##### Table of Contents



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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 June 26, 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 ̈No x



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



As of July 28, 2005, 800,000 shares of common stock, par value $.01 per
share, were outstanding.



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##### Table of Contents

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 |  | 11
|          |  |                       | 
|          |  | 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
|          | 
|Signature |  | 33                   





2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



1.Financial Statements



Horizon Lines Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

($ in thousands)



|                                                                                                                                         |  |                      |           |               |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | --------- | ------------- | - | --------- | -
|                                                                                                                                         |  | December 26, 2004(1) |           | June 26, 2005 |  
|Assets                                                                                                                                   |  |                      |           |               |   |           |  
|Current assets                                                                                                                           |  |                      |           |               |   |           |  
|Cash and cash equivalents                                                                                                                |  | $                    | 56,264    |               | $ | 60,475    |  
|Accounts receivable, net of allowance of $7,938 and $9,372 at December 26, 2004 and June 26, 2005, respectively                          |  |                      | 110,801   |               |   | 127,781   |  
|Income taxes receivable                                                                                                                  |  |                      | 9,354     |               |   | 9,354     |  
|Deferred tax asset                                                                                                                       |  |                      | 4,055     |               |   | 4,843     |  
|Materials and supplies                                                                                                                   |  |                      | 21,680    |               |   | 23,304    |  
|Other current assets                                                                                                                     |  |                      | 7,019     |               |   | 5,479     |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Total current assets                                                                                                                     |  |                      | 209,173   |               |   | 231,236   |  
|Property and equipment, net                                                                                                              |  |                      | 190,123   |               |   | 177,019   |  
|Deferred tax assets                                                                                                                      |  |                      | 80,280    |               |   | 73,257    |  
|Intangible assets, net                                                                                                                   |  |                      | 517,556   |               |   | 506,558   |  
|Other long term assets                                                                                                                   |  |                      | 15,640    |               |   | 20,873    |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Total assets                                                                                                                             |  | $                    | 1,012,772 |               | $ | 1,008,943 |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Liabilities and Stockholders Equity                                                                                                     |  |                      |           |               |   |           |  
|Current liabilities                                                                                                                      |  |                      |           |               |   |           |  
|Accounts payable                                                                                                                         |  | $                    | 25,275    |               | $ | 21,240    |  
|Deferred tax liability                                                                                                                   |  |                      | 1,683     |               |   | 1,278     |  
|Current portion of long term debt                                                                                                        |  |                      | 2,500     |               |   | 2,500     |  
|Other accrued liabilities                                                                                                                |  |                      | 114,167   |               |   | 121,351   |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Total current liabilities                                                                                                                |  |                      | 143,625   |               |   | 146,369   |  
|Long term debt, net of current                                                                                                           |  |                      | 496,875   |               |   | 495,625   |  
|Deferred tax liability                                                                                                                   |  |                      | 136,538   |               |   | 129,581   |  
|Deferred rent                                                                                                                            |  |                      | 44,949    |               |   | 42,712    |  
|Other long term liabilities                                                                                                              |  |                      | 2,429     |               |   | 3,206     |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Total liabilities                                                                                                                        |  |                      | 824,416   |               |   | 817,493   |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Stockholders equity                                                                                                                     |  |                      |           |               |   |           |  
|Common stock, $.01 par value, 800,000 shares authorized and 800,000 shares issued and outstanding at December 26, 2004 and June 26,
2005 |  |                      | 8         |               |   | 8         |  
|Additional paid in capital                                                                                                               |  |                      | 179,486   |               |   | 179,789   |  
|Accumulated other comprehensive income (loss)                                                                                            |  |                      | 71        |               |   | (58       | )
|Retained earnings                                                                                                                        |  |                      | 8,791     |               |   | 11,711    |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Total stockholders equity                                                                                                               |  |                      | 188,356   |               |   | 191,450   |  
|                                                                                                                                         |  |                      |           |               |   |           |  
|Total liabilities and stockholders equity                                                                                               |  | $                    | 1,012,772 |               | $ | 1,008,943 |  
|                                                                                                                                         |  |                      |           |               |   |           |  

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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.





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##### Table of Contents

Horizon Lines Holding Corp. and Subsidiaries and Predecessor Company

Unaudited Condensed Consolidated
Statements of Operations

($ in thousands)



|                                                 |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        
|------------------------------------------------ |  | ------------------------------------------------ | ------- | ------------------------------------------------ | - | ------- | --------------------------------------------------- |  | --------------------------------------------------- | ------- |  | - | -------
|                                                 |  | Predecessor-A                                    |         | Horizon Lines Holding Corp.                      |   |         | Predecessor-A                                       |  | Horizon Lines Holding Corp.                        
|                                                 |  | For the PeriodMarch 22,2004 throughJune 20, 2004 |         | For the PeriodMarch 28,2005 throughJune 26, 2005 |   |         | For the PeriodDecember 22,2003 throughJune 20, 2004 |  | For the PeriodDecember 27,2004 throughJune 26, 2005
|Operating revenue                                |  | $                                                | 235,855 |                                                  | $ | 270,544 |                                                     |  | $                                                   | 455,849 |  | $ | 528,106
|                                                 |  |                                                  |         |                                                 
|Operating expenses:                              |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        
|Operating expense                                |  |                                                  | 186,450 |                                                  |   | 216,266 |                                                     |  |                                                     | 368,933 |  |   | 422,469
|Selling, general and administrative              |  |                                                  | 19,108  |                                                  |   | 21,121  |                                                     |  |                                                     | 38,043  |  |   | 44,222 
|Depreciation and amortization                    |  |                                                  | 9,216   |                                                  |   | 12,548  |                                                     |  |                                                     | 19,785  |  |   | 25,441 
|Amortization of vessel drydocking                |  |                                                  | 4,069   |                                                  |   | 4,746   |                                                     |  |                                                     | 8,211   |  |   | 8,544  
|Miscellaneous expense, net                       |  |                                                  | 666     |                                                  |   | (94     | )                                                   |  |                                                     | 1,871   |  |   | 1,220  
|                                                 |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        
|Total operating expenses                         |  |                                                  | 219,509 |                                                  |   | 254,587 |                                                     |  |                                                     | 436,843 |  |   | 501,896
|                                                 |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        
|Operating income                                 |  |                                                  | 16,346  |                                                  |   | 15,957  |                                                     |  |                                                     | 19,006  |  |   | 26,210 
|                                                 |  |                                                  |         |                                                 
|Other expense:                                   |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        
|Interest expense                                 |  |                                                  | 2,255   |                                                  |   | 10,066  |                                                     |  |                                                     | 4,603   |  |   | 19,745 
|Interest expense  preferred units of subsidiary |  |                                                  | 1,206   |                                                  |   |        |                                                     |  |                                                     | 2,387   |  |   |       
|Other expense, net                               |  |                                                  | 2       |                                                  |   | (2      | )                                                   |  |                                                     | 7       |  |   | 1      
|                                                 |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        
|Income before income taxes                       |  |                                                  | 12,883  |                                                  |   | 5,893   |                                                     |  |                                                     | 12,009  |  |   | 6,464  
|Income tax expense                               |  |                                                  | 4,902   |                                                  |   | 2,407   |                                                     |  |                                                     | 4,564   |  |   | 2,625  
|                                                 |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        
|Net income                                       |  | $                                                | 7,981   |                                                  | $ | 3,486   |                                                     |  | $                                                   | 7,445   |  | $ | 3,839  
|                                                 |  |                                                  |         |                                                  |   |         |                                                     |  |                                                     |         |  |   |        







