting the three
non-contiguous Jones Act markets, and to Guam. Under the coastwise laws of the United States, also known as the Jones Act, all vessels transporting cargo between U.S. ports must, subject to limited exceptions, be built in the U.S., registered under
the U.S. flag, manned by predominately U.S. crews and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. We operate the largest Jones Act containership fleet with 16 vessels and approximately 22,100
cargo containers. We provide comprehensive shipping and logistics services in our markets. We have long-term access to terminal facilities in each of our ports, operating our terminals in Alaska, Hawaii, and Puerto Rico and contracting for terminal
services in our seven ports in the continental U.S. and in our ports in Guam, Hong Kong and Taiwan.



History and Transactions



Our long operating history dates back to 1956, when Sea-Land Service, Inc. pioneered the marine container shipping industry and established our business. In 1958, we introduced container shipping to the Puerto Rico market and in 1964 we
pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing container shipping services between the West Coast and Hawaii and Guam through our acquisition from an existing carrier of all of
its vessels and certain other assets that were already serving that market. In 2000, we introduced HITS, our industry-leading ocean shipping and logistics information technology system enabling us to capture all critical aspects of every shipment
and allowing our customers to book, track and trace shipments on a real-time basis. Today, as the only Jones Act vessel operator with an integrated organization serving Alaska, Puerto Rico, and Hawaii, we are uniquely positioned to serve our
customers that require shipping and logistics services in more than one of these markets.



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



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On July 7, 2004, H-Lines Subcorp., a wholly-owned subsidiary of Horizon Lines, Inc. (the Parent),
merged with and into the Company, with the latter entity as the survivor of such merger. As a result, the Company became a wholly-owned subsidiary of the Parent. The foregoing merger and related financing and other transactions are referred to in
this quarterly report as the acquisition transaction. On July 7, 2004, as part of the acquisition transaction, the Company and HL issued $250.0 million aggregate principal amount of 9% senior notes.



On December 6, 2004, the Parent formed H-Lines Finance Holding Corp.
(HLFHC) as a wholly-owned direct subsidiary, and contributed all of its shares of the capital stock of the Company to HLFHC. As a result, the Company became a direct wholly-owned subsidiary of HLFHC and an indirect wholly-owned
subsidiary of the Parent.



Basis of Presentation



The accompanying condensed consolidated financial statements include the
consolidated accounts of the Company and its subsidiaries as of December 26, 2004 and September 25, 2005, the related unaudited consolidated statement of operations for the period from July 7, 2004 through September 19, 2004, the
period from June 27, 2005 through September 25, 2005, the period from December 27, 2004 through September 25, 2005 and the related unaudited statement of cash flows for the period from July 7, 2004 through September 19,
2004 and from December 27, 2004 through September 25, 2005. The accompanying condensed consolidated financial statements include the related unaudited consolidated statement of operations for the period June 21, 2004 through
July 6, 2004 and the period from December 22, 2003 through July 6, 2004 for Predecessor-A and the related unaudited statement of cash flows for the period December 22, 2003 through July 6, 2004 for Predecessor-A. All
significant intercompany accounts and transactions have been eliminated.



The financial statements for periods subsequent to February 26, 2003, but prior to July 7, 2004 have been prepared using the Predecessor Companys basis in the assets and liabilities acquired in the
February 27, 2003 purchase transaction, determined by applying the purchase method of accounting to such transaction, and the assets and liabilities so acquired were valued on the Companys books at the Companys assessment of their
fair market value. The financial statements for periods subsequent to July 6, 2004 have been prepared using the basis of the Company in the assets and liabilities deemed acquired by the Parent in the acquisition transaction, determined by
applying the purchase method of accounting to such transactions, and the assets and liabilities so acquired were valued on the Companys books at the Companys assessment of their fair market value. The consolidated financial information
included in this quarterly report may not necessarily reflect the consolidated financial position, operating results, changes in stockholders equity and cash flows of the Company in the future.



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



Fiscal Year



We have a 52 or 53-week (approximately every sixth or seventh year) fiscal
year that ends on the Sunday before the last Friday in December.



Critical
Accounting Policies



The preparation of our financial
statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in the reported amounts of revenues and expenses during the reporting period and in reporting the
amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of our financial statements. Since many of these estimates and assumptions are based upon our critical accounting policies applied on a consistent
basis from year to year, actual results could differ from these estimates.



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



Revenue Recognition



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



15



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



Allowance for Doubtful Accounts



We record an allowance for doubtful accounts based upon a number of factors,
including historical uncollectible amounts, ongoing credit evaluations of customers, customer markets and overall economic conditions. Historical trends are continually reviewed with adjustments made to the allowance for doubtful accounts as
appropriate. If the financial condition of our customers were to deteriorate resulting in a perceived impairment of their ability to make payments, specific allowances might be taken.



Casualty Claims



We purchase insurance coverage for a portion of our exposure related to employee injuries (workers compensation and compensation under the Longshore
and Harbor Workers Compensation Act), vehicular and vessel collision, accidents and personal injury and cargo claims. Most insurance arrangements include a level of self-insurance (self-retention or deductible) applicable to each claim or
vessel voyage, but provide an umbrella policy to limit our exposure to catastrophic claim costs. The amounts of self-insurance coverage change from time to time. Our current insurance coverage specifies that the self-insured limit on claims ranges
from $2,500 to $1,000,000. Our safety and claims personnel work directly with representatives from our insurance companies to continually update the anticipated residual exposure for each claim. In establishing accruals and reserves for claims and
insurance expenses, we evaluate and monitor each claim individually, and we use factors such as historical experience, known trends and third-party estimates to determine the appropriate reserves for potential liability. Changes in the perceived
severity of previously reported claims, significant changes in medical costs and legislative changes affecting the administration of our plans could significantly impact the determination of appropriate reserves.



Goodwill, Purchase Costs and Other Identifiable Intangible Assets



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



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



Shipping Rates



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



Vessel Drydocking



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



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



16



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Deferred Tax Assets



Deferred tax items represent expenses and benefits recognized for financial reporting purposes that may result in tax benefits and deductions,
respectively, in the future. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowance and income tax expense in the consolidated financial statements. We record an income tax valuation allowance when the
realization of certain deferred tax assets, net operating losses and capital loss carryforwards is not likely.



Union Plans



We
contribute to multiemployer health, welfare and pension plans for employees covered by collective bargaining agreements. The amounts of these contributions, absent a termination, withdrawal or determination by the Internal Revenue Service, are
determined in accordance with these agreements. Our health and welfare plans provide health care and disability benefits to active employees and retirees. The pension plans provide defined benefits to retired participants. We recognize as net
pension cost the required contribution for the applicable period and recognize as a liability any contributions due and unpaid.



We have a noncontributory pension plan that covered 20 union employees as of September 25, 2005. Costs of the plan are charged to current operations
and consist of several components of net periodic pension cost based on various actuarial assumptions regarding future experience of the plans. In addition, certain other union employees are covered by plans provided by their respective union
organizations. We expense amounts as paid in accordance with the applicable union agreements. Amounts recorded for the pension plan covering the 20 union employees reflect estimates related to future interest rates, investment returns and employee
turnover. We review all assumptions and estimates on an ongoing basis. We record an additional minimum pension liability adjustment, when necessary, for the amount of underfunded accumulated pension obligations in excess of accrued pension costs.



Property And Equipment



We capitalize property and equipment as permitted or required by applicable
accounting standards, including replacements and improvements when costs incurred for those purposes extend the useful life of the asset. We charge maintenance and repairs to expense as incurred. Depreciation on capital assets is computed using the
straight-line method and ranges from 3 to 25 years. Our management makes assumptions regarding future conditions in determining estimated useful lives and potential salvage values. These assumptions impact the amount of depreciation expense
recognized in the period and any gain or loss once the asset is disposed.



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



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based upon their fair values beginning with the first annual period that begins after June 15, 2005,
with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the first quarter of fiscal year 2006.
Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation costs and the transition method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. As a result of the exercise of all of the Predecessor Companys remaining outstanding options on September 26, 2005, the Company does not have any outstanding employee stock options.



Results of Operations



Operating Revenue Overview



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



17



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Over 90% of our revenue is generated from our shipping and logistics services in markets where the marine
trade is subject to the Jones Act or other U.S. maritime laws that restrict entry of shipping companies. The balance of our revenue is derived from vessel loading and unloading services that we provide for vessel operators at our terminals and
agency services that we provide for third-party shippers lacking administrative presences in our markets.



As used in this quarterly report, the term revenue containers connotes containers that are transported for a charge, as opposed to empty
containers.



