##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



Form 10-Q



(Mark one)

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



For the quarterly period ended September 25, 2005



OR



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



For the transition period from
 to



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Commission File Number 333-123073



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HORIZON LINES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 74-3123672                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4064 Colony Road, Suite 200, Charlotte, North Carolina         |  | 28211                               
|(Address of principal executive offices)                       |  | (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 by check mark whether the Registrant is a shell company (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 November 2, 2005, 33,544,170 shares of common stock, par value $.01 per share, were outstanding.



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1



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##### Table of Contents



HORIZON LINES, INC.



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 |  | 16                                                            
|          |  |                                                                                         
|          |  | 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 34                                                            
|          |  |                                                                                         
|          |  | 4. Controls and Procedures                                                               |  | 34                                                            
|          |  |                                                                                         
|Part II.  |  | Other Information                                                                        |  | 34                                                            
|          |  |                                                                                         
|          |  | 1. Legal Proceedings                                                                     |  | 34                                                            
|          |  |                                                                                         
|          |  | 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 35                                                            
|          |  |                                                                                         
|          |  | 3. Defaults Upon Senior Securities                                                       |  | 35                                                            
|          |  |                                                                                         
|          |  | 4. Submission of Matters to a Vote of Security-Holders                                   |  | 36                                                            
|          |  |                                                                                         
|          |  | 5. Other Information                                                                     |  | 36                                                            
|          |  |                                                                                         
|          |  | 6. Exhibits                                                                              |  | 36                                                            
|          | 
|Signature |  | 37                                                                                      



2



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##### Table of Contents



PART I. FINANCIAL INFORMATION



1.Financial Statements



Horizon Lines, Inc.

Unaudited Condensed Consolidated Balance Sheets

($ in thousands)



|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | --------- | - | ------------------ | - | --------- | -
|                                                                                                                                                                                 |  | December 26, 2004(1) |           |   | September 25, 2005 |  
|Assets                                                                                                                                                                           |  |                      |           |   |                    |   |           |  
|Current assets                                                                                                                                                                   |  |                      |           |   |                    |   |           |  
|Cash and cash equivalents                                                                                                                                                        |  | $                    | 56,766    |   |                    | $ | 64,024    |  
|Accounts receivable, net of allowance of $7,938 and $9,998 at December 26, 2004 and September 25, 2005, respectively                                                             |  |                      | 110,801   |   |                    |   | 136,896   |  
|Income taxes receivable                                                                                                                                                          |  |                      | 9,354     |   |                    |   | 9,560     |  
|Current portion of deferred tax asset                                                                                                                                            |  |                      | 5,680     |   |                    |   | 5,178     |  
|Materials and supplies                                                                                                                                                           |  |                      | 21,680    |   |                    |   | 25,792    |  
|Other current assets                                                                                                                                                             |  |                      | 7,019     |   |                    |   | 6,047     |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Total current assets                                                                                                                                                             |  |                      | 211,300   |   |                    |   | 247,497   |  
|Property and equipment, net                                                                                                                                                      |  |                      | 190,123   |   |                    |   | 197,402   |  
|Deferred tax assets                                                                                                                                                              |  |                      | 80,499    |   |                    |   | 69,318    |  
|Intangible assets, net                                                                                                                                                           |  |                      | 522,412   |   |                    |   | 505,948   |  
|Other long term assets                                                                                                                                                           |  |                      | 15,640    |   |                    |   | 21,098    |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Total assets                                                                                                                                                                     |  | $                    | 1,019,974 |   |                    | $ | 1,041,263 |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Liabilities and Stockholders Equity                                                                                                                                             |  |                      |           |   |                    |   |           |  
|Current liabilities                                                                                                                                                              |  |                      |           |   |                    |   |           |  
|Accounts payable                                                                                                                                                                 |  | $                    | 25,275    |   |                    | $ | 23,609    |  
|Current portion of deferred tax liability                                                                                                                                        |  |                      | 1,683     |   |                    |   | 1,965     |  
|Current portion of long term debt                                                                                                                                                |  |                      | 2,500     |   |                    |   | 2,500     |  
|Other accrued liabilities                                                                                                                                                        |  |                      | 114,590   |   |                    |   | 136,982   |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Total current liabilities                                                                                                                                                        |  |                      | 144,048   |   |                    |   | 165,056   |  
|Long term debt, net of current                                                                                                                                                   |  |                      | 609,694   |   |                    |   | 621,717   |  
|Deferred tax liability                                                                                                                                                           |  |                      | 136,538   |   |                    |   | 126,391   |  
|Deferred rent                                                                                                                                                                    |  |                      | 44,949    |   |                    |   | 41,594    |  
|Other long term liabilities                                                                                                                                                      |  |                      | 2,429     |   |                    |   | 3,134     |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Total liabilities                                                                                                                                                                |  |                      | 937,658   |   |                    |   | 957,892   |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Series A redeemable preferred stock                                                                                                                                              |  |                      | 56,708    |   |                    |   | 60,682    |  
|Stockholders equity                                                                                                                                                             |  |                      |           |   |                    |   |           |  
|Common stock, $.01 par value, 50,000,000 shares authorized and 16,345,421 and 18,216,845 shares issued and outstanding at December 26,
2004 and September 25, 2005, respectively |  |                      | 163       |   |                    |   | 183       |  
|Additional paid in capital                                                                                                                                                       |  |                      | 26,530    |   |                    |   | 34,748    |  
|Accumulated other comprehensive income (loss)                                                                                                                                    |  |                      | 71        |   |                    |   | (58       | )
|Retained deficit                                                                                                                                                                 |  |                      | (1,156    | ) |                    |   | (12,184   | )
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Total stockholders equity                                                                                                                                                       |  |                      | 25,608    |   |                    |   | 22,689    |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  
|Total liabilities and stockholders equity                                                                                                                                       |  | $                    | 1,019,974 |   |                    | $ | 1,041,263 |  
|                                                                                                                                                                                 |  |                      |           |   |                    |   |           |  