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





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##### Table of Contents

Horizon Lines Holding Corp. and Subsidiaries and Predecessor Company

Unaudited Condensed Consolidated
Statements of Cash Flows

($ in thousands)



|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | - |  |  | --------------------------------------------------- | - | ------- | -
|                                                                                  |  | Predecessor-A                                       |         |   |  |  | Horizon Lines Holding Corp.                         |  
|                                                                                  |  | For the PeriodDecember 22,2003 throughJune 20, 2004 |         |   |  |  | For the PeriodDecember 27,2004 throughJune 26, 2005 |  
|Cash flows from operating activities:                                             |  |                                                     |         |   |  |  |                                                     |   |         |  
|Net income                                                                        |  | $                                                   | 7,445   |   |  |  |                                                     | $ | 3,839   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                                     |         |   |  |  |                                                     |   |         |  
|Depreciation                                                                      |  |                                                     | 18,358  |   |  |  |                                                     |   | 15,660  |  
|Amortization of other intangible assets                                           |  |                                                     | 1,427   |   |  |  |                                                     |   | 9,781   |  
|Amortization of vessel drydocking                                                 |  |                                                     | 8,211   |   |  |  |                                                     |   | 8,544   |  
|Amortization of deferred financing costs                                          |  |                                                     | 505     |   |  |  |                                                     |   | 1,172   |  
|Deferred income taxes                                                             |  |                                                     |        |   |  |  |                                                     |   | (1,127  | )
|Loss (gain) on equipment disposals                                                |  |                                                     | 61      |   |  |  |                                                     |   | (114    | )
|Accretion of preferred units of subsidiary                                        |  |                                                     | 2,387   |   |  |  |                                                     |   |        |  
|Changes in operating assets and liabilities:                                      |  |                                                     |         |   |  |  |                                                     |   |         |  
|Accounts receivable                                                               |  |                                                     | (5,929  | ) |  |  |                                                     |   | (16,980 | )
|Materials and supplies                                                            |  |                                                     | (1,497  | ) |  |  |                                                     |   | (1,624  | )
|Other current assets                                                              |  |                                                     | (1,796  | ) |  |  |                                                     |   | 1,540   |  
|Accounts payable                                                                  |  |                                                     | 1,982   |   |  |  |                                                     |   | (4,035  | )
|Accrued liabilities                                                               |  |                                                     | (13,852 | ) |  |  |                                                     |   | 3,423   |  
|Vessel drydocking payments                                                        |  |                                                     | (9,879  | ) |  |  |                                                     |   | (9,991  | )
|Other assets/liabilities                                                          |  |                                                     | 3,468   |   |  |  |                                                     |   | (2,114  | )
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|Net cash provided by operating activities                                         |  |                                                     | 10,891  |   |  |  |                                                     |   | 7,974   |  
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|Cash flows from investing activities:                                             |  |                                                     |         |   |  |  |                                                     |   |         |  
|Purchases of property and equipment                                               |  |                                                     | (17,543 | ) |  |  |                                                     |   | (2,217  | )
|Proceeds from the sale of property and equipment                                  |  |                                                     | 1,224   |   |  |  |                                                     |   | 413     |  
|Other investing activities                                                        |  |                                                     | (150    | ) |  |  |                                                     |   |        |  
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|Net cash used in investing activities                                             |  |                                                     | (16,469 | ) |  |  |                                                     |   | (1,804  | )
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|Cash flows from financing activities:                                             |  |                                                     |         |   |  |  |                                                     |   |         |  
|Principal payments on long term debt                                              |  |                                                     |        |   |  |  |                                                     |   | (1,250  | )
|Dividend to parent                                                                |  |                                                     |         |   |  |  |                                                     |   | (919    | )
|Capital contribution                                                              |  |                                                     |        |   |  |  |                                                     |   | 303     |  
|Payments on capital lease obligation                                              |  |                                                     | (87     | ) |  |  |                                                     |   | (93     | )
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|Net cash used in financing activities                                             |  |                                                     | (87     | ) |  |  |                                                     |   | (1,959  | )
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |                                                     | (5,665  | ) |  |  |                                                     |   | 4,211   |  
|Cash and cash equivalents at beginning of period                                  |  |                                                     | 41,811  |   |  |  |                                                     |   | 56,264  |  
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                                                   | 36,146  |   |  |  |                                                     | $ | 60,475  |  
|                                                                                  |  |                                                     |         |   |  |  |                                                     |   |         |  



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





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##### Table of Contents

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 six month periods ended June 26, 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 and Horizon Lines of Puerto Rico, Inc. (HLPR), a Delaware corporation and direct wholly-owned subsidiary. 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 February 27, 2003 through July 6, 2004, is referred to as Predecessor-A.



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 June 26, 2005, the related consolidated statement of operations for the periods from March 22, 2004 through June 20, 2004, from March 28, 2005, through June 26, 2005, from December 27, 2004 through June 26, 2005, from December 22, 2003
through June 20, 2004 and the related statement of cash flows for the period from December 22, 2003 through June 20, 2004 and from December 27, 2004 through June 26, 2005. All significant intercompany accounts and transactions have been eliminated.



On July 7, 2004, the Company, H-Lines Subcorp., a wholly owned
subsidiary of Horizon Lines, Inc., 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 Horizon Lines, Inc. 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 Horizon Lines, LLC, 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 Horizon Lines, Inc. 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 (the Put/Call
Agreement), the shares of common stock issued by the Company upon the exercise of such retained options are subject to exchange, at the option of the Company (or the holders of such shares), with the Company for shares of common stock and
preferred stock of Horizon Lines, Inc. 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



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##### Table of Contents

HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



estimated fair market value of the net assets acquired, including separately identifiable intangible assets, approximated $306.4 million, and was allocated
to goodwill.



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



|                                  |  |   |          |  
|--------------------------------- |  | - | -------- | -
|Working capital                   |  | $ | 66,377   |  
|Property & 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 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 supercedes 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 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. The Company is evaluating the requirements of SFAS 123R and has not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts
that are similar to the current pro forma disclosures under SFAS 123.



Reclassifications



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



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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. Certain of these vested options remain outstanding at June 26, 2005.



As permitted by SFAS No. 123, Accounting for Stock-based Compensation (FAS 123), Predecessor-A chose to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Accordingly, compensation cost for stock options was
measured as the excess, if any, of the quoted market price of 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 FAS 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 March 22, 2004 through June 20, 2004
|Net income as reported                                                                                           |  | $                                                   | 7,981
|Deduct: total stock-based compensation expense determined under the fair value method net of related tax effects |  |                                                     | 148  
|                                                                                                                 |  |                                                     |      
|Pro forma net income                                                                                             |  | $                                                   | 7,833
|                                                                                                                 |  |                                                     |      



|                                                                                                                 |  |                                                        |      
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | -----
|                                                                                                                 |  | Predecessor-A                                         
|                                                                                                                 |  | For the Period December 22, 2003 through June 20, 2004
|Net income as reported                                                                                           |  | $                                                      | 7,445
|Deduct: total stock-based compensation expense determined under the fair value method net of related tax effects |  |                                                        | 299  
|                                                                                                                 |  |                                                        |      
|Pro forma net income                                                                                             |  | $                                                      | 7,146
|                                                                                                                 |  |                                                        |      



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 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 %     



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



3. Other Comprehensive Income



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



|                                                  |  |                                                     |       |                                                     |   |       |  
|------------------------------------------------- |  | --------------------------------------------------- | ----- | --------------------------------------------------- | - | ----- | -
|                                                  |  | Predecessor-A                                       |       | Horizon Lines Holding Corp.                         |  
|                                                  |  | For the Period March 22, 2004
through June 20, 2004 |       | For the Period March 28, 2005 through June 26, 2005 |  
|Net income                                        |  | $                                                   | 7,981 |                                                     | $ | 3,486 |  
|Change in fair value of interest rate contract    |  |                                                     | 322   |                                                     |   |      |  
|Change in fair value of fixed price fuel contract |  |                                                     |      |                                                     |   | (70   | )
|                                                  |  |                                                     |       |                                                     |   |       |  
|Comprehensive income                              |  | $                                                   | 8,303 |                                                     | $ | 3,416 |  
|                                                  |  |                                                     |       |                                                     |   |       |  



|                                                  |  |                                                        |       |                                                        |   |       |  
|------------------------------------------------- |  | ------------------------------------------------------ | ----- | ------------------------------------------------------ | - | ----- | -
|                                                  |  | Predecessor-A                                          |       | Horizon Lines Holding Corp.                            |  
|                                                  |  | For the Period December 22, 2003
through June 20, 2004 |       | For the Period December 27, 2004 through June 26, 2005 |  
|Net income                                        |  | $                                                      | 7,445 |                                                        | $ | 3,839 |  
|Change in fair value of interest rate contract    |  |                                                        | 286   |                                                        |   |      |  
|Change in fair value of fixed price fuel contract |  |                                                        |      |                                                        |   | (129  | )
|                                                  |  |                                                        |       |                                                        |   |       |  
|Comprehensive income                              |  | $                                                      | 7,731 |                                                        | $ | 3,710 |  
|                                                  |  |                                                        |       |                                                        |   |       |  