Operating Expense Overview



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



Quarter Ended September 25, 2005 Compared
with the Quarter Ended September 19, 2004



|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|----------------------------------- |  | ----------------------------- | ------- | - | ----------------------------- | - | ------- | -------- |  | ----- | --
|                                    |  | QuarterEndedSeptember 19,2004 |         |   | QuarterEndedSeptember 25,2005 |   |         | % Change | 
|                                    |  | ($ in thousands)              |         |   |                               |  
|Operating revenue                   |  | $                             | 251,105 |   |                               | $ | 289,075 |          |  | 15.1  | % 
|Operating expense:                  |  |                               |         |   |                               |   |         |          |  |       |   
|Vessel                              |  |                               | 59,277  |   |                               |   | 76,282  |          |  | 28.7  | % 
|Marine                              |  |                               | 46,987  |   |                               |   | 49,514  |          |  | 5.4   | % 
|Inland                              |  |                               | 42,441  |   |                               |   | 49,902  |          |  | 17.6  | % 
|Land                                |  |                               | 32,297  |   |                               |   | 35,709  |          |  | 10.6  | % 
|Rolling stock rent                  |  |                               | 9,599   |   |                               |   | 10,561  |          |  | 10.0  | % 
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Operating expense                   |  |                               | 190,601 |   |                               |   | 221,968 |          |  | 16.5  | % 
|Selling, general and administrative |  |                               | 21,339  |   |                               |   | 28,097  |          |  | 31.7  | % 
|Depreciation and amortization       |  |                               | 7,169   |   |                               |   | 13,085  |          |  | 82.5  | % 
|Amortization of vessel drydocking   |  |                               | 3,767   |   |                               |   | 3,815   |          |  | 1.3   | % 
|Miscellaneous expense, net          |  |                               | 844     |   |                               |   | 585     |          |  | (30.7 | %)
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Total operating expenses            |  |                               | 223,720 |   |                               |   | 267,550 |          |  | 19.6  | % 
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Operating income                    |  | $                             | 27,385  |   |                               | $ | 21,525  |          |  | (21.4 | %)
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Operating ratio                     |  |                               | 89.1    | % |                               |   | 92.6    | %        |  | (3.5  | %)
|Revenue containers (units)          |  |                               | 77,970  |   |                               |   | 80,316  |          |  | 3.0   | % 



Operating Revenue.Operating revenue increased to $289.1 million for the quarter ended September 25, 2005 compared to $251.1 million for the quarter ended September 19, 2004, an increase of $38.0 million, or 15.1%. This revenue increase can be attributed
to the following factors ($ in thousands):



|                                                                                                                                                            |  |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------
|Revenue container volume growth                                                                                                                             |  | $ | 6,898 
|Intermodal surcharges, more favorable cargo mix, and general rate increases                                                                                 |  |   | 10,788
|Bunker fuel surcharges included in rates to offset rising fuel cost                                                                                         |  |   | 7,716 
|New management contract to manage seven oceanographic vessels for the U.S. Government and new management contract to manage two Ready Reserve
Fleet vessels |  |   | 5,759 
|Growth in other non-transportation services                                                                                                                 |  |   | 6,809 
|                                                                                                                                                            |  |   |       
|                                                                                                                                                            |  | $ | 37,970
|                                                                                                                                                            |  |   |       



18



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The increased revenue due to revenue container volume growth for the quarter ended September 25,
2005 compared to the quarter ended September 19, 2004 reflects stronger market demand for transportation services. Bunker fuel surcharges, which are included in our transportation revenue, accounted for approximately 8% of total revenue in the
quarter ended September 25, 2005 and approximately 6% of total revenue in the quarter ended September 19, 2004. Bunker fuel surcharges are evaluated regularly as the price of fuel fluctuates and we may at times incorporate these surcharges
into our base transportation rates that we charge. The new management contract to manage seven oceanographic vessels was awarded to us in the fourth quarter of the twelve months period ended December 26, 2004 and the new management contract to
manage two Ready Reserve Fleet vessels which was awarded to us in the third quarter of fiscal year 2005.



Operating Expense.Operating expense increased to $222.0 million for the quarter ended September 25, 2005 compared to $190.6
million for the quarter ended September 19, 2004, an increase of $31.4 million or 16.5%. The increase in operating expense primarily reflects the increase in total revenue container volume and the effect of rising fuel prices, as well as the
additional costs incurred associated with the growth in our non-transportation and other revenue. Vessel expense, which is not primarily driven by revenue container volume, increased to $76.3 million for the quarter ended September 25, 2005
from $59.3 million for the quarter ended September 19, 2004, an increase of $17.0 million or 28.7%. Approximately $5.4 million of this increase in vessel expense is attributable to additional costs related to a contract to manage seven
oceanographic vessels which was awarded to us in the fourth quarter of the twelve month period ended December 26, 2004 and to additional costs associated with a contract to manage two Ready Reserve Fleet vessels which was awarded to us in the
third quarter of fiscal year 2005.Approximately $9.0 million of the remaining increase in vessel expenses is attributable to additional bunker fuel expenses. Vessel fuel cost period over period increased by 41.9% driven by a significant rise
in fuel prices for the three months ended September 25, 2005 compared to the three months ended September 19, 2004. The remaining increase in vessel expenses is primarily attributable to running our spare vessel, the Horizon Fairbanks, in
our Alaska service between Tacoma and Anchorage during the summer months to handle a portion of the peak season demand in addition to higher labor costs on all of our vessels as a result of normal contractual rate increases.



Marine expense is comprised of the costs incurred to bring vessels into and
out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expense increased to
$49.5 million for the quarter ended September 25, 2005 from $47.0 million for quarter ended September 19, 2004, an increase of $2.5 million or 5.4%. This increase in marine expenses can be attributed to a 3.0% increase in total revenue
container volume period over period in addition to contractual labor increases.



Inland expense increased to $49.9 million for the three months ended September 25, 2005 from $42.4 million for the quarter ended September 19, 2004, an increase of $7.5 million or 17.6%, as a result of
increased total revenue container volume quarter over quarter as well as higher fuel costs, as rail and truck carriers have substantially increased their fuel surcharges period over period. Other factors contributing to the increase in inland
expense period over period were increases in linehaul truck and rail moves and increases in truck and rail rates.



Land expense is comprised of the costs included within the terminal for the handling, maintenance and storage of containers, including yard operations,
gate operations, maintenance, warehouse and terminal overhead. Land expense increased to $35.7 million for the quarter ended September 25, 2005 from $32.3 million for the quarter ended September 19, 2004, an increase of $3.4 million or
10.6%. The primary drivers of this period over period increase were increased non-vessel related maintenance expenses and increased yard and gate expenses. Non-vessel related maintenance expenses increased by approximately $1.4 million for the
quarter ended September 25, 2005 from the quarter ended September 19, 2004, primarily due to higher fuel prices in addition to increases in refrigerated cargo containers shipped, increased labor rates, and general rate increases from our
vendors. Yard and gate expense is comprised of the costs associated with moving cargo into and out of the terminal facility and the costs associated with the storage of equipment and revenue loads in the terminal facility. Yard and gate expenses
increased approximately $1.4 million for the quarter ended September 25, 2005 from the quarter ended September 19, 2004, primarily due to increased revenue container volumes, additional ground moves in the yard due to yard congestion, and
increased labor costs due to normal contractual rate increases.



|                   |  |                               |        |                               |   |          |  |      |   
|------------------ |  | ----------------------------- | ------ | ----------------------------- | - | -------- |  | ---- | --
|                   |  | QuarterEndedSeptember 19,2004 |        | QuarterEndedSeptember 25,2005 |   | % Change | 
|                   |  | ($ in thousands)              |        |                               |  
|Land expense:      |  |                               |        |                               |   |          |  |      |   
|Maintenance        |  | $                             | 12,895 |                               | $ | 14,254   |  | 10.5 | % 
|Terminal overhead  |  |                               | 11,250 |                               |   | 12,097   |  | 7.5  | % 
|Yard and gate      |  |                               | 5,629  |                               |   | 7,055    |  | 25.3 | % 
|Warehouse          |  |                               | 2,523  |                               |   | 2,303    |  | (8.7 | %)
|                   |  |                               |        |                               |   |          |  |      |   
|Total land expense |  | $                             | 32,297 |                               | $ | 35,709   |  | 10.6 | % 
|                   |  |                               |        |                               |   |          |  |      |   



19



---

The purchase of one vessel in our fleet that was previously operated by us under an operating lease, the
Horizon Trader in October 2004, led to a decrease in vessel lease expense of $0.5 million for the quarter ended September 25, 2005 compared to the quarter ended September 19, 2004. In addition, during the quarter ended September 25,
2005 we acquired the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise, the Horizon Pacific, and the charters under which HL operates such vessels,
leading to a decrease in vessel lease expense of $0.3 million for the quarter ended September 25, 2005 compared to the three months ended September 19, 2004. The decrease in vessel lease expense was partially offset by the resulting
increase in depreciation and amortization.



|                                      |  |                               |       |                               |   |          |  |       |  
|------------------------------------- |  | ----------------------------- | ----- | ----------------------------- | - | -------- |  | ----- | -
|                                      |  | QuarterEndedSeptember 19,2004 |       | QuarterEndedSeptember 25,2005 |   | % Change | 
|                                      |  | ($ in thousands)              |       |                               |  
|Depreciation and amortization:        |  |                               |       |                               |   |          |  |       |  
|Depreciationowned vessels            |  | $                             | 1,834 |                               | $ | 2,170    |  | 18.3  | %
|Depreciation and amortization  other |  |                               | 4,619 |                               |   | 6,026    |  | 30.5  | %
|Amortization of intangible assets     |  |                               | 716   |                               |   | 4,889    |  | 582.8 | %
|                                      |  |                               |       |                               |   |          |  |       |  
|Total depreciation and amortization   |  | $                             | 7,169 |                               | $ | 13,085   |  | 82.5  | %
|                                      |  |                               |       |                               |   |          |  |       |  
|Amortization of vessel drydocking     |  | $                             | 3,767 |                               | $ | 3,815    |  | 1.3   | %
|                                      |  |                               |       |                               |   |          |  |       |  