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



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



3



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##### Table of Contents



Horizon Lines, Inc. and Subsidiaries and Predecessor Company

Unaudited Condensed Consolidated Statements of
Operations

($ in thousands)



|                                                   |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|-------------------------------------------------- |  | ----------------------------------------------- | ------ |  | ---------------------------------------------------- | - | ----------------------------------------------------- |  | - | ---------------------------------------------------- |  |  | ----------------------------------------------------- | ------- | --------------------------------------------------------- |  | - | ------- |  | - | ------- | -
|                                                   |  | Predecessor-A                                   |        |  | Horizon Lines, Inc.                                  |   | Horizon Lines, Inc                                    |  |   | Predecessor-A                                        |  |  | HorizonLines, Inc.                                    |         | HorizonLines, Inc.                                        | 
|                                                   |  | For the PeriodJune 21, 2004 throughJuly 6, 2004 |        |  | For the PeriodJuly 7, 2004 throughSeptember 19, 2004 |   | For the PeriodJune 27, 2005 throughSeptember 25, 2005 |  |   | For the PeriodDecember 22, 2003 through July
6, 2004 |  |  | For the Period July 7, 2004 throughSeptember 19, 2004 |         | For the PeriodDecember 27, 2004 throughSeptember 25, 2005 | 
|Operating revenue                                  |  | $                                               | 42,581 |  |                                                      | $ | 208,524                                               |  | $ | 289,075                                              |  |  | $                                                     | 498,430 |                                                           |  | $ | 208,524 |  | $ | 817,181 |  
|                                                   |  |                                                 |        |  |                                                      |  
|Operating expenses:                                |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|Operating expense                                  |  |                                                 | 33,942 |  |                                                      |   | 156,659                                               |  |   | 221,968                                              |  |  |                                                       | 402,875 |                                                           |  |   | 156,659 |  |   | 644,437 |  
|Selling, general and administrative                |  |                                                 | 5,280  |  |                                                      |   | 16,059                                                |  |   | 31,229                                               |  |  |                                                       | 43,323  |                                                           |  |   | 16,059  |  |   | 85,863  |  
|Depreciation and amortization                      |  |                                                 | 1,152  |  |                                                      |   | 6,017                                                 |  |   | 13,085                                               |  |  |                                                       | 20,937  |                                                           |  |   | 6,017   |  |   | 38,526  |  
|Amortization of vessel drydocking                  |  |                                                 | 532    |  |                                                      |   | 3,235                                                 |  |   | 3,815                                                |  |  |                                                       | 8,743   |                                                           |  |   | 3,235   |  |   | 12,359  |  
|Miscellaneous expense, net                         |  |                                                 | 20     |  |                                                      |   | 824                                                   |  |   | 585                                                  |  |  |                                                       | 1,891   |                                                           |  |   | 824     |  |   | 1,805   |  
|                                                   |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|Total operating expenses                           |  |                                                 | 40,926 |  |                                                      |   | 182,794                                               |  |   | 270,682                                              |  |  |                                                       | 477,769 |                                                           |  |   | 182,794 |  |   | 782,990 |  
|                                                   |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|Operating income                                   |  |                                                 | 1,655  |  |                                                      |   | 25,730                                                |  |   | 18,393                                               |  |  |                                                       | 20,661  |                                                           |  |   | 25,730  |  |   | 34,191  |  
|                                                   |  |                                                 |        |  |                                                      |  
|Other expense:                                     |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|Interest expense, net                              |  |                                                 | 507    |  |                                                      |   | 7,634                                                 |  |   | 12,936                                               |  |  |                                                       | 5,111   |                                                           |  |   | 7,634   |  |   | 39,174  |  
|Interest expense  preferred units of subsidiary   |  |                                                 | 302    |  |                                                      |   |                                                      |  |   |                                                     |  |  |                                                       | 2,686   |                                                           |  |   |        |  |   |        |  
|Other expense, net                                 |  |                                                 |       |  |                                                      |   | 8                                                     |  |   | 16                                                   |  |  |                                                       | 7       |                                                           |  |   | 8       |  |   | 17      |  
|                                                   |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|Income (loss) before income taxes                  |  |                                                 | 846    |  |                                                      |   | 18,088                                                |  |   | 5,441                                                |  |  |                                                       | 12,857  |                                                           |  |   | 18,088  |  |   | (5,000  | )
|Income tax expense                                 |  |                                                 | 332    |  |                                                      |   | 7,272                                                 |  |   | 2,202                                                |  |  |                                                       | 4,896   |                                                           |  |   | 7,272   |  |   | 2,428   |  
|                                                   |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|Net income (loss)                                  |  | $                                               | 514    |  |                                                      | $ | 10,816                                                |  | $ | 3,239                                                |  |  | $                                                     | 7,961   |                                                           |  | $ | 10,816  |  | $ | (7,428  | )
|                                                   |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  
|                                                   |  |                                                 |        |  |                                                      |  
|Less: accretion of preferred stock                 |  |                                                 |       |  |                                                      |   | 1,797                                                 |  |   | 479                                                  |  |  |                                                       |        |                                                           |  |   | 1,797   |  |   | 3,600   |  
|Net income (loss) available to common stockholders |  | $                                               | 514    |  |                                                      | $ | 9,019                                                 |  | $ | 2,760                                                |  |  | $                                                     | 7,961   |                                                           |  | $ | 9,019   |  | $ | (11,028 | )
|                                                   |  |                                                 |        |  |                                                      |   |                                                       |  |   |                                                      |  |  |                                                       |         |                                                           |  |   |         |  |   |         |  