4. Property and Equipment



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



|                                |  |                   |         |   |               |   |         |  
|------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                |  | December 26, 2004 |         |   | June 26, 2005 |  
|Vessels                         |  | $                 | 106,686 |   |               | $ | 107,598 |  
|Containers                      |  |                   | 25,366  |   |               |   | 24,993  |  
|Chassis                         |  |                   | 13,443  |   |               |   | 13,521  |  
|Cranes                          |  |                   | 13,284  |   |               |   | 13,661  |  
|Machinery and equipment         |  |                   | 11,569  |   |               |   | 12,803  |  
|Facilities and land improvement |  |                   | 4,250   |   |               |   | 4,311   |  
|Software                        |  |                   | 29,099  |   |               |   | 29,533  |  
|Other                           |  |                   | 1,613   |   |               |   | 1,121   |  
|                                |  |                   |         |   |               |   |         |  
|Total property and equipment    |  |                   | 205,310 |   |               |   | 207,541 |  
|Accumulated depreciation        |  |                   | (15,187 | ) |               |   | (30,522 | )
|                                |  |                   |         |   |               |   |         |  
|Property and equipment, net     |  | $                 | 190,123 |   |               | $ | 177,019 |  
|                                |  |                   |         |   |               |   |         |  



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HORIZON LINES HOLDING CORP.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



5. Intangible Assets



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



|                                      |  |                   |         |   |               |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                      |  | December 26, 2004 |         |   | June 26, 2005 |  
|Customer contracts                    |  | $                 | 137,675 |   |               | $ | 137,675 |  
|Trademarks                            |  |                   | 63,800  |   |               |   | 63,800  |  
|Deferred financing costs              |  |                   | 20,077  |   |               |   | 20,277  |  
|                                      |  |                   |         |   |               |   |         |  
|Total intangibles with definite lives |  |                   | 221,552 |   |               |   | 221,752 |  
|Less: accumulated amortization        |  |                   | (10,676 | ) |               |   | (21,874 | )
|                                      |  |                   |         |   |               |   |         |  
|Net intangibles with definite lives   |  |                   | 210,876 |   |               |   | 199,878 |  
|Goodwill                              |  |                   | 306,680 |   |               |   | 306,680 |  
|                                      |  |                   |         |   |               |   |         |  
|Intangible assets, net                |  | $                 | 517,556 |   |               | $ | 506,558 |  
|                                      |  |                   |         |   |               |   |         |  



6. 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 June 26, 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 period over which the estimated accrual will be paid out cannot be estimated at this
time.



Legal Proceedings



There are two actions currently pending before the Surface Transportation
Board (the STB) involving Horizon Lines, LLC. The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against Horizon Lines, LLC and Matson Navigation Co., seeks a ruling from the STB that Horizon
Lines, LLCs Guam shipping rates during 1996-1998 were unreasonable under the ICC Termination Act of 1995 (the ICCTA), and an order awarding reparations to Guam and its citizens. The STB has asked the parties to brief the threshold
issue of what methodology should be applied in determining rate reasonableness under the ICCTA. This issue was fully briefed in June 2002, and the parties are awaiting a ruling. An adverse ruling could result in significant damages and could affect
Horizon Lines, LLCs current and future rate structure for its Guam shipping. An adverse decision could also affect the rates that Horizon Lines, LLC would be permitted to charge on its other routes. The likelihood of an unfavorable outcome is
reasonably possible. However, a range of potential damages cannot be determined at this stage in the action against Horizon Lines, LLC.



On June 8, 2005, upon the motion of Horizon Lines, 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. Horizon Lines has filed a
response thereto asserting that the Government of Guams response is not sufficient to show cause. No assurance can be given that the final decision with respect to this matter will be favorable to us.



The second action currently pending before the STB involving Horizon Lines,
LLC, brought by DHX, Inc. in 1999 against Horizon Lines, LLC and Matson Navigation Co., challenges the reasonableness of certain rates and practices of Horizon Lines, LLC and Matson. DHX is a major freight forwarder in the domestic Hawaii trade. DHX
is seeking $11.0 million in damages. In addition to the award of damages, an adverse ruling could affect Horizon Lines, LLCs current and future rate structure for its Hawaii shipping. An adverse STB decision could also affect the rates that
Horizon Lines would be permitted to charge on its other routes.



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HORIZON LINES HOLDING CORP.





On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in
DHXs complaint; (ii) found that Horizon Lines, LLC 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.
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 June 26, 2005, amounts outstanding on
these letters of credit totaled $6.7 million.



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



The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements 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 debt; 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.



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HORIZON LINES HOLDING CORP.





Executive Overview



|                           |  |                             |        |   |                             |   |        |                                |  |   |                                |   |  |   |         |  
|-------------------------- |  | --------------------------- | ------ | - | --------------------------- | - | ------ | ------------------------------ |  | - | ------------------------------ | - |  | - | ------- | -
|                           |  | Quarter Ended June 20, 2004 |        |   | Quarter Ended June 26, 2005 |   |        | Six Months Ended June 20, 2004 |  |   | Six Months Ended June 26, 2005 |  
|                           |  | ($ in Millions)             |       
|Operating revenue          |  | $                           | 235.9  |   |                             | $ | 270.5  |                                |  | $ | 455.9                          |   |  | $ | 528.1   |  
|Operating expense          |  |                             | 219.5  |   |                             |   | 254.6  |                                |  |   | 436.8                          |   |  |   | 501.9   |  
|                           |  |                             |        |   |                             |   |        |                                |  |   |                                |   |  |   |         |  
|Operating income           |  | $                           | 16.4   |   |                             | $ | 16.0   |                                |  | $ | 19.0                           |   |  | $ | 26.2    |  
|                           |  |                             |        |   |                             |   |        |                                |  |   |                                |   |  |   |         |  
|Operating ratio            |  |                             | 93.1   | % |                             |   | 94.1   | %                              |  |   | 95.8                           | % |  |   | 95.0    | %
|Revenue containers (units) |  |                             | 76,288 |   |                             |   | 78,606 |                                |  |   | 147,202                        |   |  |   | 153,024 |  



Operating revenue
increased by $34.7 million or 14.7% from the quarter ended June 20, 2004 to the quarter ended June 26, 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 $35.1 million or 16.0% from the quarter ended
June 20, 2004 to the quarter ended June 26, 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 deprecation and amortization due to the purchase price accounting step-up in basis of customer
contracts and trademarks related to the consummation of the acquisition transaction on July 7, 2004, in addition to higher selling, general, and administrative costs.



Operating income decreased by $0.4 million or 2.4% from the quarter ended June 20, 2004 to the quarter ended June 26, 2005.
This decrease in operating income is primarily due to the increased operating expenses during the quarter ended June 26, 2005 specifically driven by the growth in total revenue containers shipped, higher fuel costs, and additional amortization of
intangible assets. These increased operating expenses are partially offset by increased operating revenue during the same period.



Operating revenue increased by $72.3 million or 14.5% from the six months ended June 20, 2004 to the six months ended June 26, 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 $65.1 million or 14.9% from the six months ended June 20, 2004 to the six months ended June 26, 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 include 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 of the acquisition transaction on July 7, 2004, in addition to higher selling, general, and
administrative costs.