Depreciation and
Amortization. Depreciation and amortization costs increased to $13.1 million for the quarter ended September 25, 2005 from $7.2 million for the quarter ended September 19, 2004, an increase of $5.9 million or 82.5%. The increase in
depreciation and amortization is primarily due to the purchase price accounting step-up in basis of customer contracts and trademarks related to the consummation on July 7, 2004 of the acquisition transaction. Amortization costs related to
customer contracts and trademarks increased by $4.2 million from the quarter ended September 19, 2004 to the quarter ended September 25, 2005. The depreciation of other assets increased by $1.4 million during this same period primarily as
a result of higher depreciation of leasehold improvements. Depreciation of owned vessels increased by $0.3 million from the quarter ended September 19, 2004 to the quarter ended September 25, 2005 due to the purchase of the Horizon Trader
in the fourth quarter of the twelve month period ended December 26, 2004 as well as to the acquisition of the rights and beneficial interest of the sole owner participant in two separate trusts, the assets of which consist primarily of the
Horizon Enterprise and the Horizon Pacific and the charters related thereto under which HL operates such vessels, in the third quarter of fiscal year 2005.



20



---

Amortization of Vessel Drydocking.Amortization of vessel drydocking remained
relatively flat at $3.8 million for the quarter ended September 25, 2005 as compared to the quarter ended September 19, 2004.



Selling, General and Administrative.Selling, general and administrative costs increased to $28.1 million for the quarter ended
September 25, 2005 compared to $21.3 million for the quarter ended September 19, 2004, an increase of $6.8 million or 31.7%. Approximately $7.5 million of the period over period increase is a result of a charge related to the termination
of the ongoing management services and related fee provisions of a management agreement with Castle Harlan.



Miscellaneous Expense (Income), Net.Miscellaneous expense (income) decreased to $0.6 million for the quarter ended September 25, 2005
compared to $0.8 million for the quarter ended September 19, 2004, a decrease of $0.3 million or 30.7%. This reduction is primarily a result of lower bad debt expense recorded for the quarter ended September 25, 2005.



Interest Expense, Net.Interest expense increased to
$9.6 million for the quarter ended September 25, 2005 compared to $8.1 million for the quarter ended September 19, 2004, an increase of $1.5 million or 17.8%. Our senior credit facility bears interest at variable interest rates that are
based on LIBOR plus an applicable margin. Approximately $1.0 million of the increase in interest expense is due to a 1.9% increase in the LIBOR rate in the quarter ended September 25, 2005 as compared to the quarter ended September 19,
2004. The remaining $0.5 million increase in interest expense is due to the incurrence of approximately $340.0 million of additional debt in conjunction with the consummation on July 7, 2004 of the acquisition transaction.



Interest Expense  Preferred Units of Subsidiary.Interest expensepreferred units of subsidiary decreased to zero for the quarter ended September 25, 2005 compared to $0.3 million for the quarter ended September 19, 2004, a decrease of $0.3 million or 100%. The preferred
units were issued in conjunction with the closing of the February 27, 2003 purchase transaction and began accreting interest at 10%. The preferred units were redeemed in conjunction with the consummation on July 7, 2004 of the acquisition
transaction.



Nine Months Ended September 25, 2005 Compared with
Nine Months Ended September 19, 2004



|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|----------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | ------- | -------- |  | ----- | --
|                                    |  | Nine MonthsEndedSeptember 19,2004 |         |   | Nine MonthsEndedSeptember 25,2005 |   |         | % Change | 
|                                    |  | ($ in thousands)                  |         |   |                                   |  
|Operating revenue                   |  | $                                 | 706,954 |   |                                   | $ | 817,181 |          |  | 15.6  | % 
|Operating expense:                  |  |                                   |         |   |                                   |   |         |          |  |       |   
|Vessel                              |  |                                   | 177,783 |   |                                   |   | 220,716 |          |  | 24.1  | % 
|Marine                              |  |                                   | 137,285 |   |                                   |   | 146,786 |          |  | 6.9   | % 
|Inland                              |  |                                   | 120,047 |   |                                   |   | 140,331 |          |  | 16.9  | % 
|Land                                |  |                                   | 93,986  |   |                                   |   | 104,614 |          |  | 11.3  | % 
|Rolling stock rent                  |  |                                   | 30,433  |   |                                   |   | 31,990  |          |  | 5.1   | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating expense                   |  |                                   | 559,534 |   |                                   |   | 644,437 |          |  | 15.2  | % 
|Selling, general and administrative |  |                                   | 59,382  |   |                                   |   | 72,319  |          |  | 21.8  | % 
|Depreciation and amortization       |  |                                   | 26,954  |   |                                   |   | 38,526  |          |  | 42.9  | % 
|Amortization of vessel drydocking   |  |                                   | 11,978  |   |                                   |   | 12,359  |          |  | 3.2   | % 
|Miscellaneous expense, net          |  |                                   | 2,715   |   |                                   |   | 1,805   |          |  | (33.5 | %)
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Total operating expenses            |  |                                   | 660,563 |   |                                   |   | 769,446 |          |  | 16.5  | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating income                    |  | $                                 | 46,391  |   |                                   | $ | 47,735  |          |  | 2.9   | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating ratio                     |  |                                   | 93.4    | % |                                   |   | 94.2    | %        |  | (0.8  | %)
|Revenue containers (units)          |  |                                   | 225,172 |   |                                   |   | 233,341 |          |  | 3.6   | % 



Operating
Revenue.Operating revenue increased to $817.2 million for the nine months ended September 25, 2005 compared to $707.0 million for the nine months ended September 19, 2004, an increase of $110.2 million, or 15.6%. This
revenue increase can be attributed to the following factors ($ in thousands):



|                                                                                                                                                            |  |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------
|Revenue container volume growth                                                                                                                             |  | $ | 23,425 
|Intermodal surcharges, more favorable cargo mix, and general rate increases                                                                                 |  |   | 30,192 
|Bunker fuel surcharges included in rates to offset rising fuel cost                                                                                         |  |   | 23,783 
|New management contract to manage seven oceanographic vessels for the U.S. Government and new management contract to manage two Ready Reserve
Fleet vessels |  |   | 16,980 
|Growth in other non-transportation services                                                                                                                 |  |   | 15,847 
|                                                                                                                                                            |  |   |        
|                                                                                                                                                            |  | $ | 110,227
|                                                                                                                                                            |  |   |        



21



---

The increased revenue due to revenue container volume growth for the nine months ended September 25,
2005 compared to the nine months ended September 19, 2004 reflects stronger market demand for transportation services. Bunker fuel surcharges, which are included in our transportation revenue, accounted for approximately 7% of total revenue in
the nine months ended September 25, 2005 and approximately 5% of total revenue in the nine months ended September 19, 2004. Bunker fuel surcharges are evaluated regularly as the price of fuel fluctuates and we may at times incorporate
these surcharges into our base transportation rates that we charge. The new management contract to manage seven oceanographic vessels was awarded to us in the fourth quarter of the twelve month period ended December 26, 2004 and the new
management contract to manage two Ready Reserve Fleet vessels was awarded to us in the third quarter of fiscal year 2005.



Operating Expense.Operating expense increased to $644.4 million for the nine months ended September 25, 2005 compared to $559.5
million for the nine months ended September 19, 2004, an increase of $84.9 million or 15.2%. The increase in operating expense primarily reflects the increase in total revenue container volume and the effect of rising fuel prices, as well as
the additional costs incurred associated with the growth in our non-transportation and other revenue. Vessel expense, which is not primarily driven by revenue container volume, increased to $220.7 million for the nine months ended September 25,
2005 from $177.8 million for the nine months ended September 19, 2004, an increase of $42.9 million or 24.1%. Approximately $15.6 million of this increase in vessel expense is attributable to additional costs related to a contract to manage
seven oceanographic vessels which was awarded to us in the fourth quarter of the twelve month period ended December 26, 2004 and additional costs associated with a contract to manage two Ready Reserve Fleet vessels which was awarded to us in
the third quarter of fiscal year 2005. Approximately $21.1 million of the remaining increase in vessel expenses is attributable to additional bunker fuel expenses. Vessel fuel cost period over period increased by 34.2% driven by a significant rise
in fuel prices for the nine months ended September 25, 2005 compared to the nine months ended September 19, 2004. The remaining increase in vessel expenses is primarily attributable to operating our spare vessel, the Horizon Fairbanks, in
our Alaska service between Tacoma and Anchorage during the summer months to handle a portion of the peak season demand in addition to higher labor costs on all of our vessels as a result of normal contractual rate increases.



Marine expense is comprised of the costs incurred to bring vessels into and
out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expense increased to
$146.8 million for the nine months ended September 25, 2005 from $137.3 million for the nine months ended September 19, 2004, an increase of $9.5 million or 6.9%. This increase in marine expenses can be attributed to a 3.6% increase in
total revenue container volume period over period in addition to contractual labor increases.