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



4



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##### Table of Contents



Horizon Lines, Inc. and Subsidiaries and Predecessor Company

Unaudited Condensed Consolidated Statements of
Cash Flows

($ in thousands)



|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | - | ---------------------------------------------------- | - | -------- | --------------------------------------------------------- |  | - | ------- | -
|                                                                                                   |  | Predecessor-A                                       |         |   | Horizon Lines, Inc.                                  |   |          | Horizon Lines, Inc.                                       | 
|                                                                                                   |  | For the PeriodDecember 22, 2003 throughJuly 6, 2004 |         |   | For the PeriodJuly 7, 2004 throughSeptember 19, 2004 |   |          | For the PeriodDecember 27, 2004 throughSeptember 25, 2005 | 
|Cash flows from operating activities:                                                              |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Net income (loss)                                                                                  |  | $                                                   | 7,961   |   |                                                      | $ | 10,816   |                                                           |  | $ | (7,428  | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Depreciation                                                                                       |  |                                                     | 19,385  |   |                                                      |   | 5,429    |                                                           |  |   | 23,855  |  
|Amortization of other intangible assets                                                            |  |                                                     | 1,552   |   |                                                      |   | 588      |                                                           |  |   | 14,671  |  
|Amortization of vessel drydocking                                                                  |  |                                                     | 8,743   |   |                                                      |   | 3,235    |                                                           |  |   | 12,359  |  
|Amortization of deferred financing costs                                                           |  |                                                     | 550     |   |                                                      |   | 326      |                                                           |  |   | 2,528   |  
|Deferred income taxes                                                                              |  |                                                     | 2,968   |   |                                                      |   |         |                                                           |  |   | 1,818   |  
|Loss (gain) on equipment disposals                                                                 |  |                                                     | 24      |   |                                                      |   |         |                                                           |  |   | (253    | )
|Stock-based compensation                                                                           |  |                                                     | 1,765   |   |                                                      |   |         |                                                           |  |   | 12,039  |  
|Accretion of preferred units of subsidiary                                                         |  |                                                     | 2,686   |   |                                                      |   |         |                                                           |  |   |        |  
|Accretion of interest on 11% senior discount notes                                                 |  |                                                     |        |   |                                                      |   |         |                                                           |  |   | 9,384   |  
|Changes in operating assets and liabilities:                                                       |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Accounts receivable                                                                                |  |                                                     | (13,678 | ) |                                                      |   | 2,507    |                                                           |  |   | (26,095 | )
|Materials and supplies                                                                             |  |                                                     | (3,020  | ) |                                                      |   | 597      |                                                           |  |   | (4,112  | )
|Other current assets                                                                               |  |                                                     | (6,152  | ) |                                                      |   | 1,267    |                                                           |  |   | 766     |  
|Accounts payable                                                                                   |  |                                                     | 200     |   |                                                      |   | (5,331   | )                                                         |  |   | (1,666  | )
|Accrued liabilities                                                                                |  |                                                     | (13,152 | ) |                                                      |   | 8,446    |                                                           |  |   | 19,366  |  
|Vessel drydocking payments                                                                         |  |                                                     | (10,198 | ) |                                                      |   | (595     | )                                                         |  |   | (12,621 | )
|Other assets/liabilities                                                                           |  |                                                     | (2,562  | ) |                                                      |   | (574     | )                                                         |  |   | (1,296  | )
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                                                     | (2,928  | ) |                                                      |   | 26,711   |                                                           |  |   | 43,315  |  
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Cash flows from investing activities:                                                              |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Purchases of property and equipment                                                                |  |                                                     | (21,889 | ) |                                                      |   | (860     | )                                                         |  |   | (29,481 | )
|Acquisition of Company                                                                             |  |                                                     |        |   |                                                      |   | (663,027 | )                                                         |  |   |        |  
|Proceeds from the sale of property and equipment                                                   |  |                                                     | 1,399   |   |                                                      |   |         |                                                           |  |   | 904     |  
|Other investing activities                                                                         |  |                                                     | (150    | ) |                                                      |   |         |                                                           |  |   |        |  
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Net cash used in investing activities                                                              |  |                                                     | (20,640 | ) |                                                      |   | (663,887 | )                                                         |  |   | (28,577 | )
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Cash flows from financing activities:                                                              |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Initial capitalization of Company                                                                  |  |                                                     |        |   |                                                      |   | 87,027   |                                                           |  |   |        |  
|Borrowing under 13% promissory notes                                                               |  |                                                     |        |   |                                                      |   | 70,000   |                                                           |  |   |        |  
|Borrowing on term loans                                                                            |  |                                                     |        |   |                                                      |   | 250,000  |                                                           |  |   |        |  
|Issuance of 9% Senior Notes                                                                        |  |                                                     |        |   |                                                      |   | 250,000  |                                                           |  |   |        |  
|Borrowing under line of credit                                                                     |  |                                                     |        |   |                                                      |   | 6,000    |                                                           |  |   |        |  
|Payment on line of credit                                                                          |  |                                                     |        |   |                                                      |   | (6,000   | )                                                         |  |   |        |  
|Principal payments on long term debt                                                               |  |                                                     |        |   |                                                      |   |         |                                                           |  |   | (1,875  | )
|Payment of financing costs                                                                         |  |                                                     |        |   |                                                      |   |         |                                                           |  |   | (1,588  | )
|Payment of costs associated with common stock offering                                             |  |                                                     |        |   |                                                      |   |         |                                                           |  |   | (4,456  | )
|Sale of stock                                                                                      |  |                                                     |        |   |                                                      |   |         |                                                           |  |   | 1,108   |  
|Distribution to holders of preferred stock                                                         |  |                                                     |        |   |                                                      |   |         |                                                           |  |   | (535    | )
|Payments on capital lease obligation                                                               |  |                                                     | (87     | ) |                                                      |   | (39      | )                                                         |  |   | (134    | )
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Net cash (used in) provided by financing activities                                                |  |                                                     | (87     | ) |                                                      |   | 656,988  |                                                           |  |   | (7,480  | )
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                               |  |                                                     | (23,655 | ) |                                                      |   | 19,812   |                                                           |  |   | 7,258   |  
|Cash and cash equivalents at beginning of period                                                   |  |                                                     | 41,811  |   |                                                      |   | 8,598    |                                                           |  |   | 56,766  |  
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $                                                   | 18,156  |   |                                                      | $ | 28,410   |                                                           |  | $ | 64,024  |  
|                                                                                                   |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Supplemental information: non-cash activities                                                      |  |                                                     |         |   |                                                      |   |          |                                                           |  |   |         |  
|Notes payable in conjunction with the acquisition of beneficial interest in vessel trusts          |  | $                                                   |        |   |                                                      | $ |         |                                                           |  | $ | 4,514   |  