Operating income increased by $7.2
million or 37.9% from the six months ended June 20, 2004 to the six months ended June 26, 2005. This improvement in operating income is primarily due to the substantial increase in operating revenue during the six months ended June 26, 2005
partially offset by expenses associated with the growth in total revenue containers shipped, higher fuel costs, and additional depreciation and amortization during the same period.



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HORIZON LINES HOLDING CORP.





General



We are the nations leading Jones Act container shipping and 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 22,200 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 serving each of the Alaska, Puerto Rico, and Hawaii and Guam markets, we are uniquely positioned to serve our customers that require shipping and logistics services in multiple 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, 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 and CSX Lines of Puerto Rico, Inc. is now known as Horizon Lines of Puerto Rico, Inc.



On July 7, 2004, H-Lines Subcorp., a wholly-owned subsidiary of Horizon Lines, Inc., 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 Horizon Lines, Inc. 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 due 2012 (senior notes).



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



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 June 26, 2005, and the related consolidated statement of operations for the periods from March 22, 2004 through June 20, 2004,
from March 28, 2005 through June 26, 2005, December 27, 2004 through June 26, 2005, from December 22, 2003 through June 20, 2004 and the related statement of cash flows for the period from December 22, 2003 through June 20, 2004 and from
December 27, 2004 through June 26, 2005. All significant intercompany accounts and transactions have been eliminated.



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The financial statements for periods subsequent to February 26, 2003 but prior to July 7, 2004 have
been prepared using the 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 Horizon Lines, Inc. 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.



Fiscal Year



We have a 52 or 53-week (every 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.



Revenue Recognition



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



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



Allowance for Doubtful Accounts



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



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HORIZON LINES HOLDING CORP.





$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 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 as the STB in this quarterly report. 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.



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.



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HORIZON LINES HOLDING CORP.





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. 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 June 26, 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 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 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 interim or annual
period 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. We are required to adopt SFAS 123R in the first quarter of
fiscal 2006. Under SFAS 123R, we 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. We are evaluating the requirements of SFAS 123R and have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption
will result in amounts that are similar to the current pro forma disclosures under SFAS 123.



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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. At times, there is a timing disparity between fuel surcharges and fuel costs that may result in insufficient surcharges during sharp fuel price hikes and excess surcharges when
fuel prices level off or decline.



Over 90% of our revenues are
generated from our shipping and logistics services in markets where the marine trade is subject to the Jones Act or other U.S. maritime laws. The balance of our revenue is derived from 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 Expenses 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. Our land costs consist primarily of maintenance, yard and gate operations, warehousing operations and terminal overhead in the terminals in which we operate. We view our fuel costs
as substantially fixed with respect to unit consumption but subject to potential fluctuation as a result of changes in unit prices in the fuel market. Rolling stock rent consists primarily of rent for street tractors, yard equipment, chassis,
gensets and various dry and refrigerated containers.



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Quarter Ended June 26, 2005 Compared with Quarter Ended June 20, 2004



|                                    |  |                          |        |   |                          |   |        |          |  |        |   
|----------------------------------- |  | ------------------------ | ------ | - | ------------------------ | - | ------ | -------- |  | ------ | --
|                                    |  | QuarterEndedJune 20,2004 |        |   | QuarterEndedJune 26,2005 |   |        | % Change | 
|                                    |  | ($ in millions)          |        |   |                          |  
|Operating revenue                   |  | $                        | 235.9  |   |                          | $ | 270.5  |          |  | 14.7   | % 
|Operating expense:                  |  |                          |        |   |                          |   |        |          |  |        |   
|Vessel                              |  |                          | 58.5   |   |                          |   | 77.2   |          |  | 32.0   | % 
|Marine                              |  |                          | 45.9   |   |                          |   | 48.9   |          |  | 6.4    | % 
|Inland                              |  |                          | 40.1   |   |                          |   | 46.2   |          |  | 15.2   | % 
|Land                                |  |                          | 31.4   |   |                          |   | 33.3   |          |  | 6.2    | % 
|Rolling stock rent                  |  |                          | 10.6   |   |                          |   | 10.7   |          |  | 1.0    | % 
|                                    |  |                          |        |   |                          |   |        |          |  |        |   
|Operating expense                   |  |                          | 186.5  |   |                          |   | 216.3  |          |  | 16.0   | % 
|Selling, general and administrative |  |                          | 19.1   |   |                          |   | 21.1   |          |  | 10.5   | % 
|Depreciation and amortization       |  |                          | 9.2    |   |                          |   | 12.6   |          |  | 36.2   | % 
|Amortization of vessel drydocking   |  |                          | 4.1    |   |                          |   | 4.8    |          |  | 16.6   | % 
|Miscellaneous expense, net          |  |                          | 0.7    |   |                          |   | (0.1   | )        |  | (114.1 | %)
|                                    |  |                          |        |   |                          |   |        |          |  |        |   
|Total operating expenses            |  |                          | 219.5  |   |                          |   | 254.6  |          |  | 16.0   | % 
|                                    |  |                          |        |   |                          |   |        |          |  |        |   
|Operating income                    |  | $                        | 16.4   |   |                          | $ | 16.0   |          |  | (2.4   | %)
|                                    |  |                          |        |   |                          |   |        |          |  |        |   
|Operating ratio                     |  |                          | 93.1   | % |                          |   | 94.1   | %        |  | 1.0    | % 
|Revenue containers (units)          |  |                          | 76,288 |   |                          |   | 78,606 |          |  | 3.0    | % 



Operating Revenue.Operating revenue increased to $270.5 million for the quarter ended June 26, 2005 compared to $235.9 million for the quarter ended June 20, 2004, an increase of $34.7 million, or 14.7%. This revenue increase can be attributed to the following
factors ($ in millions):



|                                                                                                                                                               |  |   |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ----
|Revenue container volume growth                                                                                                                                |  | $ | 6.6 
|Intermodal surcharges, more favorable cargo mix, and general rate increases                                                                                    |  |   | 12.1
|Bunker fuel surcharges included in rates to offset rising fuel cost                                                                                            |  |   | 6.4 
|New management contract awarded in the fourth quarter of our fiscal year ended December 26, 2004 to manage seven oceanographic vessels
for the U.S. Government |  |   | 5.8 
|Growth in other non-transportation services                                                                                                                    |  |   | 3.8 
|                                                                                                                                                               |  |   |     
|                                                                                                                                                               |  | $ | 34.7
|                                                                                                                                                               |  |   |     



The increased revenue
due to revenue container volume growth for the quarter ended June 26, 2005 compared to the quarter ended June 20, 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 quarter ended June 26, 2005 and approximately 5% of total revenue in the quarter ended June 20, 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.



Operating Expense.Operating expense increased to $216.3 million for the quarter ended June 26, 2005 compared to $186.5 million for the quarter
ended June 20, 2004, an increase of $29.8 million or 16.0%. 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 incurred costs associated
with the growth in our non-transportation and other revenue. Vessel expense, which is not primarily driven by revenue container volume, increased to $77.2 million for the quarter ended June 26, 2005 from $58.5 million for the quarter ended June 20,
2004, an



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increase of $18.7 million or 32.0%. Approximately $5.3 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. Approximately $10.0 million of the remaining increase in vessel expenses is attributable to additional bunker
fuel expenses. Vessel fuel cost quarter over quarter increased by 49.8% driven by a significant rise in fuel prices for the quarter ended June 26, 2005 compared to the quarter ended June 20, 2004. The remaining increase in vessel expenses is
primarily attributable to higher labor costs as a result of contractual labor increases and additional overtime hours.



Marine expense increased to $48.9 million for the quarter ended June 26, 2005 from $45.9 million for the quarter ended June 20, 2004, an increase of $3.0
million or 6.4%. This increase in marine expenses can be attributed to a 3.0% increase in total revenue container volume quarter over quarter in addition to contractual labor increases.