Inland expense increased to $140.3 million for the nine months ended September 25, 2005 from $120.0 million for the nine months ended September 19, 2004, an increase of $20.3 million or 16.9%, as a result of
increased total revenue container volume period over period as well as higher fuel costs, as rail and truck carriers have substantially increased their fuel surcharges period over period. Other factors contributing to the increase in inland expense
period over period were increases in the average length of haul for linehaul truck moves and increases in rail and truck rates.



Land expense is comprised of the costs included within the terminal for the handling, maintenance and storage of containers, including yard operations,
gate operations, maintenance, warehouse and terminal overhead. Land expense increased to $104.6 million for the nine months ended September 25, 2005 from $94.0 million for the nine months ended September 19, 2004, an increase of $10.6
million or 11.3%. In tandem with the 3.6% increase in total revenue container volume, period over period, the significant drivers of the increase in land expense were higher non-vessel related maintenance expense and increased yard and gate
expenses. Maintenance expense increased by approximately $4.8 million period over period primarily due to higher fuel prices in addition to increases in refrigerated cargo containers shipped, normal contractual labor increases, and general rate
increases from our vendors. Yard and gate expense is comprised of the costs associated with moving cargo into and out of the terminal facility and the costs associated with the storage of equipment and revenue loads in the terminal facility. Yard
and gate expense increased approximately $4.4 million period over period primarily due to increased revenue container volumes, additional ground moves in the yard due to yard congestion, and increased labor costs due to normal contractual rate
increases.



|                   |  |                                   |        |                                   |   |          |  |       |   
|------------------ |  | --------------------------------- | ------ | --------------------------------- | - | -------- |  | ----- | --
|                   |  | Nine MonthsEndedSeptember 19,2004 |        | Nine MonthsEndedSeptember 25,2005 |   | % Change | 
|                   |  | ($ in thousands)                  |        |                                   |  
|Land expense:      |  |                                   |        |                                   |   |          |  |       |   
|Maintenance        |  | $                                 | 36,735 |                                   | $ | 41,516   |  | 13.0  | % 
|Terminal overhead  |  |                                   | 33,242 |                                   |   | 35,954   |  | 8.2   | % 
|Yard and gate      |  |                                   | 16,097 |                                   |   | 20,461   |  | 27.1  | % 
|Warehouse          |  |                                   | 7,912  |                                   |   | 6,683    |  | (15.5 | %)
|                   |  |                                   |        |                                   |   |          |  |       |   
|Total land expense |  | $                                 | 93,986 |                                   | $ | 104,614  |  | 11.3  | % 
|                   |  |                                   |        |                                   |   |          |  |       |   



22



---

The purchase of two vessels in our fleet that were previously operated by us under operating leases, the
Horizon Navigator in April 2004 and the Horizon Trader in October 2004, led to a decrease in vessel lease expense of $2.4 million for the nine months ended September 25, 2005 compared to the nine months ended September 19, 2004. In
addition, the acquisition, during the nine months ended September 25, 2005, of the rights and beneficial interest of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the
Horizon Pacific and the charters related thereto under which HL operates such vessels, in September 2005 led to a decrease in vessel lease expense of $0.3 million for the nine months ended September 25, 2005 compared to the nine months ended
September 19, 2004. The decrease in vessel lease expense was partially offset by the resulting increase in depreciation and amortization.



|                                      |  |                                   |        |                                   |   |          |  |       |   
|------------------------------------- |  | --------------------------------- | ------ | --------------------------------- | - | -------- |  | ----- | --
|                                      |  | Nine MonthsEndedSeptember 19,2004 |        | Nine MonthsEndedSeptember 25,2005 |   | % Change | 
|                                      |  | ($ in thousands)                  |        |                                   |  
|Depreciation and amortization:        |  |                                   |        |                                   |   |          |  |       |   
|Depreciation  owned vessels          |  | $                                 | 5,250  |                                   | $ | 6,562    |  | 25.0  | % 
|Depreciation and amortization  other |  |                                   | 19,564 |                                   |   | 17,293   |  | (11.6 | %)
|Amortization of intangible assets     |  |                                   | 2,140  |                                   |   | 14,671   |  | 585.6 | % 
|                                      |  |                                   |        |                                   |   |          |  |       |   
|Total depreciation and amortization   |  | $                                 | 26,954 |                                   | $ | 38,526   |  | 42.9  | % 
|                                      |  |                                   |        |                                   |   |          |  |       |   
|Amortization of vessel drydocking     |  | $                                 | 11,978 |                                   | $ | 12,359   |  | 3.2   | % 
|                                      |  |                                   |        |                                   |   |          |  |       |   



Depreciation and
Amortization. Depreciation and amortization costs increased to $38.5 million for the nine months ended September 25, 2005 from $27.0 million for the nine months ended September 19, 2004, an increase of $11.6 million or 42.9%. The
increase in depreciation and amortization is primarily due to the purchase price accounting step-up in basis of customer contracts and trademarks related to the consummation on July 7, 2004 of the acquisition transaction. Amortization costs
related to customer contracts and trademarks increased by $12.5 million from the nine months ended September 19, 2004 to the nine months ended September 25, 2005. The depreciation of other assets decreased by $2.3 million during this same
period as a result of higher depreciation of leasehold improvements on leased vessels in the nine months ended September 19, 2004. Three vessels under operating lease, the Horizon Fairbanks, Horizon Navigator, and Horizon Trader, were purchased
during January 2004, April 2004, and October 2004, respectively. The rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific,
and the charters related thereto under which HL operates such vessels, were acquired in September 2005. This change has primarily contributed to the lower depreciation of leasehold improvements and higher depreciation of owned vessels in the nine
months ended September 25, 2005.



Amortization of
Vessel Drydocking. Amortization of vessel drydocking increased to $12.4 million for the nine months ended September 25, 2005 from $12.0 million for the nine months ended September 19, 2004, an increase of $0.4 million or 3.2%. This
increase is attributed to higher costs incurred on various recent vessel drydockings.



Selling, General and Administrative.Selling, general and administrative costs increased to $72.3 million for the nine months ended September 25, 2005 compared to $59.4
million for the nine months ended September 19, 2004, an increase of $12.9 million or 21.8%. Approximately $8.8 million of the period over period increase is due to higher management fees, including a $7.5 million charge related to the
termination of the ongoing management services and related fee provisions of a management agreement with Castle Harlan. In addition, approximately $3.5 million of the period over period increase is a result of increased expenses related to the
timing of an accrual for a bonus plan which covers all of our non-union employees. The remaining $0.6 million increase in selling, general and administrative costs primarily result from increased costs related to preparation for compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act and general inflationary costs increases.



Miscellaneous Expense (Income), Net. Miscellaneous expense decreased to $1.8 million for the nine months ended September 25, 2005 compared to
$2.7 million for the nine months ended September 19, 2004, a decrease of $0.9 million or 33.5%. Miscellaneous expense primarily consists of bad debt expense.



23



---

Interest Expense, Net.Interest expense increased to $29.3 million for the nine
months ended September 25, 2005 compared to $12.7 million for the nine months ended September 19, 2004, an increase of $16.6 million. This increase is due to significantly higher levels of debt outstanding during the nine months ended
September 25, 2005, as a result of the consummation on July 7, 2004 of the acquisition transaction as well as to higher overall interest rates on our senior credit facility.



Interest Expense  Preferred Units of Subsidiary.Interest expensepreferred units of
subsidiary decreased to zero for the nine months ended September 25, 2005 compared to $2.7 million for the nine months ended September 19, 2004, a decrease of $2.7 million or 100%. The preferred units were issued in conjunction with the
closing of the February 27, 2003 purchase transaction and began accreting interest at 10%. The preferred units were redeemed in conjunction with the consummation on July 7, 2004 of the acquisition transaction.



Income Tax Expense.Income tax expense for the nine months ended
September 25, 2005 totaled $7.4 million compared to income tax expense of $12.2 million for the nine months ended September 19, 2004, which represent effective annual tax rates of 40% and 39%, respectively. The difference between the
federal statutory rate and the effective annual tax rate for these periods is primarily due to state income taxes and permanent differences. In addition, during the nine months ended September 25, 2005, we adjusted our tax balance sheet
accounts for the twelve month period ended December 26, 2004 to reflect tax adjustments reported on our income tax return for such twelve month period.



Uncertainty Related to Renewal of Our Arrangements with Maersk



Our commercial agreements with Maersk, an international shipping company, encompass terminal services, equipment sharing, cargo space charters, sales
agency services, and trucking services. These agreements generally are scheduled to expire at the end of 2007. If we fail to renew these agreements or to enter into substitute agreements with third parties, or if we enter into substitute agreements
with third parties on terms and conditions significantly less favorable to us than those of our existing agreements with Maersk, we may have to make changes to our operations, which may cause disruptions to our business, which could be significant,
and may result in reduced revenue and in additional costs and expenses.