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



5



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##### Table of Contents



HORIZON LINES, INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1. Basis of
Presentation and Operations



Unaudited Interim
Financial Statements



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



Operations



Horizon Lines, Inc. (the Company), formerly known as H-Lines
Holding Corp., was formed as an acquisition vehicle to acquire the equity interest in Horizon Lines Holding Corp. (HLHC) HLHC, a Delaware corporation operates as a holding company for Horizon Lines, LLC (HL), a Delaware
limited liability company and wholly-owned subsidiary and for Horizon Lines of Puerto Rico, Inc. (HLPR) a Delaware corporation and 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. HLHC, during the period from
December 22, 2003 through July 6, 2004, is referred to as Predecessor-A.



On December 6, 2004, H-Lines Finance Holding Corp. (HLFHC) was formed as a wholly owned subsidiary of the Company. On December 10, 2004, HLFHC sold $160.0 million aggregate principal amount at
maturity of its 11% senior discount notes. The gross proceeds of $112.8 million were distributed to the Company.



Basis of Presentation



The Company was formed as an acquisition vehicle to acquire the equity interest in HLHC and has no independent operations. Consequently, the accompanying
unaudited condensed consolidated financial statements include the consolidated accounts of the Company and its subsidiaries as of December 26, 2004 and September 25, 2005, the related unaudited consolidated statement of operations for the
period from July 7, 2004 through September 19, 2004, the period from June 27, 2005 through September 25, 2005, the period from December 27, 2004 through September 25, 2005 and the related unaudited statement of cash
flows for the period from July 7, 2004 through September 19, 2004 and from December 27, 2004 through September 25, 2005. The accompanying unaudited condensed consolidated financial statements include the related unaudited
condensed consolidated statement of operations for the period June 21, 2004 through July 6, 2004 for Predecessor-A and the period from December 22, 2003 through July 6, 2004 for Predecessor-A and the related unaudited statement
of cash flows for the period December 22, 2003 through July 6, 2004 for Predecessor-A. All significant intercompany accounts and transactions have been eliminated.



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



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HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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



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



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



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



Recent Accounting
Pronouncements



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



Reclassifications



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



2.
Stock-Based Compensation



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



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



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



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HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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



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



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



3. Other Comprehensive Income



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



|                                               |  |                                                   |     |                                                        |   |                                                         |  |   |      
|---------------------------------------------- |  | ------------------------------------------------- | --- | ------------------------------------------------------ | - | ------------------------------------------------------- |  | - | -----
|                                               |  | Predecessor-A                                     |     | Horizon Lines, Inc.                                    |   | Horizon Lines, Inc.                                    
|                                               |  | For the Period June 21, 2004 through July 6, 2004 |     | For the Period July 7, 2004 through September 19, 2004 |   | For the Period June 27, 2005 through September 25, 2005
|Net income                                     |  | $                                                 | 514 |                                                        | $ | 10,816                                                  |  | $ | 3,239
|Change in fair value of interest rate contract |  |                                                   | 302 |                                                        |   |                                                        |  |   |     
|                                               |  |                                                   |     |                                                        |   |                                                         |  |   |      
|Comprehensive income                           |  | $                                                 | 816 |                                                        | $ | 10,816                                                  |  | $ | 3,239
|                                               |  |                                                   |     |                                                        |   |                                                         |  |   |      



|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  
|------------------------------------------------- |  | ----------------------------------------------------- | ----- | ------------------------------------------------------ | - | ----------------------------------------------------------- |  | - | ------ | -
|                                                  |  | Predecessor-A                                         |       | Horizon Lines, Inc.                                    |   | Horizon Lines, Inc.                                         | 
|                                                  |  | For the Period December 22, 2003 through July 6, 2004 |       | For the Period July 7, 2004 through September 19, 2004 |   | For the Period December 27, 2004 through September 25, 2005 | 
|Net income (loss)                                 |  | $                                                     | 7,961 |                                                        | $ | 10,816                                                      |  | $ | (7,428 | )
|Change in fair value of interest rate contract    |  |                                                       | 286   |                                                        |   |                                                            |  |   |       |  
|Change in fair value of fixed price fuel contract |  |                                                       |      |                                                        |   |                                                            |  |   | (129   | )
|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  
|Comprehensive income (loss)                       |  | $                                                     | 8,247 |                                                        | $ | 10,816                                                      |  | $ | (7,557 | )
|                                                  |  |                                                       |       |                                                        |   |                                                             |  |   |        |  