Inland cost increased to $46.2 million for the quarter ended June 26, 2005 from $40.1 million for the quarter ended June 20,
2004, an increase of $6.1 million or 15.2%, 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 quarter over
quarter. Other factors contributing to the increase in inland expense quarter over quarter were increases in linehaul truck and rail moves and increases in rail rates.



Land expense increased to $33.3 million for the quarter ended June 26, 2005 from $31.4 million for the quarter ended June
20, 2004, an increase of $1.9 million or 6.2%. The primary drivers of this quarter over quarter increase in land expense include a 3.0% increase in total revenue container volumes, increased maintenance expenses resulting from increased refrigerated
containers being moved, and contractual labor increases.



The
purchase of one vessel in our fleet that was previously operated by us under an operating lease, namely the Horizon Trader in October 2004, led to a decrease in vessel lease expense of $0.7 million for the quarter ended June 26, 2005 compared to the
quarter ended June 20, 2004. The decrease in vessel lease expense was partially offset by the resulting increase in depreciation and amortization.



|                                      |  |                          |     |                          |   |          |  |       |   
|------------------------------------- |  | ------------------------ | --- | ------------------------ | - | -------- |  | ----- | --
|                                      |  | QuarterEndedJune 20,2004 |     | QuarterEndedJune 26,2005 |   | % Change | 
|                                      |  | ($ in millions)          |     |                          |  
|Depreciation and amortization:        |  |                          |     |                          |   |          |  |       |   
|Depreciationowned vessels            |  | $                        | 1.8 |                          | $ | 2.1      |  | 15.6  | % 
|Depreciation and amortization  other |  |                          | 6.7 |                          |   | 5.5      |  | (17.0 | )%
|Amortization of intangible assets     |  |                          | 0.7 |                          |   | 4.9      |  | 585.8 | % 
|                                      |  |                          |     |                          |   |          |  |       |   
|Total depreciation and amortization   |  | $                        | 9.2 |                          | $ | 12.6     |  | 36.2  | % 
|                                      |  |                          |     |                          |   |          |  |       |   
|Amortization of vessel drydocking     |  | $                        | 4.1 |                          | $ | 4.8      |  | 16.6  | % 
|                                      |  |                          |     |                          |   |          |  |       |   



Depreciation and
Amortization. Depreciation and amortization costs increased to $12.6 million for the quarter ended June 26, 2005 from $9.2 million for the quarter ended June 20, 2004, an increase of $3.3 million or 36.2%. The increase in depreciation and
amortization is primarily due to the purchase price accounting step-up in basis of customer contracts and trademarks related to the consummation of the acquisition transaction on July 7, 2004. Amortization costs related to customer contracts and
trademarks increased by $4.2 million from the quarter ended June 20, 2004 to the quarter ended June 26, 2005. The depreciation of other assets decreased by $1.2 million during this same period primarily as a result of higher depreciation of
leasehold improvements on leased



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vessels in the quarter ended June 20, 2004. This decrease in depreciation of other assets is partially offset by an increase in depreciation of owned vessels
of $0.3 million from the quarter ended June 20, 2004 to the quarter ended June 26, 2005.



Amortization of Vessel Drydocking. Amortization of vessel drydocking increased to $4.8 million for the quarter ended June 26, 2005 from $4.1 million for the quarter ended June 20, 2004, an increase of $0.7
million or 16.6%. This increase is attributed to higher costs incurred on various recent vessel drydockings.



Selling, General and Administrative. Selling, general and administrative costs increased to $21.1 million for the quarter ended June 26, 2005
compared to $19.1 million for the quarter ended June 20, 2004, an increase of $2.0 million or 10.5%. Approximately $0.7 million of the quarter to quarter 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 $1.3 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, management fees paid to Castle Harlan, Inc. and general inflationary costs increases.



Miscellaneous Expense (Income), Net. Miscellaneous expense (income) decreased to $(0.1) million for the quarter ended June 26, 2005 compared to
$0.7 million for the quarter ended June 20, 2004, a decrease of $0.8 million or 114.1%. This reduction is primarily a result of lower bad debt expense recorded for the quarter ended June 26, 2005.



Interest Expense, Net. Interest expense increased to $10.1 million for
the quarter ended June 26, 2005 compared to $2.3 million for the quarter ended June 20, 2004, an increase of $7.8 million or 346.4%. This increase is due to significantly higher levels of debt outstanding during the quarter ended June 26, 2005, as a
result of the acquisition transaction on July 7, 2004.



Interest Expense  Preferred Units of Subsidiary. Interest expensepreferred units of subsidiary decreased to $0.0 million for the quarter ended June 26, 2005 compared to $1.2 million for the quarter ended June 20, 2004, a
decrease of $1.2 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 holders of the preferred units were redeemed in conjunction with
the closing of the acquisition transaction on July 7, 2004.



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Six Months Ended June 26, 2005 Compared with Six Months Ended June 20, 2004



|                                    |  |                             |         |   |                             |   |         |          |  |       |   
|----------------------------------- |  | --------------------------- | ------- | - | --------------------------- | - | ------- | -------- |  | ----- | --
|                                    |  | Six MonthsEndedJune 20,2004 |         |   | Six MonthsEndedJune 26,2005 |   |         | % Change | 
|                                    |  | ($ in millions)             |         |   |                             |  
|Operating revenue                   |  | $                           | 455.8   |   |                             | $ | 528.1   |          |  | 15.9  | % 
|Operating expense:                  |  |                             |         |   |                             |   |         |          |  |       |   
|Vessel                              |  |                             | 118.5   |   |                             |   | 144.4   |          |  | 21.9  | % 
|Marine                              |  |                             | 90.3    |   |                             |   | 97.3    |          |  | 7.7   | % 
|Inland                              |  |                             | 77.6    |   |                             |   | 90.4    |          |  | 16.5  | % 
|Land                                |  |                             | 61.7    |   |                             |   | 68.9    |          |  | 11.7  | % 
|Rolling stock rent                  |  |                             | 20.8    |   |                             |   | 21.4    |          |  | 2.9   | % 
|                                    |  |                             |         |   |                             |   |         |          |  |       |   
|Operating expense                   |  |                             | 368.9   |   |                             |   | 422.5   |          |  | 14.5  | % 
|Selling, general and administrative |  |                             | 38.0    |   |                             |   | 44.2    |          |  | 16.2  | % 
|Depreciation and amortization       |  |                             | 19.8    |   |                             |   | 25.4    |          |  | 28.6  | % 
|Amortization of vessel drydocking   |  |                             | 8.2     |   |                             |   | 8.5     |          |  | 4.0   | % 
|Miscellaneous expense, net          |  |                             | 1.9     |   |                             |   | 1.2     |          |  | (34.8 | %)
|                                    |  |                             |         |   |                             |   |         |          |  |       |   
|Total operating expenses            |  |                             | 436.8   |   |                             |   | 501.9   |          |  | 14.9  | % 
|                                    |  |                             |         |   |                             |   |         |          |  |       |   
|Operating income                    |  | $                           | 19.0    |   |                             | $ | 26.2    |          |  | 37.9  | % 
|                                    |  |                             |         |   |                             |   |         |          |  |       |   
|Operating ratio                     |  |                             | 95.8    | % |                             |   | 95.0    | %        |  | (0.8  | %)
|Revenue containers (units)          |  |                             | 147,202 |   |                             |   | 153,024 |          |  | 4.0   | % 



Operating Revenue.Operating revenue increased to $528.1 million for the six months ended June 26, 2005 compared to $455.8 million for the six months ended June 20, 2004, an increase of $72.3 million, or 15.9%. This revenue increase can be attributed to the
following factors ($ in millions):



|                                                                                                                                                               |  |   |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ----
|Revenue container volume growth                                                                                                                                |  | $ | 16.5
|Intermodal surcharges, more favorable cargo mix, and general rate increases                                                                                    |  |   | 23.9
|Bunker fuel surcharges included in rates to offset rising fuel cost                                                                                            |  |   | 11.6
|New management contract awarded in the fourth quarter of our fiscal year ended December 26, 2004 to manage seven oceanographic vessels
for the U.S. Government |  |   | 11.2
|Growth in other non-transportation services                                                                                                                    |  |   | 9.1 
|                                                                                                                                                               |  |   |     
|                                                                                                                                                               |  | $ | 72.3
|                                                                                                                                                               |  |   |     



The increased revenue
due to revenue container volume growth for the six months ended June 26, 2005 compared to the six months ended June 20, 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 six months ended June 26, 2005 and approximately 5% of total revenue in the six months ended June 20, 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.