Liquidity and Capital Resources



Our
principal sources of funds have been (i) earnings before non-cash charges, (ii) borrowings under debt arrangements and (iii) equity capitalization. Our principal uses of funds have been (i) capital expenditures on our container
fleet, our terminal operating equipment, improvements to our owned and leased vessel fleet, and our information technology systems, (ii) vessel drydocking expenditures, (iii) the purchase of vessels upon expiration of operating leases,
(iv) working capital consumption, and (v) principal and interest payments on our existing indebtedness. Cash and cash equivalents totaled $63.1 million at September 25, 2005. As of September 25, 2005, $18.3 million was available
for borrowing by us under the existing $25.0 million revolving credit facility, after taking into account $6.7 million utilized for outstanding letters of credit.



24



---

Operating Activities



|                                                                                  |  |                                   |         |   |                                   |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|                                                                                  |  | Nine MonthsEndedSeptember 19,2004 |         |   | Nine MonthsEndedSeptember 25,2005 |  
|                                                                                  |  | ($ in thousands)                  |        
|Cash flows provided by operating activities                                       |  |                                   |         |   |                                   |   |         |  
|Net income                                                                        |  | $                                 | 18,777  |   |                                   | $ | 11,029  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                   |         |   |                                   |   |         |  
|Depreciation                                                                      |  |                                   | 24,814  |   |                                   |   | 23,855  |  
|Amortization of other intangible assets                                           |  |                                   | 2,140   |   |                                   |   | 14,671  |  
|Amortization of vessel drydocking                                                 |  |                                   | 11,978  |   |                                   |   | 12,359  |  
|Amortization of deferred financing costs                                          |  |                                   | 876     |   |                                   |   | 2,071   |  
|Deferred income taxes                                                             |  |                                   | 2,968   |   |                                   |   | (115    | )
|Stock-based compensation                                                          |  |                                   | 1,765   |   |                                   |   |        |  
|Accretion of preferred units of subsidiary                                        |  |                                   | 2,686   |   |                                   |   |        |  
|                                                                                  |  |                                   |         |   |                                   |   |         |  
|Subtotal                                                                          |  |                                   | 47,227  |   |                                   |   | 52,841  |  
|                                                                                  |  |                                   |         |   |                                   |   |         |  
|Earnings adjusted for non-cash charges                                            |  |                                   | 66,004  |   |                                   |   | 63,870  |  
|                                                                                  |  |                                   |         |   |                                   |   |         |  
|Changes in operating assets and liabilities:                                      |  |                                   |         |   |                                   |   |         |  
|Accounts receivable                                                               |  |                                   | (11,171 | ) |                                   |   | (26,095 | )
|Materials and supplies                                                            |  |                                   | (2,423  | ) |                                   |   | (4,112  | )
|Other current assets                                                              |  |                                   | (4,885  | ) |                                   |   | 875     |  
|Accounts payable                                                                  |  |                                   | (5,131  | ) |                                   |   | (1,666  | )
|Accrued liabilities                                                               |  |                                   | (4,706  | ) |                                   |   | 22,958  |  
|Other assets / liabilities                                                        |  |                                   | (3,136  | ) |                                   |   | (1,815  | )
|                                                                                  |  |                                   |         |   |                                   |   |         |  
|Subtotal                                                                          |  |                                   | (31,452 | ) |                                   |   | (9,855  | )
|                                                                                  |  |                                   |         |   |                                   |   |         |  
|Loss (gain) on equipment disposals                                                |  |                                   | 24      |   |                                   |   | (253    | )
|Vessel drydocking payments                                                        |  |                                   | (10,793 | ) |                                   |   | (12,621 | )
|                                                                                  |  |                                   |         |   |                                   |   |         |  
|Net cash provided by operating activities                                         |  | $                                 | 23,783  |   |                                   | $ | 41,141  |  
|                                                                                  |  |                                   |         |   |                                   |   |         |  



Operating Activities



Net cash provided by operating activities increased
by $17.4 million to $41.1 million for the nine months ended September 25, 2005 compared to $23.8 million of net cash provided by operating activities for the nine months ended September 19, 2004. This increase is primarily driven by
improved profitability after non-cash charges and by a positive net change in working capital. Net earnings adjusted for depreciation, amortization, deferred income taxes, accretion and other non-cash operating activities resulted in cash flow
generation of $63.9 million for the nine months ended September 25, 2005 compared to $66.0 million for the nine months ended September 19, 2004. Changes in working capital resulted in a use of cash of $9.9 million for the nine months ended
September 25, 2005 compared to a use of cash of $31.5 million for the nine months ended September 19, 2004. The $27.7 million increase in accrued liabilities is primarily a result of vessel lease payments of $37.7 million for the nine
months ended September 19, 2004 as compared to $20.0 million for the nine months ended September 25, 2005. Our vessel lease payments, which are made in January and July of each year, are not straight lined throughout the lease terms. Other
contributing factors to the increase in accrued liabilities include the timing of interest payments associated with indebtedness incurred in connection with the consummation on July 7, 2004 of the acquisition transaction. In addition, our
accounts receivable balances typically trend down in the fourth quarter of each year due to year end collection activity as well as lower revenues in the fourth quarter. Additionally, our accounts receivable have grown by $26.1 million for the nine
months ended September 25, 2005 primarily as a result of revenue growth.



Investing Activities



Net cash used in
investing activities, excluding the acquisition transaction, increased by $7.1 million to $28.6 million for the nine months ended September 25, 2005 compared to $21.5 million for the nine months ended September 19, 2004. The increase is
primarily attributable to the acquisition, for $25.2 million, of the rights and beneficial interest of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific and the
charters related thereto under which HL operates such vessels in the nine months ended September 25, 2005 as compared to the acquisition, for $11.9 million, of two vessels in the nine months ended September 19, 2004. The differences in
acquisition prices were due to the size of the vessels in addition to the age of the vessels at the time of acquisition.



25



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Financing Activities



Net cash used for financing activities during the nine months ended September 25, 2005 was $5.8 million compared to
$0.1 million for the nine months ended September 19, 2004, excluding our initial capitalization as part of the acquisition transaction. The net cash used for financing activities during the nine months ended September 25, 2005 primarily
includes $1.9 million of principal payments on long-term debt.



Common Stock
Offering



On September 30, 2005, the Parent issued
and sold 12,500,000 shares (the Initial Shares) of its common stock, in the initial public offering, at a price to the public of $10.00 per share. The net proceeds to the Parent from the sale of these shares were $116.5 million (net of
underwriter discounts and commissions). Other fees and expenses associated with the initial public offering totaled approximately $5.7 million, of which approximately $4.5 million was paid prior to or on September 30, 2005. On
September 30, 2005, $44.7 million of these net proceeds were contributed to HLFHC and $43.6 million of these net proceeds were contributed, via HLFHC, to the Company, and, immediately thereafter, the Company paid a dividend of $40.0 million to
HLFHC, which then remitted such funds, as a dividend, to the Parent, which, using such funds and a portion of the proceeds of the initial public offering, redeemed, for a total purchase price of $62.2 million all of its outstanding shares of its
Series A redeemable preferred stock. In addition, on September 30, 2005, the Company and HL submitted a redemption notice to the indenture trustee for the 9% senior notes for the voluntary redemption, on November 2, 2005, of $40.0 million
of the then-outstanding aggregate principal amount of the 9% senior notes with the proceeds from the issuance and sale of the Initial Shares.



On October 14, 2005, the Parent issued and sold the Additional Shares of its common stock to the underwriters of its initial public offering at a net
price of $9.30 per share, representing the initial public offering price to the public of $10.00 per share, less the underwriters discount of 7% per share. These shares were issued and sold pursuant to the exercise in full by the
underwriters of their option to purchase additional shares from the Parent granted to them with respect to the initial public offering. The net proceeds to the Parent from the sale of these shares were $17.4 million (net of underwriter discounts and
commissions). On October 14, 2005, $3.2 million of these net proceeds were contributed to HLFHC and $14.2 of these net proceeds were contributed, via HLFHC, to the Company. On October 20, 2005, the Company and HL submitted a redemption
notice to the indenture trustee for the 9% senior notes for the voluntary redemption, on November 21, 2005, of $2.9 million of the then-outstanding aggregate principal amount of the 9% senior notes with the proceeds from the issuance and sale
of the Additional Shares.



The early redemption of the 9%
senior notes will result in a reduction of approximately $4.8 million per annum in interest expense during fiscal year 2006.



On October 25, 2005, the Parent announced that its Board of Directors has voted to declare a cash dividend (referred to herein as the HLI
Dividend) on its outstanding shares of common stock of $0.11 per share, payable on December 15, 2005 to all stockholders of record as of the close of business on December 1, 2005. The aggregate amount of the HLI Dividend is $3.7
million. In connection therewith, the Company declared a cash dividend of $3.7 million, payable to its sole stockholder, HLFHC, on December 14, 2005, and HLFHC declared a cash dividend of $3.7 million, payable to its sole stockholder, the
Parent, on December 14, 2005.



Capital Requirements



Our current and future capital needs relate primarily to debt service,
maintenance, and improvement of our vessel fleet, including purchasing vessels upon expiration of vessel operating leases and providing for other necessary equipment acquisitions. Cash to be used for investing activities, including purchases of
property and equipment, for the next 12 months are expected to total approximately $17.0 million. In addition, expenditures for vessel drydocking payments are estimated at $17.0 million.