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##### Table of Contents

HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



4. Property and Equipment



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



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



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



5. Intangible Assets



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



|                                      |  |                   |         |   |                    |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                      |  | December 26, 2004 |         |   | September 25, 2005 |  
|Customer contracts                    |  | $                 | 137,675 |   |                    | $ | 137,675 |  
|Trademarks                            |  |                   | 63,800  |   |                    |   | 63,800  |  
|Deferred financing costs              |  |                   | 25,006  |   |                    |   | 26,549  |  
|                                      |  |                   |         |   |                    |   |         |  
|Total intangibles with definite lives |  |                   | 226,481 |   |                    |   | 228,024 |  
|Accumulated amortization              |  |                   | (10,749 | ) |                    |   | (27,949 | )
|                                      |  |                   |         |   |                    |   |         |  
|Net intangibles with definite lives   |  |                   | 215,732 |   |                    |   | 200,075 |  
|Goodwill                              |  |                   | 306,680 |   |                    |   | 305,873 |  
|                                      |  |                   |         |   |                    |   |         |  
|Intangible assets, net                |  | $                 | 522,412 |   |                    | $ | 505,948 |  
|                                      |  |                   |         |   |                    |   |         |  



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



9



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##### Table of Contents

HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



6. Accrued Liabilities



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



|                                |  |                   |         |                    |   |        
|------------------------------- |  | ----------------- | ------- | ------------------ | - | -------
|                                |  | December 26, 2004 |         | September 25, 2005
|Marine operations               |  | $                 | 12,301  |                    | $ | 16,267 
|Terminal operations             |  |                   | 10,842  |                    |   | 13,328 
|Vessel and rolling stock rent   |  |                   | 24,024  |                    |   | 21,092 
|Vessel operations               |  |                   | 20,452  |                    |   | 23,279 
|Fuel                            |  |                   | 7,537   |                    |   | 10,486 
|Bonus                           |  |                   | 10,200  |                    |   | 8,905  
|Interest                        |  |                   | 6,306   |                    |   | 12,671 
|Other liabilities               |  |                   | 22,928  |                    |   | 30,954 
|                                |  |                   |         |                    |   |        
|Total other accrued liabilities |  | $                 | 114,590 |                    |   | 136,982
|                                |  |                   |         |                    |   |        



7. Long-Term Debt



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



|                                                                                                                              |  |                   |         |   |                    |   |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                                                              |  | December 26, 2004 |         |   | September 25, 2005 |  
|Senior credit facility                                                                                                        |  | $                 | 249,375 |   |                    | $ | 247,500 |  
|9% senior notes                                                                                                               |  |                   | 250,000 |   |                    |   | 250,000 |  
|11% senior discount notes                                                                                                     |  |                   | 112,819 |   |                    |   | 122,203 |  
|Notes issued by the owner trustees of the owner trusts and which are secured by mortgages on the vessels owned by such trusts |  |                   |        |   |                    |   | 4,514   |  
|                                                                                                                              |  |                   |         |   |                    |   |         |  
|Total long-term debt                                                                                                          |  |                   | 612,194 |   |                    |   | 624,217 |  
|Current portion                                                                                                               |  |                   | (2,500  | ) |                    |   | (2,500  | )
|                                                                                                                              |  |                   |         |   |                    |   |         |  
|Long-term debt, net of current                                                                                                |  | $                 | 609,694 |   |                    | $ | 621,717 |  
|                                                                                                                              |  |                   |         |   |                    |   |         |  



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



8. Commitments and
Contingencies



Environmental Contingency



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



10



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HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Legal Proceedings



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



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



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



The second action
currently pending before the STB involving HL, brought by DHX, Inc. in 1999 against HL and Matson, challenges the reasonableness of certain rates and practices of HL and Matson. DHX is a major freight forwarder in the domestic Hawaii trade. Freight
forwarders typically accept less than full container loads of cargo, consolidate these loads into full container loads, and offer the full container load to the ocean carriers. Some freight forwarders, including DHX, also solicit full container
loads from shippers. Among other things, DHX charged that HL and Matson took actions that were intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for the full container load business. DHX is seeking $11.0
million in damages. In addition to the award of damages, an adverse ruling could affect HLs current and future rate structure for its Hawaii shipping. An adverse STB decision could also affect the rates that HL would be permitted to charge on
its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHXs complaint; (ii) found that HL met all of its tariff filing obligations; and (iii) reaffirmed the
STBs earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which was repealed by the ICCTA, are no longer applicable to our business. On June 13, 2005, the STB issued a decision that denied DHXs
motion for reconsideration and denied the alternative request by DHX for clarification of the STBs December 13, 2004 decision. On August 5, 2005, DHX filed a Notice of Appeal with the United States Court of Appeals for the Ninth
Circuit challenging the STBs order dismissing its complaint. HL has filed a Motion to Intervene, which has been granted, so it can participate directly in the appellate process. No assurance can be given that the final decision with respect to
this matter will be favorable to us.



11



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##### Table of Contents

HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Standby Letters of Credit



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



9. Subsequent Events



On September 26,
2005, all options outstanding under the option plan, as amended on September 20, 2005, were exercised and all of the resulting shares of common stock of HLHC were exchanged for 952,325 shares of common stock and 731,448 shares of Series A
preferred stock of the Company pursuant to the provisions of the Put/Call Agreement. Immediately following such exchange, all of the shares of the common stock of HLHC that were so acquired by the Company were contributed to HLFHC and, in turn,
HLFHC contributed such shares to HLHC. As of the date hereof, all of the outstanding shares of the common stock of the HLHC are directly owned by HLFHC and no options are outstanding or issuable under Predecessor-As stock option plan, as
amended.