Operating Expense.Operating expense increased to $422.5 million for the six months ended June 26, 2005 compared to $368.9 million for the six
months ended June 20, 2004, an increase of $53.6 million or 14.5%. 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 incurred costs
associated with the growth in our non-transportation and other revenue. Vessel expense, which is not primarily driven by revenue container volume, increased to $144.4 million for the six months ended June 26, 2005 from $118.5 million for the six
months ended June 20,



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2004, an increase of $25.9 million or 21.9%. Approximately $10.2 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. Approximately $12.1 million of the remaining increase in vessel expenses is attributable to additional
bunker fuel expenses. Vessel fuel cost period over period increased by 30.1% driven by a significant rise in fuel prices for the six months ended June 26, 2005 compared to the six months ended June 20, 2004. The remaining increase in vessel
expenses is primarily attributable to higher labor costs as a result of contractual labor increases and additional overtime hours.



Marine expense increased to $97.3 million for the six months ended June 26, 2005 from $90.3 million for the six months ended June 20, 2004, an increase of
$7.0 million or 7.7%. This increase in marine expenses can be attributed to a 4.0% increase in total revenue container volume period over period in addition to contractual labor increases.



Inland cost increased to $90.4 million for the six months ended June 26, 2005
from $77.6 million for the six months ended June 20, 2004, an increase of $12.8 million or 16.5%, 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 rates.



Land expense increased to $68.9 million for the six months ended June 26,
2005 from $61.7 million for the six months ended June 20, 2004, an increase of $7.2 million or 11.7%. In tandem with the 4.0% increase in total revenue container volume, period over period, the significant determinants of land expense increased from
the six months ended June 20, 2004 to the six months ended June 26, 2005, as follows:



|                          |  |                             |  |                             |  |          |  
|------------------------- |  | --------------------------- |  | --------------------------- |  | -------- | -
|                          |  | Six MonthsEndedJune 20,2004 |  | Six MonthsEndedJune 26,2005 |  | % Change |  
|Container lifts           |  | 526,609                     |  | 540,274                     |  | 2.6      | %
|Container grounding moves |  | 355,184                     |  | 462,673                     |  | 30.3     | %
|Terminal labor hours      |  | 246,779                     |  | 249,901                     |  | 1.3      | %



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The purchase of two vessels in our fleet that were previously operated by us under operating leases,
namely the Horizon Navigator in April 2004 and the Horizon Trader in October 2004, led to a decrease in vessel lease expense of $1.9 million for the six months ended June 26, 2005 compared to the six months ended June 20, 2004. The decrease in
vessel lease expense was partially offset by the resulting increase in depreciation and amortization.



|                                      |  |                             |      |                             |   |          |  |       |   
|------------------------------------- |  | --------------------------- | ---- | --------------------------- | - | -------- |  | ----- | --
|                                      |  | Six MonthsEndedJune 20,2004 |      | Six MonthsEndedJune 26,2005 |   | % Change | 
|                                      |  | ($ in millions)             |      |                             |  
|Depreciation and amortization:        |  |                             |      |                             |   |          |  |       |   
|Depreciation  owned vessels          |  | $                           | 3.4  |                             | $ | 4.4      |  | 28.6  | % 
|Depreciation and amortization  other |  |                             | 14.9 |                             |   | 11.3     |  | (24.6 | %)
|Amortization of intangible assets     |  |                             | 1.4  |                             |   | 9.8      |  | 585.4 | % 
|                                      |  |                             |      |                             |   |          |  |       |   
|Total depreciation and amortization   |  | $                           | 19.8 |                             | $ | 25.4     |  | 28.6  | % 
|                                      |  |                             |      |                             |   |          |  |       |   
|Amortization of vessel drydocking     |  | $                           | 8.2  |                             | $ | 8.5      |  | 4.0   | % 
|                                      |  |                             |      |                             |   |          |  |       |   



Depreciation and
Amortization. Depreciation and amortization costs increased to $25.4 million for the six months ended June 26, 2005 from $19.8 million for the six months ended June 20, 2004, an increase of $5.6 million or 28.6%. 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 of the acquisition transaction on July 7, 2004. Amortization costs related to customer contracts and
trademarks increased by $8.4 million from the six months ended June 20, 2004 to the six months ended June 26, 2005. The depreciation of other assets decreased by $3.6 million during this same period as a result of higher depreciation of leasehold
improvements on leased vessels in the six months ended June 20, 2004. Three vessels under operating lease, the Horizon Fairbanks, Horizon Trader, and Horizon Navigator, were purchased during 2004. This change has primarily contributed to the lower
depreciation of leasehold improvements and higher depreciation of owned vessels in the six months ended June 26, 2005.



Amortization of Vessel Drydocking. Amortization of vessel drydocking increased to $8.5 million for the six months ended June 26, 2005 from $8.2
million for the six months ended June 20, 2004, an increase of $0.3 million or 4.0%. This increase is attributed to higher costs incurred on various recent vessel drydockings.



Selling, General and Administrative. Selling, general and administrative costs increased to $44.2 million for the six
months ended June 26, 2005 compared to $38.0 million for the six months ended June 20, 2004, an increase of $6.2 million or 16.2%. Approximately $3.3 million of the period to 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 $2.9 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, management fees paid to the Castle Harlan Group and general inflationary costs increases.



Miscellaneous Expense (Income), Net. Miscellaneous expense decreased to $1.2 million for the six months ended June 26, 2005 compared to $1.9
million for the six months ended June 20, 2004, a decrease of $0.7 million or 34.8%. Miscellaneous expense primarily consists of bad debt expense.



Interest Expense, Net. Interest expense increased to $19.8 million for the six months ended June 26, 2005 compared to $4.6 million for the six
months ended June 20, 2004, an increase of $15.1 million or 329.0%. This increase is due to significantly higher levels of debt outstanding during the six months ended June 26, 2005, as a result of the acquisition transaction on July 7, 2004.



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Interest Expense  Preferred Units of Subsidiary. Interest expensepreferred units
of subsidiary decreased to $0.0 million for the six months ended June 26, 2005 compared to $2.4 million for the six months ended June 20, 2004, a decrease of $2.4 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 holders of the preferred units were redeemed in conjunction with the closing of the acquisition transaction on July 7, 2004.



Income Tax Expense.Income tax expense for the six months ended June
26, 2005 totaled $2.6 million compared to $4.6 million for the six months ended June 20, 2004, which represent effective annual tax rates of 40.6% and 38.0%, respectively. The difference between the federal statutory rate and the effective annual
tax rate is primarily due to state income taxes and permanent differences. The increase in the effective rate from June 20, 2004 to July 26, 2005 is due to an increase in permanent differences.



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 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 $60.5 million at June 26, 2005. As of June 26, 2005, $18.3 million was undrawn under the
existing $25.0 million revolving credit facility, after taking into account $6.7 million utilized for outstanding letters of credit.