As required by the agreements entered into with respect to the acquisition transaction, on October 5, 2004, we made a
post-closing reimbursement payment to Carlyle-Horizon Partners, L.P. and other pre-acquisition equity holders totaling $6.1 million. We disbursed $7.7 million in cash on October 15, 2004 to purchase a vessel, the Horizon Trader, that was under
an operating lease agreement.



Three of our vessels, the
Horizon Anchorage, Horizon Tacoma and Horizon Kodiak, are leased, or chartered. The charter periods for these vessels are due to expire in January 2015. The charters for these vessels permit us, to purchase the applicable vessel at the expiration of
the charter period for a fair market value specified in the relevant charter, that is determined through a pre-agreed appraisal procedure. During fiscal year 2003 and fiscal year 2004, we purchased four vessels, Horizon Fairbanks, Horizon Hawaii,
Horizon Navigator and Horizon Trader, at the expiration of their charter periods, utilizing similar fair market value purchase option arrangements. The purchase prices of the four vessels ranged from $3.8 million to $8.2 million per vessel. The fair
market values of the vessels currently under charter at the expiration of their charters cannot be predicted with any certainty.



26



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During the third quarter of fiscal year 2005, HL acquired with available cash, for $25.2 million, the
rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of two vessels, the Horizon Enterprise and the Horizon Pacific, and the charters related thereto under which HL operates such
vessels. Title to each of the two vessels is held by the respective owner trustee of the relevant trust for the use and benefit of the owner participant and the vessels are subject to a mortgage securing non-recourse indebtedness of the respective
owner trustees. HL charters each vessel from the relevant owner trustee. By acquiring the beneficial interests of the owner participant of each trust estate, HL obtained the right to the corpus of such estate remaining after required payments on the
aforementioned indebtedness are made. Further, upon the repayment of such indebtedness at maturity on January 1, 2007 HL will be able to obtain title to the two vessels from the respective owner trustees and terminate the charter. The
outstanding indebtedness secured by mortgages on the Horizon Enterprise and the Horizon Pacific is $2.3 million and $2.2 million, respectively.



Contractual Obligations



Contractual obligations as of September 25, 2005(1)are as follows ($ in thousands):



|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|------------------------------ |  | ---------------- | --------- | ------------- | - | ------ |  | ---- | ------- | ---- | - | ------- |  | ---------- | ------ |  | - | ------ |  | - | -------
|                               |  | TotalObligations |           | Remaining2005 |   | 2006   |  | 2007 |         | 2008 |   | 2009    |  | After 2009
|Principal obligations:         |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  | $                | 247,500   |               | $ | 625    |  | $    | 2,500   |      | $ | 2,500   |  | $          | 2,500  |  | $ | 2,500  |  | $ | 236,875
|Notes issued by owner trustees |  |                  | 4,514     |               |   |       |  |      |        |      |   | 4,514   |  |            |       |  |   |       |  |   |       
|9% senior notes                |  |                  | 250,000   |               |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   | 250,000
|Operating leases               |  |                  | 368,196   |               |   | 10,802 |  |      | 57,760  |      |   | 74,535  |  |            | 33,446 |  |   | 33,283 |  |   | 158,370
|Capital lease obligations      |  |                  | 596       |               |   | 48     |  |      | 193     |      |   | 193     |  |            | 162    |  |   |       |  |   |       
|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                  | 870,806   |               |   | 11,475 |  |      | 60,453  |      |   | 81,742  |  |            | 36,108 |  |   | 35,783 |  |   | 645,245
|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Interest obligations:          |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  |                  | 92,321    |               |   | 4,024  |  |      | 17,046  |      |   | 17,341  |  |            | 17,301 |  |   | 17,234 |  |   | 19,375 
|Series B notes                 |  |                  | 624       |               |   | 139    |  |      | 485     |      |   |         |  |            |        |  |   |        |  |   |        
|9% senior notes                |  |                  | 165,000   |               |   | 11,250 |  |      | 22,500  |      |   | 22,500  |  |            | 22,500 |  |   | 22,500 |  |   | 63,750 
|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                  | 257,945   |               |   | 15,413 |  |      | 40,031  |      |   | 39,841  |  |            | 39,801 |  |   | 39,734 |  |   | 83,125 
|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Total principal and interest   |  | $                | 1,128,751 |               | $ | 26,888 |  | $    | 100,484 |      | $ | 121,583 |  | $          | 75,909 |  | $ | 75,517 |  | $ | 728,370
|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Other commercial commitments:  |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Standby letters of credit      |  | $                | 6,745     |               | $ |       |  | $    |        |      | $ |        |  | $          |       |  | $ |       |  | $ | 6,745  
|Surety bonds                   |  |                  | 8,575     |               |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   | 8,575  
|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|                               |  | $                | 15,320    |               | $ |       |  | $    |        |      | $ |        |  | $          |       |  | $ |       |  | $ | 15,320 
|                               |  |                  |           |               |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        

---

|(1) | Included in contractual obligations are scheduled interest payments. Interest payments on the
senior credit facility are variable and are based as of September 25, 2005, upon the London Inter-Bank Offering Rate (LIBOR) plus 2.50%. The three-month LIBOR / swap curve has been utilized to estimate interest payments on the senior credit
facility. Interest on the 9% senior notes is fixed and is paid semi-annually on May 1 and November 1 of each year until maturity on November 1, 2012.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



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Contractual obligations as of September 25, 2005(1), on a pro forma basis, to give effect to the consummation of the issuance and sale by the Parent of the Initial Shares and the Additional Shares of its
common stock pursuant to the initial public offering, the use of proceeds therefrom, and other related transactions, are as follows ($ in thousands):



|                               |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|------------------------------ |  | ---------------- | --------- | ------------- | - | ------ |  | ---- | ------ | ---- | - | ------- |  | ---------- | ------ |  | - | ------ |  | - | -------
|                               |  | TotalObligations |           | Remaining2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009    |  | After 2009
|Principal obligations:         |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  | $                | 247,500   |               | $ | 625    |  | $    | 2,500  |      | $ | 2,500   |  | $          | 2,500  |  | $ | 2,500  |  | $ | 236,875
|Notes issued by owner trustees |  |                  | 4,514     |               |   |       |  |      |       |      |   | 4,514   |  |            |       |  |   |       |  |   |       
|9% senior notes                |  |                  | 197,014   |               |   |       |  |      |       |      |   |        |  |            |       |  |   |       |  |   | 197,014
|Operating leases               |  |                  | 368,196   |               |   | 10,802 |  |      | 57,760 |      |   | 74,535  |  |            | 33,446 |  |   | 33,283 |  |   | 158,370
|Capital lease obligations      |  |                  | 596       |               |   | 48     |  |      | 193    |      |   | 193     |  |            | 162    |  |   |       |  |   |       
|                               |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                  | 817,820   |               |   | 11,475 |  |      | 60,453 |      |   | 81,742  |  |            | 36,108 |  |   | 35,783 |  |   | 592,259
|                               |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Interest obligations:          |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  |                  | 89,083    |               |   | 3,870  |  |      | 16,432 |      |   | 16,733  |  |            | 16,699 |  |   | 16,639 |  |   | 18,710 
|Series B notes                 |  |                  | 624       |               |   | 139    |  |      | 485    |      |   |         |  |            |        |  |   |        |  |   |        
|9% senior notes                |  |                  | 130,029   |               |   | 8,866  |  |      | 17,731 |      |   | 17,731  |  |            | 17,731 |  |   | 17,731 |  |   | 50,239 
|                               |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                  | 219,736   |               |   | 12,875 |  |      | 34,648 |      |   | 34,464  |  |            | 34,430 |  |   | 34,370 |  |   | 68,949 
|                               |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Total principal and interest   |  | $                | 1,037,556 |               | $ | 24,350 |  | $    | 95,101 |      | $ | 116,206 |  | $          | 70,538 |  | $ | 70,153 |  | $ | 661,208
|                               |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Other commercial commitments:  |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Standby letters of credit      |  | $                | 6,745     |               | $ |       |  | $    |       |      | $ |        |  | $          |       |  | $ |       |  | $ | 6,745  
|Surety bonds                   |  |                  | 8,575     |               |   |       |  |      |       |      |   |        |  |            |       |  |   |       |  |   | 8,575  
|                               |  |                  |           |               |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|                               |  | $                | 15,320    |               | $ |       |  | $    |       |      | $ |        |  | $          |       |  | $ |       |  | $ | 15,320 



|(1) | The figures set forth in this table give effect to the offering transactions as if they had
occurred as of September 25, 2005. Included in contractual obligations are scheduled interest payments. Interest payments on the senior credit facility are variable and are based as of September 25, 2005, on a pro forma basis, upon the
London Inter-Bank Offering Rate (LIBOR) plus 2.25%. The three-month LIBOR / swap curve has been utilized to estimate interest payments on the senior credit facility. Interest on the 9% senior notes is fixed and is paid semi-annually on May 1
and November 1 of each year until maturity on November 1, 2012.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Long-Term Debt



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



On July 7, 2004,
the Company and HL entered into a senior credit facility, which was amended and restated as of April 7, 2005 and September 22, 2005. The credit facility is comprised of a $247.5 million term loan facility due in 2011 and a $25.0 million
revolving credit facility due in 2009, which, upon the redemption, using the proceeds from the consummation of the issuance and sale by our indirect parent, Horizon Lines, Inc., of shares of its common stock pursuant to the initial public offering
of at least $40.0 million of the aggregate principal amount of the 9% senior notes, will increase to a $50.0 million revolving credit facility. (For further information regarding the initial public offering (which has been consummated), see
Common Stock Offering). We expect that the subsidiaries of the issuer that are the borrowers under the senior credit facility will be permitted to incur up to an additional $50.0 million of senior secured debt in the form of term loans
at the option of the participating lenders under the term loan facility, provided that no default or event of default under the senior credit facility has occurred or would occur after giving effect to such incurrence and certain other conditions
are satisfied.