On September 30, 2005, the Company issued and
sold 12,500,000 shares (the Initial Shares) of its common stock, in an initial public offering (referred to herein as the initial public offering), at a price to the public of $10.00 per share. The net proceeds to the Company
from the sale of these shares were $116.5 million (net of underwriter discounts and commissions). Other fees and expenses associated with the initial public offering totaled approximately $5.7 million, of which approximately $4.5 million was paid
prior to or on September 30, 2005. On September 30, 2005, $44.7 million of these net proceeds were contributed to HLFHC and $43.6 million of these net proceeds were contributed, via HLFHC, to HLHC, and, immediately thereafter, HLHC paid a
dividend, out of cash flows generated from operations, of $40.0 million to HLFHC, which then remitted such funds, as a dividend, to the Company, which, using such funds and a portion of the proceeds of the initial public offering, redeemed, for a
total redemption price of $62.2 million, all of its outstanding shares of its Series A redeemable preferred stock. In addition, on September 30, 2005, HLHC and HL submitted a redemption notice to the indenture trustee for the 9% senior notes
for the voluntary redemption, on November 2, 2005, of $40.0 million of the then outstanding aggregate principal amount of the 9% senior notes with the proceeds from the issuance and sale of the Initial Shares. Also, on September 30, 2005,
HLFHC submitted a redemption notice to the indenture trustee for the 11% senior discount notes for the voluntary redemption, on November 2, 2005, of $40.3 million of accreted value or $52.3 million of aggregate principal amount at maturity of
the 11% senior discount notes with the proceeds from the issuance and sale of the Initial Shares.



On October 14, 2005, the Company issued and sold an additional 1,875,000 shares (the Additional Shares) of its common stock to the
underwriters of its initial public offering at a net price of $9.30 per share, representing the initial public offering price to the public of $10.00 per share, less the underwriters discount of 7% per share. These shares were issued and
sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares from the Company granted to them with respect to the initial public offering. The net proceeds to the Company from the sale of these shares were
$17.4 million (net of underwriter discounts and commissions). On October 14, 2005, $3.2 million of these net proceeds were contributed to HLFHC and $14.2 million of these net proceeds were contributed, via HLFHC to HLHC. On October 20,
2005, HLHC and HL submitted a redemption notice to the indenture trustee for the 9% senior notes for the voluntary redemption, on November 21, 2005, of $13.0 million of the then-outstanding aggregate principal amount of the 9% senior notes with
the proceeds from the issuance and sale of the Additional Shares. Also, on October 20, 2005, HLFHC submitted a redemption notice to the indenture trustee for the 11% senior discount notes for the voluntary redemption, on November 21, 2005,
of $2.9 million of accreted value or $3.7 million of aggregate principal amount at maturity of the 11% senior discount notes with the proceeds from the issuance and sale of the Additional Shares.



12



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##### Table of Contents

HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



The following table sets forth the capitalization, as of September 25, 2005, on an actual consolidated basis for
the Company and as adjusted to give effect to the consummation of the issuance and sale by the Company of the Initial Shares and the Additional Shares of its common stock pursuant to the initial public offering, the use of proceeds therefrom, and
other related transactions, as if, in each case, such transactions occurred as of September 25, 2005 ($ in thousands).



|                                                                                                                                                                                                            |  |                          |         |   |          |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | -------- | - | ------- | -
|                                                                                                                                                                                                            |  | As of September 25, 2005 |        
|                                                                                                                                                                                                            |  | Actual                   |         |   | Proforma |  
|Senior credit facility                                                                                                                                                                                      |  | $                        | 247,500 |   |          | $ | 247,500 |  
|9% senior notes                                                                                                                                                                                             |  |                          | 250,000 |   |          |   | 197,014 |  
|Notes issued by the owner trustees of the owner trusts and which are secured by mortgages on the vessels owned by such trusts                                                                               |  |                          | 4,514   |   |          |   | 4,514   |  
|11% senior discount notes                                                                                                                                                                                   |  |                          | 122,203 |   |          |   | 78,993  |  
|Capital lease obligation                                                                                                                                                                                    |  |                          | 535     |   |          |   | 535     |  
|                                                                                                                                                                                                            |  |                          |         |   |          |   |         |  
|Total debt                                                                                                                                                                                                  |  |                          | 624,752 |   |          |   | 528,556 |  
|Series A redeemable preferred stock                                                                                                                                                                         |  |                          | 60,682  |   |          |   |        |  
|Stockholders equity:                                                                                                                                                                                       |  |                          |         |   |          |   |         |  
|Common stock, $.01 par value; actual: 50,000,000 shares authorized, 18,216,845 shares issued and outstanding; pro forma as adjusted;
50,000,000 shares authorized, 33,544,170 shares issued and outstanding |  |                          | 183     |   |          |   | 336     |  
|Additional paid in capital                                                                                                                                                                                  |  |                          | 34,748  |   |          |   | 173,758 |  
|Accumulated other comprehensive loss                                                                                                                                                                        |  |                          | (58     | ) |          |   | (58     | )
|Retained deficit                                                                                                                                                                                            |  |                          | (12,184 | ) |          |   | (33,722 | )
|                                                                                                                                                                                                            |  |                          |         |   |          |   |         |  
|Total stockholders equity                                                                                                                                                                                  |  |                          | 22,689  |   |          |   | 140,314 |  
|                                                                                                                                                                                                            |  |                          |         |   |          |   |         |  
|Total capitalization                                                                                                                                                                                        |  | $                        | 708,123 |   |          | $ | 668,870 |  
|                                                                                                                                                                                                            |  |                          |         |   |          |   |         |  



The following table sets forth
earnings per share as of September 25, 2005 on an actual basis for the Company, and as adjusted to give effect to the consummation of the issuance and sale by the Company of the Initial Shares and the Additional Shares of its common stock
pursuant to the initial public offering, use of proceeds therefrom, and other related transactions, as if, in each case, such transactions occurred as of December 27, 2004 ($ in thousands, except per share figures).