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Operating Activities



|                                                                                  |  |                             |         |   |                             |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------- | - | ------- | -
|                                                                                  |  | Six MonthsEndedJune 20,2004 |         |   | Six MonthsEndedJune 26,2005 |  
|Cash flows provided by operating activities                                       |  |                             |         |   |                             |   |         |  
|Net income                                                                        |  | $                           | 7,445   |   |                             | $ | 3,839   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |                             |   |         |  
|Depreciation                                                                      |  |                             | 18,358  |   |                             |   | 15,660  |  
|Amortization of other intangible assets                                           |  |                             | 1,427   |   |                             |   | 9,781   |  
|Amortization of vessel drydocking                                                 |  |                             | 8,211   |   |                             |   | 8,544   |  
|Amortization of deferred financing costs                                          |  |                             | 505     |   |                             |   | 1,172   |  
|Deferred income taxes                                                             |  |                             |        |   |                             |   | (1,127  | )
|Accretion of preferred units of subsidiary                                        |  |                             | 2,387   |   |                             |   |        |  
|                                                                                  |  |                             |         |   |                             |   |         |  
|Subtotal                                                                          |  |                             | 30,888  |   |                             |   | 34,030  |  
|                                                                                  |  |                             |         |   |                             |   |         |  
|Earnings adjusted for non-cash charges                                            |  |                             | 38,333  |   |                             |   | 37,869  |  
|                                                                                  |  |                             |         |   |                             |   |         |  
|Changes in operating assets and liabilities:                                      |  |                             |         |   |                             |   |         |  
|Accounts receivable                                                               |  |                             | (5,929  | ) |                             |   | (16,980 | )
|Materials and supplies                                                            |  |                             | (1,497  | ) |                             |   | (1,624  | )
|Other current assets                                                              |  |                             | (1,796  | ) |                             |   | 1,540   |  
|Accounts payable                                                                  |  |                             | 1,982   |   |                             |   | (4,035  | )
|Accrued liabilities                                                               |  |                             | (13,852 | ) |                             |   | 3,423   |  
|Other assets / liabilities                                                        |  |                             | 3,468   |   |                             |   | (2,114  | )
|                                                                                  |  |                             |         |   |                             |   |         |  
|Subtotal                                                                          |  |                             | (17,624 | ) |                             |   | (19,790 | )
|                                                                                  |  |                             |         |   |                             |   |         |  
|Loss (gain) on equipment disposals                                                |  |                             | 61      |   |                             |   | (114    | )
|Vessel drydocking payments                                                        |  |                             | (9,879  | ) |                             |   | (9,991  | )
|                                                                                  |  |                             |         |   |                             |   |         |  
|Net cash provided by operating activities                                         |  | $                           | 10,891  |   |                             | $ | 7,974   |  
|                                                                                  |  |                             |         |   |                             |   |         |  



Operating Activities



Net cash provided by operating activities decreased by
$2.9 million to $8.0 million for the six months ended June 26, 2005 compared to $10.9 million of net cash provided by operating activities for the six months ended June 20, 2004. This decrease is primarily driven by improved profitability before
non-cash charges which is more than offset by a negative 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 $37.9 million for the six months ended June 26, 2005 compared to $38.3 million for the six months ended June 20, 2004, accounting for a decrease of $0.5 million in cash flows from operating activities. Changes in working capital resulted in a use
of cash of $19.8 million for the six months ended June 26, 2005 compared to a use of cash of $17.6 million for the six months ended June 20, 2004. The first six months of each fiscal year typically has a higher use of working capital compared to the
second six months of the fiscal year as a majority of our annual vessel lease payments and our annual management bonuses are made in January. Additionally, our accounts receivable have grown by $17.0 million for the six months ended June 26, 2005
primarily as a result of revenue growth.



Investing Activities



Net cash used in investing activities decreased by $14.7
million to $1.8 million for the six months ended June 26, 2005 compared to $16.5 million for the six months ended June 20, 2004. This decrease is primarily attributable to the purchase of the Horizon Fairbanks and Horizon Navigator for $11.9 million
and investments in various terminal assets during the six months ended June 20, 2004.



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HORIZON LINES HOLDING CORP.





Financing Activities



Net cash used for financing activities during the six months ended June 26, 2005 was $2.0 million compared to $0.1 million for the six months ended
June 20, 2004. The net cash used for financing activities during the six months ended June 26, 2005 primarily includes $1.3 million of principal payments on long-term debt.



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 $15.0
million. In addition, expenditures for vessel drydocking payments are estimated at $20.0 million.



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



Five of our vessels are leased,
or chartered. The charter periods for two of our vessels, the Horizon Pacific and Horizon Enterprise, are due to expire in July, 2007. The charter periods for three of our vessels, the Horizon Anchorage, Horizon Tacoma and Horizon Kodiak, 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 2003 and 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.



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HORIZON LINES HOLDING CORP.





Contractual Obligations



Contractual obligations as of June 26, 2005(1)are as follows ($ in thousands):



|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|----------------------------- |  | ---------------- | --------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------ |  | - | ------ |  | - | -------
|                              |  | TotalObligations |           | 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009   |  | After 2009
|Principal obligations:        |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Senior credit facility        |  | $                | 248,125   |      | $ | 1,250  |  | $    | 2,500  |      | $ | 2,500  |  | $          | 2,500  |  | $ | 2,500  |  | $ | 236,875
|9% senior notes               |  |                  | 250,000   |      |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   | 250,000
|Operating leases              |  |                  | 328,324   |      |   | 22,679 |  |      | 39,814 |      |   | 58,421 |  |            | 30,019 |  |   | 29,856 |  |   | 147,535
|Capital lease obligations     |  |                  | 644       |      |   | 97     |  |      | 193    |      |   | 193    |  |            | 161    |  |   |       |  |   |       
|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Subtotal                      |  |                  | 827,093   |      |   | 24,026 |  |      | 42,507 |      |   | 61,114 |  |            | 32,680 |  |   | 32,356 |  |   | 634,410
|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Interest obligations:         |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Senior credit facility        |  |                  | 87,646    |      |   | 7,601  |  |      | 15,619 |      |   | 15,641 |  |            | 15,624 |  |   | 15,604 |  |   | 17,557 
|9% senior notes               |  |                  | 168,750   |      |   | 11,250 |  |      | 22,500 |      |   | 22,500 |  |            | 22,500 |  |   | 22,500 |  |   | 67,500 
|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Subtotal                      |  |                  | 256,396   |      |   | 18,851 |  |      | 38,119 |      |   | 38,141 |  |            | 38,124 |  |   | 38,104 |  |   | 85,057 
|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Total principal and interest  |  | $                | 1,083,489 |      | $ | 42,877 |  | $    | 80,626 |      | $ | 99,255 |  | $          | 70,804 |  | $ | 70,460 |  | $ | 719,467
|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Other commercial commitments: |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Standby letters of credit     |  | $                | 6,745     |      | $ |       |  | $    |       |      | $ |       |  | $          |       |  | $ |       |  | $ | 6,745  
|Surety bonds                  |  |                  | 5,881     |      |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   | 5,881  
|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|                              |  | $                | 12,626    |      | $ |       |  | $    |       |      | $ |       |  | $          |       |  | $ |       |  | $ | 12,626 
|                              |  |                  |           |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        

---

|(1) | Included in Contractual obligations are scheduled interest payments. Interest payments on the senior credit facility are variable and are based as of June 26, 2005, upon the London
Inter-Bank Offering Rate (LIBOR) + 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, Horizon Lines Holding and
Horizon Lines entered into a senior credit facility, which was amended and restated as of April 7, 2005. The credit facility is comprised of a $248.1 million term loan facility due in 2011 and a $25.0 million revolving credit facility due in 2009,
which, upon the consummation of the initial public offering of Horizon Lines, Inc. and the redemption, using the proceeds therefrom, 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. 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



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HORIZON LINES HOLDING CORP.





the consummation of the initial public offering of Horizon Lines, Inc. and 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.



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, Horizon
Lines Holding and Horizon Lines 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 have 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 of 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. If Horizon Lines Holding and Horizon Lines fail to meet these targets (a 9%
senior notes default), the annual interest rate on the 9% senior notes will increase by 0.25% during the first 90-day period during which the 9% senior notes default continues, up to a maximum increase of 1.0% over the interest rate that would
otherwise apply to the 9% senior notes. As soon as Horizon Lines Holding cures the registration default, the interest rate applicable will revert to its original level. The registration statement referred to in this paragraph was filed by Horizon
Lines Holding, Horizon Lines and their respective subsidiaries and declared effective by the SEC in a timely manner. The exchange offer has commenced and is scheduled to expire on July 31, 2005.