Borrowings under the senior credit facility
bear interest at the LIBOR or the base rate (as determined by the borrowers), in each case, plus an applicable margin, subject to adjustment based on a pricing grid. In addition, one percent of the term loan facility will amortize during each of the
first six years after the closing date of the senior credit facility in equal consecutive quarterly installments. The remaining portion of the term loan facility will amortize during the seventh year of the term loan facility in equal consecutive
quarterly installments. Upon the redemption specified above, the margin applicable to the term loan portion of the senior credit facility will decrease from 1.50% to 1.25% for base rate loans and from 2.50% to 2.25% for LIBOR loans.



28



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The senior credit facility requires the subsidiaries of the issuer that are the borrowers thereunder to
meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the senior credit facility contains certain restrictive covenants which will, among other things, limit the incurrence of additional indebtedness, capital
expenditures, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. It also
contains certain customary events of default, subject to grace periods, as appropriate.



On July 7, 2004, the Company and HL sold $250.0 million of 9% senior notes, the proceeds of which, along with borrowings under the senior credit facility and proceeds from the cash equity investment in Horizon
Lines Holding, were used to fund the acquisition transaction. In order to give the holders of the 9% senior notes the opportunity in the future to exchange the 9% senior notes for identical notes that have been registered under the Securities Act
(the new 9% senior notes), Horizon Lines Holding and Horizon Lines agreed to file a registration statement for the new 9% senior notes within 270 days after the issue date of the 9% senior notes, cause the registration statement for the
new 9% senior notes to become effective within 360 days after the issue date of the 9% senior notes, and consummate the exchange offer within 390 days after the issue date of the 9% senior notes. The exchange offer referred to in this paragraph was
consummated by the Company, HL and their respective subsidiaries in a timely manner. The Company and HL have submitted redemption notices to the indenture trustee for the new 9% senior notes for the following: (i) the voluntary redemption, on
November 2, 2005, of $40.0 million of the outstanding aggregate principal amount of the new 9% senior notes with the proceeds of the initial public offering, and (ii) the voluntary redemption, on November 21, 2005, of $2.9 million of
the outstanding aggregate principal amount of the new 9% senior notes with the proceeds of the initial public offering.



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



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



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



Based upon the current level of operations and certain anticipated improvements, we believe that cash flow from operations and available cash, together
with borrowings available under the senior credit facility, will be adequate to meet our future liquidity needs throughout 2005. There can be no assurance that we will generate sufficient cash flow from operations, that anticipated revenue growth
and operating improvements will be realized or that future borrowings will be available under the senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs. In addition, there can be no
assurance that we will be able to effect any future refinancing of our debt on commercially reasonable terms or at all.



Interest Rate Risk



Our primary interest rate exposure relates to the senior credit facility. As a result of the acquisition transaction, as of September 25, 2005, the
Company and HL have outstanding a $247.5 million term loan, which bears interest at variable rates. Each quarter point change in interest rates would result in a $0.6 million change in interest expense on the term loan. The Company and HL also have
a revolving credit facility which provides for borrowings of up to $25.0 million which, upon the redemption, using the proceeds from the initial public offering, of at least $40.0 million of the aggregate principal amount of the 9% senior notes,
will increase to $50.0 million, which will bear interest at variable rates. As of September 25, 2005, no amounts were outstanding under the revolving credit facility.



Working Capital



Working capital at September 25, 2005, was $78.3 million, compared to $65.6 million at December 26, 2004. This $12.7 million increase is
primarily the result of revenue growth during the period. Adequate current assets are maintained to satisfy current liabilities and maturing obligations when they come due and we have sufficient financial capacity to manage our daily cash
requirements.



29



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Credit Ratings



As of September 25, 2005, Moodys Investors Service and Standard and Poors Rating Services assigned the following credit ratings to our
outstanding debt:



Debt/Rating Outlook:



|                                        |  |         |  |                  
|--------------------------------------- |  | ------- |  | -----------------
|                                        |  | Moodys |  | Standard & Poors
|Senior Secured Credit Facility          |  | B2      |  | B                
|$250.0 million 9% Senior Notes due 2012 |  | B3      |  | CCC+             
|Rating Outlook                          |  | Stable  |  | Stable           



On December 6,
2004, Standard and Poors lowered its ratings on the Company and its subsidiary, HL, including, in each case, lowering the corporate credit rating of such entity to B from B+. At the same time, Standard &
Poors lowered its rating of the $250.0 million principal amount of 9% senior notes from B to CCC+.



Ratio of Earnings to Fixed Charges



Our ratio of earnings to fixed charges for the fiscal quarter and nine months ended September 25, 2005 are as follows ($ in thousands):



|                                   |  |                                            |        |  
|---------------------------------- |  | ------------------------------------------ | ------ | -
|                                   |  | For theQuarter EndedSeptember 25, 2005     |       
|Pretax income                      |  | $                                          | 11,921 |  
|                                   | 
|Interest expense                   |  |                                            | 10,381 |  
|Rentals                            |  |                                            | 6,203  |  
|                                   |  |                                            |        |  
|Total fixed charges                |  | $                                          | 16,584 |  
|                                   |  |                                            |        |  
|Pretax earnings plus fixed charges |  | $                                          | 28,505 |  
|                                   |  |                                            |        |  
|Ratio of earnings to fixed charges |  |                                            | 1.72   | x
|                                   | 
|                                   |  | For theNine Months EndedSeptember 25, 2005 |       
|Pretax income                      |  | $                                          | 18,385 |  
|                                   | 
|Interest expense                   |  |                                            | 30,454 |  
|Rentals                            |  |                                            | 18,764 |  
|                                   |  |                                            |        |  
|Total fixed charges                |  | $                                          | 49,218 |  
|                                   |  |                                            |        |  
|Pretax earnings plus fixed charges |  | $                                          | 67,603 |  
|                                   |  |                                            |        |  
|Ratio of earnings to fixed charges |  |                                            | 1.37   | x



For the purposes of
calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consists of interest expense, including amortization of net discount or premium and financing costs and the portion
of operating rental expense (33%) which our management believes is representative of interest component of rent expense.



3.Quantitative and Qualitative Disclosures About Market Risk



The principal market risks to which we are exposed that may adversely impact the results of our operations and financial position consist of changes in
interest rates and credit risk. As a result of the acquisition transaction, as of September 25, 2005, we have outstanding a $247.5 million term loan, which bears interest at variable rates. Each quarter point change in interest rates would
result in a $0.6 million change in interest expense on our term loan. We also have a revolving credit facility which provides for borrowings of up to $25.0 million, which, upon the redemption, using the proceeds from the initial public offering, of
at least $40.0 million of the aggregate principal amount of the 9% senior notes, will increase to $50.0 million, which will bear interest at variable rates. As of September 25, 2005 no amounts were outstanding under the revolving credit
facility.



We are also exposed to certain credit risks related
to our accounts receivable. We perform ongoing credit evaluations of our customers to minimize the potential exposure. As September 25, 2005 and December 26, 2004, we had allowances for doubtful accounts of $10.0 million and $7.9 million,
respectively.



4.Controls and Procedures



Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of September 25, 2005, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that



30



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these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect
these controls during the fiscal quarter ended September 25, 2005.



Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended
(referred to herein as the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



PART II. OTHER INFORMATION



1.Legal Proceedings



In the ordinary course of our business, from time to time, the Company and its subsidiaries, including, without limitation, HL, become involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo,
employees personal injury claims, and claims for loss or damage to the person or property of third parties. The Company and its subsidiaries generally maintain insurance, subject to customary deductibles or self-retention amounts, and/or
reserves to cover these types of claims. The Company and its subsidiaries also, from time to time, become involved in routine employment-related disputes and disputes with parties with which they have contracts.