|                                 |  |                                                         |            |                                                             |   |            |  |            |          |  |   |           
|-------------------------------- |  | ------------------------------------------------------- | ---------- | ----------------------------------------------------------- | - | ---------- |  | ---------- | -------- |  | - | ----------
|                                 |  | For the Period June 27, 2005 Through September 25, 2005 |            | For the Period December 27, 2004 Through September 25, 2005
|                                 |  | Actual                                                  |            | Proforma                                                    |   | Actual     |  |            | Proforma
|Net income (loss) per share (a): |  |                                                         |            |                                                             |   |            |  |            |          |  |   |           
|Basic                            |  | $                                                       | 0.14       |                                                             | $ | 0.37       |  | ($0.58     | )        |  | $ | 0.24      
|Diluted                          |  | $                                                       | 0.14       |                                                             | $ | 0.36       |  | ($0.58     | )        |  | $ | 0.24      
|Number of common shares (b):     |  |                                                         |            |                                                             |   |            |  |            |          |  |   |           
|Basic                            |  |                                                         | 19,169,170 |                                                             |   | 33,544,170 |  | 19,043,071 |          |  |   | 33,418,071
|Diluted                          |  |                                                         | 19,169,170 |                                                             |   | 33,551,026 |  | 19,043,071 |          |  |   | 33,424,927



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HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|(a) | Proforma net income adjustments to give effect to the consummation of the issuance and sale by the Company of the Initial Shares and the Additional Shares of its common stock
pursuant to the initial public offering, the intended use of proceeds therefrom, and other related transactions, as if, in each case, such transactions occurred as of December 27, 2004 include the following (in thousands):
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                         |  |                                                       |        |   |                                                           |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ------ | - | --------------------------------------------------------- | - | ------- | -
|                                                                                                         |  | For the PeriodJune 27, 2005 throughSeptember 25, 2005 |        |   | For the PeriodDecember 27, 2004 throughSeptember 25, 2005 |  
|Net income (loss) available to common stockholders- actual                                               |  | $                                                     | 2,761  |   |                                                           | $ | (11,028 | )
|Proforma Adjustments:                                                                                    |  |                                                       |        |   |                                                           |   |         |  
|Elimination of management fees                                                                           |  |                                                       | 8,198  |   |                                                           |   | 9,698   |  
|Elimination of non-employee directors stock compensation and executive restricted stock compensation (1) |  |                                                       | 1,627  |   |                                                           |   | 12,039  |  
|Elimination of transaction related expenses                                                              |  |                                                       | 1,505  |   |                                                           |   | 1,505   |  
|Reduction of interest expense on early payment of 9% senior notes                                        |  |                                                       | 1,143  |   |                                                           |   | 3,429   |  
|Reduction of interest expense on early payment of 11% senior discount notes                              |  |                                                       | 1,258  |   |                                                           |   | 3,579   |  
|Reduction of interest expense from 0.25% decrease in interest rate on term loan                          |  |                                                       | 156    |   |                                                           |   | 474     |  
|Reduction in amortization of deferred finance costs                                                      |  |                                                       | 103    |   |                                                           |   | 283     |  
|Write-off of deferred financing fees associated with early payment of 9% senior notes (2)                |  |                                                       |       |   |                                                           |   | (1,898  | )
|Write-off of deferred financing fees associated with early payment of 11% senior discount notes (2)      |  |                                                       |       |   |                                                           |   | (1,733  | )
|Early prepayment premium on 9% senior notes (2)                                                          |  |                                                       |       |   |                                                           |   | (4,769  | )
|Early prepayment premium on 11% senior discount notes (2)                                                |  |                                                       |       |   |                                                           |   | (4,753  | )
|Adjustment to income tax expense                                                                         |  |                                                       | (4,986 | ) |                                                           |   | (2,326  | )
|Elimination of accretion of Series A redeemable preferred stock                                          |  |                                                       | 479    |   |                                                           |   | 3,600   |  
|                                                                                                         |  |                                                       |        |   |                                                           |   |         |  
|Total proforma adjustments                                                                               |  |                                                       | 9,483  |   |                                                           |   | 19,128  |  
|Net income proforma                                                                                      |  | $                                                     | 12,244 |   |                                                           | $ | 8,100   |  
|                                                                                                         |  |                                                       |        |   |                                                           |   |         |  



|(1) | The Company will record a non-cash compensation charge of $6.9 million in the fiscal quarter ended December 25, 2005 with respect to the vesting in full of all restricted stock
shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The Company will record a charge of approximately $13.2 million in the fiscal quarter ended December 25, 2005 related to the write-off of deferred financing fees and early
prepayment premiums. This charge will be recorded in loss on extinguishment of debt on the consolidated statement of operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | The following table provides a reconciliation between the number of common shares on a basic and diluted basis to give effect to the consummation of the issuance and sale by the
Company of the Initial Shares and the Additional Shares of its common stock pursuant to the initial public offering, as if, in each case, such transactions occurred as of December 27, 2004:
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                        |  |                                                         |  |                                                           
|----------------------------------------------------------------------- |  | ------------------------------------------------------- |  | ----------------------------------------------------------
|                                                                        |  | For the period June 27, 2005 through September 25, 2005 |  | For the periodDecember 27, 2004 through September 25, 2005
|Reconciliation of number of common shares:                              |  |                                                         |  |                                                           
|Basic- actual                                                           |  | 19,169,170                                              |  | 19,043,071                                                
|Issuance of shares in conjunction with common stock offering            |  | 12,500,000                                              |  | 12,500,000                                                
|Issuance of shares in conjunction with exercise of underwriters option |  | 1,875,000                                               |  | 1,875,000                                                 
|                                                                        |  |                                                         |  |                                                           
|Basic- proforma                                                         |  | 33,544,170                                              |  | 33,418,071                                                
|Assumed exercise of employee stock options (1)                          |  | 6,856                                                   |  | 6,856                                                     
|                                                                        |  |                                                         |  |                                                           
|Diluted-proforma                                                        |  | 33,551,026                                              |  | 33,424,927                                                



|(1) | On September 27, 2005, the Company granted nonqualified stock options under its equity incentive plan to members of management to purchase up to 705,100 shares in the aggregate
of the Companys common stock at a price per share equal to the initial public offering price per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

HORIZON LINES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



On October 18, 2005, the Board of Directors of the Company approved the vesting in full of all
of the 1,724,619 shares of the Companys common stock, that were issued and sold by the Company on January 14, 2005 to certain employees of the Company and its subsidiaries. The Boards approval of the vesting in full of these shares
was made subject to the rights of the Company with respect to these shares under the respective restricted stock agreements dated as of January 14, 2005 pursuant to which these shares were issued and sold. The Company will record a non-cash
compensation charge of $6.9 million during its fiscal quarter ending December 25, 2005 with respect to the vesting in full of all of these 1,724,619 shares.