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
June 26, 2005, Horizon Lines Holding and Horizon Lines have outstanding a $248.1 million term loan, which bears interest at variable rates. Each quarter point change in interest rates would result in a $0.6



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HORIZON LINES HOLDING CORP.





million change in interest expense on the term loan. Horizon Lines Holding and Horizon Lines also have a revolving credit facility which provides for
borrowings of up to $25.0 million, which, upon the consummation of the initial public offering of Horizon Lines, Inc. and the redemption, using the proceeds therefrom, of at least $40.0 million of the aggregate principal amount of the 9% senior
notes, will increase to $50.0 million, which would bear interest at variable rates. As of June 26, 2005, no amounts were outstanding under the revolving credit facility.



Working Capital



Working capital at June 26, 2005, was $84.9 million, compared to $65.6 million at December 26, 2004. This $19.3 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.



Credit Ratings



As of June 26, 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 Horizon Lines Holding and its subsidiary Horizon Lines 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 quarter and six months ended June 26, 2005 are as follows ($ in thousands):



|                                   |  |                                   |       
|---------------------------------- |  | --------------------------------- | ------
|                                   |  | For theQuarter EndedJune 26, 2005
|Pretax income                      |  | $                                 | 5,893 
|Fixed charges                      |  |                                   | 10,066
|Rentals                            |  |                                   | 6,321 
|                                   |  |                                   |       
|Total fixed charges                |  | $                                 | 16,387
|                                   |  |                                   |       
|Pretax earnings plus fixed charges |  | $                                 | 22,280
|Ratio of earnings to fixed charges |  |                                   | 1.36 X



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HORIZON LINES HOLDING CORP.





|                                   |  |                                      |       
|---------------------------------- |  | ------------------------------------ | ------
|                                   |  | For theSix Months EndedJune 26, 2005
|Pretax income                      |  | $                                    | 6,464 
|Fixed charges                      |  |                                      | 19,745
|Rentals                            |  |                                      | 12,561
|                                   |  |                                      |       
|Total fixed charges                |  | $                                    | 32,306
|                                   |  |                                      |       
|Pretax earnings plus fixed charges |  | $                                    | 38,770
|Ratio of earnings to fixed charges |  |                                      | 1.20 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 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 operations and financial position include changes in interest
rates and credit risks. As a result of the acquisition transaction, as of June 26, 2005, we have outstanding a $248.1 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 consummation of the initial public offering of Horizon Lines, Inc. and the
redemption, using the proceeds therefrom, of at least $40.0 million of the aggregate principal amount of the senior notes, will increase to $50.0 million. Borrowings under the revolving credit facility bear interest at variable rates. As of June 26,
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 June 26, 2005 and December 26, 2004, we had allowances for
doubtful accounts of $9.4 million and $7.9 million, respectively.



4.Controls and Procedures



Under the supervision and with the participation of 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 June 26, 2005, and, based on their evaluation, the principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant
changes in internal controls or in other factors that could significantly affect these controls during the quarter.



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 (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 management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



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PART II. OTHER INFORMATION



1.Legal Proceedings



There are two actions currently pending before the Surface Transportation Board, or STB, involving Horizon Lines, LLC, or Horizon Lines. The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens
against Horizon Lines and Matson Navigation Co., seeks a ruling from the STB that Horizon Lines Guam shipping rates, which are based on published tariff rates, during 1996-1998 were unreasonable under the 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 Horizon Lines during 1996-1998 were unreasonable, the STB will issue
an additional ruling to determine the persons entitled to damages and in what amounts. On June 8, 2005, upon the motion of Horizon Lines, 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. Horizon Lines has filed a
response thereto asserting that the Government of Guams response is not sufficient to show cause. 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. Horizon Lines is 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 Horizon Lines during 1996-1998 were reasonable under such standard. However, the business of Horizon Lines that provided marine container shipping to and from Guam during
1996-1998 was, at the time, part of a larger business. During 1996-1998, the Guam-related business of Horizon Lines was part of the business of Sea-Land Service, Inc., 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, Horizon Lines believes that the
actual rates of return that were earned by its business with respect to marine container shipments to and from Guam during 1996-1998 cannot be determined. Consequently, the absence of such actual rates of return would preclude the calculation of a
reasonable rate of return based on the standard proposed by the Government of Guam in the pending action. Even if each of these matters were determined adversely to Horizon Lines, we are unable at the present time to determine how many citizens of
Guam, on whose behalf the pending action has been brought by the Government of Guam, paid such rates during 1996-1998, or the amounts of their related claims, because the requisite discovery proceedings for that phase of the dispute have not yet
begun. Apart from potential damages, an adverse ruling by the STB could affect Horizon Lines current and future rate structure for its Guam shipping by requiring it to reduce its current base tariff rates and limit future rate increases to
amounts determined to be within the zone of reasonableness contained in the ICCTA, as determined in such ruling. An adverse STB decision could also affect the rates that Horizon Lines would be permitted to charge on its other routes
where rates must be reasonable under the ICCTA.



The second action currently pending before the STB involving Horizon Lines, brought by DHX, Inc. in 1999 against Horizon Lines and Matson, challenges the reasonableness of certain rates and practices of Horizon Lines and Matson. DHX is a
major freight forwarder in the domestic Hawaii trade. Freight forwarders typically accept less than full container loads of cargo, consolidate these loads into full container loads, and offer the full container load to the ocean carriers. Some
freight forwarders, including DHX, also solicit full container loads from shippers. Among other things, DHX charged that Horizon Lines and Matson took actions that were



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intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for the full container load business. DHX is seeking $11.0
million in damages. In addition to the award of damages, an adverse ruling could affect Horizon Lines current and future rate structure for its Hawaii shipping. An adverse STB decision could also affect the rates that Horizon Lines would be
permitted to charge on its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHXs complaint; (ii) found that Horizon Lines met all of its tariff filing
obligations; and (iii) reaffirmed the STBs earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which 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. 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



None



5.Other Information



None



6.Exhibits



|     |  |                                                                                                                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Second Assignment of and Third Amendment to Crane Relocation Agreement dated July 5, 2005 among SL Service, Inc. (formerly known as Sea-Land Service, Inc.), Horizon Lines, LLC, Matson
Navigation Company, Inc. and Port Authority of Guam.
|     | 
|10.2 |  | Port of Kodiak Preferential Use Agreement dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.                                                                                                       
|     | 
|10.3 |  | Terminal Operation Contract dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.                                                                                                                     
|     | 
|10.4 |  | Amendment #2 dated February 27, 2003 to Preferential Use Agreement dated October 2, 1990 between the City of Unalaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines
of Alaska, LLC).                                        
|     | 
|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.                                                                                          



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HORIZON LINES HOLDING CORP.





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: July 28, 2005



HORIZON LINES HOLDING CORP.By:

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




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EXHIBIT INDEX



|        |   |  |                                                                                                                                                                                                                                             
|------- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |  | Description                                                                                                                                                                                                                                 
|        |  
|10.1    | * |  | Second Assignment of and Third Amendment to Crane Relocation Agreement dated July 5, 2005 among SL Service, Inc. (formerly known as Sea-Land Service, Inc.), Horizon Lines, LLC, Matson
Navigation Company, Inc. and Port Authority of Guam.
|        |  
|10.2    | * |  | Port of Kodiak Preferential Use Agreement dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.                                                                                                       
|        |  
|10.3    | * |  | Terminal Operation Contract dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.                                                                                                                     
|        |  
|10.4    | * |  | Amendment #2 dated February 27, 2003 to Preferential Use Agreement dated October 2, 1990 between the City of Unalaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines
of Alaska, LLC).                                        
|        |  
|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 Amendment No. 3 to the Registration Statement on Form S-1 of Horizon Lines, Inc. (File No. 333-123073), filed on July 28, 2005.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------





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