There are two actions currently pending before the Surface Transportation
Board (referred to herein as the STB) involving HL. The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against HL and Matson Navigation Co. (referred to herein as Matson), seeks a
ruling from the STB that HLs Guam shipping rates, which are based on published tariff rates, during 1996-1998 were unreasonable under the ICC Termination Act of 1995 (referred to herein as the ICCTA), and an order
awarding reparations to Guam and its citizens. The STB is addressing this matter in three phases. During the first phase, which has been completed, the STB reviewed the allegations set forth in the complaints that were filed by the Government of
Guam and dismissed certain complaints while allowing certain other complaints to be addressed in phase two. During the currently on-going second phase, at the request of the STB, the parties fully briefed, in 2002, the threshold issue of what
methodology should be applied in determining rate reasonableness under the ICCTA, and the STB is expected to issue a ruling in 2005 that sets forth a standard for determining whether the rates charged during 1996-1998 were reasonable.
During the third phase, the STB will apply the standard that it adopts in the second phase to the rates in effect during 1996-1998. If the STB determines that the rates charged by HL during 1996-1998 were unreasonable, the STB will issue an
additional ruling to determine the persons entitled to damages and in what amounts. On June 8, 2005, upon the motion of HL, the STB issued a decision which ordered the Government of Guam to show cause by June 28, 2005 why the action should
not be dismissed. The Government of Guam has responded to this decision by asserting their intent to participate in the proceeding and attending oral argument in the second phase of the case at the STB. HL has filed a response thereto asserting that
the Government of Guams response is not sufficient to show cause. The STB issued a further order on September 15, 2005 canceling its show cause order and notified the parties that it has scheduled oral argument on the merits of the Phase
II issues on November 16, 2005. No assurance can be given that the final decision with respect to this matter will be favorable to us.



An adverse ruling by the STB in this action could result in significant damages. We are unable to quantify the amount of these damages. In the event that
the STB were to issue a ruling whereby it accepted the Government of Guams proposed standard for the determination of rate reasonableness under the ICCTA, the STB would then need to determine whether rates charged by HL during
1996-1998 were reasonable under such standard. However, the business of HL that provided marine container shipping to and from Guam during 1996-1998 was, at the time, part of a larger business. During 1996-1998, the Guam-related business of HL was
part of the business of Sea-Land Service, Inc., which included transportation, logistics and terminal services between and at ports in Asia, Guam, Hawaii and the U.S. west coast. Separate financial statements were not prepared for the operations of
Sea-Land Service that related to marine container shipping to and from Guam. Accordingly, we believe that the actual rates of return that were earned by HLs business with respect to marine container shipments to and from Guam during 1996-1998
cannot be determined. Consequently, the absence of such actual rates of return would preclude the calculation of a reasonable rate of return based on the standard proposed by the Government of Guam in the pending action. Even if each of these
matters were determined adversely to HL, we are unable at the present time to determine how many citizens of Guam, on whose behalf the pending action has been brought by the Government of Guam, paid such rates during 1996-1998, or the amounts of
their related claims, because the requisite discovery proceedings for that phase of the dispute have not yet begun. Apart from potential damages, an adverse ruling by the STB could affect HLs current and future rate structure for its Guam
shipping by requiring it to reduce its current base tariff rates and limit future rate increases to amounts determined to be within the zone of reasonableness contained in the ICCTA, as determined in such ruling. An adverse STB decision
could also affect the rates that HL would be permitted to charge on its other routes where rates must be reasonable under the ICCTA.



The second action currently pending before the STB involving HL, brought by DHX, Inc. in 1999 against HL and Matson, challenges the reasonableness of
certain rates and practices of HL and Matson. DHX is a major freight forwarder in the domestic



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Hawaii trade. Freight forwarders typically accept less than full container loads of cargo, consolidate these loads into full container loads, and offer the
full container load to the ocean carriers. Some freight forwarders, including DHX, also solicit full container loads from shippers. Among other things, DHX charged that HL and Matson took actions that were intended to prevent all freight forwarders
in the Hawaii trade from competing with the carriers for the full container load business. DHX is seeking $11.0 million in damages. In addition to the award of damages, an adverse ruling could affect HLs current and future rate structure
for its Hawaii shipping. An adverse STB decision could also affect the rates that HL would be permitted to charge on its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in
DHXs complaint; (ii) found that HL met all of its tariff filing obligations; and (iii) reaffirmed the STBs earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which was repealed by the
ICCTA, are no longer applicable to our business. On June 13, 2005, the STB issued a decision that denied DHXs motion for reconsideration and denied the alternative request by DHX for clarification of the STBs December 13, 2004
decision. On August 5, 2005, DHX filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit challenging the STBs order dismissing its complaint. HL has filed a Motion to Intervene, which has been granted, so it
can participate directly in the appellate process. No assurance can be given that the final decision with respect to this matter will be favorable to us.



2.Unregistered Sales of Equity Securities and Use of Proceeds



None



3.Defaults Upon Senior Securities



None



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



On September 20, 2005, the Board of Directors of the Company adopted (and H-Lines Finance Holding Corp. (HLFHC), the sole stockholder of
the Company approved), an amendment to the Carlyle-Horizon Holdings Corp. Stock Option Plan, as then in effect (the Stock Option Plan).



5.Other Information



On September 26, 2005, as set forth in the Prospectus dated September 26, 2005 (the Final IPO Prospectus), of the Parent, as filed with the Securities and Exchange Commission on September 28, 2005, all options
outstanding under the Stock Option Plan, as amended on September 20, 2005, were exercised and all of the resulting shares of common stock of the Company were exchanged for shares of capital stock of the Parent pursuant to the provisions of the
Put/Call Agreement. Immediately following such exchange, all of the shares of the common stock of the Company that were so acquired by the Parent were contributed to HLFHC, a direct wholly-owned subsidiary of the Parent, and, in turn, HLFHC
contributed such shares to the Company, a direct wholly-owned subsidiary of HLFHC. As of the date hereof, all of the outstanding shares of the common stock are directly owned by HLFHC and no options are outstanding or issuable under the Stock Option
Plan, as amended on September 20, 2005.



On
September 30, 2005, the Parent issued the Initial Shares of its common stock pursuant to the initial public offering. On October 14, 2005, the Parent issued the Additional Shares of its common stock pursuant to the exercise in full by the
underwriters of the initial public offering of their option to purchase additional shares from the Parent. For additional information with respect to the initial public offering, the cash dividend, and related events, see Note 9 Subsequent
Events to the Companys unaudited condensed consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations-Common Stock Offering.



On October 18, 2005, the Board of Directors of the Parent approved the
grant by HL of merit awards, in the aggregate amount of $2,500,000 and payable in cash, to certain employees of HL. These merit awards have been paid by HL. The employees that received these merit awards included three of the named executive
officers set forth in the Final IPO Prospectus, in the following amounts: Mr. Charles G Raymond: $800,000; Mr. John V. Keenan: $600,000; and Mr. M. Mark Urbania: $600,000.



On October 25, 2005, the Parent announced that its Board of Directors
voted to declare a cash dividend on its outstanding shares of common stock. In connection therewith, the Company declared a cash dividend of $3.7 million, payable to its sole stockholder, HLFHC, and HLFHC declared a cash dividend of $3.7 million,
payable to its sole stockholder, the Parent. For additional information with respect to the initial public offering and the cash dividend and related events, see Note 9 Subsequent Events to the Companys unaudited condensed
consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations-Common Stock Offering.



32



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6.Exhibits



|          |  |                                                                                                                                                                                                                                                        
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1*     |  | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of September 22, 2005, by and among Horizon Lines, LLC, UBS AG, Stamford Branch, as administrative agent, the lenders
from time to time party thereto and the other parties thereto.
|          | 
|10.13.1** |  | Amendment to the Horizon Lines Holding Corp. Stock Option Plan.                                                                                                                                                                                        
|          | 
|31.1***   |  | Certification of Chief Executive Officer Pursuant to the Rules 13a -14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                               
|          | 
|31.2***   |  | Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                    
|          | 
|32.1***   |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     
|          | 
|32.2***   |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     



|* | Incorporated by reference to the Quarterly Report on Form 10-Q of Horizon Lines, Inc. (File No. 333-123073) for the quarter ended September 25, 2005, filed on
November 2, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Incorporated by reference to the Report on Form 8-K of Horizon Lines, Inc. (File No. 333-123073), filed on October 24, 2005.
|-- | ----------------------------------------------------------------------------------------------------------------------------



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



33



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SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: November 2, 2005



HORIZON LINES HOLDING CORP.By:

/s/    M. MARK URBANIAM. Mark Urbania Senior Vice President & Chief Financial Officer (Principal Financial Officer &
Authorized Signatory)




34



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EXHIBIT INDEX



|          |  |                                                                                                                                                                                                                                                        
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit   |  | Description                                                                                                                                                                                                                                            
|10.1*     |  | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of September 22, 2005, by and among Horizon Lines, LLC, UBS AG, Stamford Branch, as administrative agent, the lenders
from time to time party thereto and the other parties thereto.
|          | 
|10.13.1** |  | Amendment to the Horizon Lines Holding Corp. Stock Option Plan.                                                                                                                                                                                        
|          | 
|31.1***   |  | Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                    
|          | 
|31.2***   |  | Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d- 14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                   
|          | 
|32.1***   |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     
|          | 
|32.2***   |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     

---

|* | Incorporated by reference to the Quarterly Report on Form 10-Q of Horizon Lines, Inc. (File No. 333-123073) for the quarter ended September 25, 2005, filed on
November 2, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Incorporated by reference to the Report on Form 8-K of Horizon Lines, Inc. (File No. 333-123073), filed on October 24, 2005.
|-- | ----------------------------------------------------------------------------------------------------------------------------



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



35