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



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



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



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##### Table of Contents

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



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



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



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



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



Executive Overview



|                           |  |                                  |         |   |                                  |   |         |                                      |  |   |                                      |   |  |   |         |  
|-------------------------- |  | -------------------------------- | ------- | - | -------------------------------- | - | ------- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ------- | -
|                           |  | Quarter Ended September 19, 2004 |         |   | Quarter Ended September 25, 2005 |   |         | Nine Months Ended September 19, 2004 |  |   | Nine Months Ended September 25, 2005 |  
|                           |  | ($ in thousands)                 |        
|Operating revenue          |  | $                                | 251,105 |   |                                  | $ | 289,075 |                                      |  | $ | 706,954                              |   |  | $ | 817,181 |  
|Operating expense          |  |                                  | 223,720 |   |                                  |   | 270,682 |                                      |  |   | 660,563                              |   |  |   | 782,990 |  
|                           |  |                                  |         |   |                                  |   |         |                                      |  |   |                                      |   |  |   |         |  
|Operating income           |  | $                                | 27,385  |   |                                  | $ | 18,393  |                                      |  | $ | 46,391                               |   |  | $ | 34,191  |  
|                           |  |                                  |         |   |                                  |   |         |                                      |  |   |                                      |   |  |   |         |  
|Operating ratio            |  |                                  | 89.1    | % |                                  |   | 93.6    | %                                    |  |   | 93.4                                 | % |  |   | 95.8    | %
|Revenue containers (units) |  |                                  | 77,970  |   |                                  |   | 80,316  |                                      |  |   | 225,172                              |   |  |   | 233,341 |  



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



Operating expense increased by $47.0 million or 21.0% from the quarter ended September 19, 2004 to the quarter ended
September 25, 2005, primarily as a result of higher costs associated with the growth in total revenue container volume and increases in non-transportation and other revenue services. Other factors contributing to the increase in operating
expense included higher vessel fuel costs and higher rail and truck transportation costs as a result of higher fuel prices, and higher depreciation and amortization due to the purchase price accounting step-up in basis of customer contracts and
trademarks related to the consummation on July 7, 2004 of the acquisition transaction (which is described in History and Transactions below), in addition to higher selling, general, and administrative costs, including a $7.5 million
charge related to the termination of the ongoing management services and related fee



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##### Table of Contents

provisions of a management agreement with Castle Harlan, Inc. (referred to herein as Castle Harlan), a $1.6 million charge related to a
restricted stock plan, and a $1.5 million charge attributable to transaction related expenses.



Operating income decreased by $9.0 million or 32.8% from the quarter ended September 19, 2004 to the quarter ended September 25, 2005. This decrease in operating income is primarily due to the increased
operating expenses during the quarter ended September 25, 2005, primarily as a result of a $7.5 million charge related to the termination of the ongoing management services and related fee provisions of a management agreement with Castle
Harlan, a $1.6 million charge related to a restricted stock plan, additional amortization of intangible assets, and higher fuel costs. These increased operating expenses were partially offset by increased operating revenue.



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



Operating expense increased by $122.4 million or 18.5% from the nine months ended September 19, 2004 to the nine months
ended September 25, 2005, primarily as a result of higher costs associated with the growth in total revenue container volume and increases in non-transportation and other revenue services. Other factors contributing to the increase in operating
expense included higher vessel fuel costs and higher rail and truck transportation costs as a result of higher fuel prices, higher depreciation and amortization due to the purchase price accounting step-up in basis of customer contracts and
trademarks related to the consummation on July 7, 2004 of the acquisition transaction, in addition to higher selling, general, and administrative costs, including a $7.5 million charge related to the termination of the ongoing management
services and related fee provisions of a management agreement with Castle Harlan and a $12.0 million charge related to a restricted stock plan.



Operating income decreased by $12.2 million or 26.3% from the nine months ended September 19, 2004 to the nine months ended September 25, 2005.
This decrease in operating income is primarily due to higher selling, general, and administrative expenses, additional amortization of intangible assets, and higher fuel costs. These increased operating expenses were partially offset by increased
operating revenue.



General



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



History
and Transactions



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



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



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##### Table of Contents

On July 7, 2004, H-Lines Subcorp., a wholly-owned subsidiary of the Company, merged with and into
HLHC, with the latter entity as the survivor of such merger. As a result, HLHC became a wholly-owned subsidiary of the Company. 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, HLHC and HL issued $250.0 million aggregate principal amount of 9% senior notes.



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



Basis of Presentation



The Company was formed as an acquisition vehicle to acquire the equity interest in HLHC and has no independent operations.
Consequently, the accompanying unaudited condensed consolidated financial statements include the consolidated accounts of the Company and its subsidiaries as of December 26, 2004 and September 25, 2005, the related unaudited consolidated
statement of operations for the period from July 7, 2004 through September 19, 2004, the period from June 27, 2005, through September 25, 2005, the period from December 27, 2004 through September 25, 2005 and the
related unaudited statement of cash flows for the period from July 7, 2004 through September 19, 2004 and from December 27, 2004 through September 25, 2005. The accompanying unaudited condensed consolidated financial statements
include the related unaudited condensed consolidated statement of operations for the period June 21, 2004 through July 6, 2004 for Predecessor-A and the period from December 22, 2003 through July 6, 2004 for Predecessor-A and the
related unaudited statement of cash flows for the period December 22, 2003 through July 6, 2004 for Predecessor-A. All significant intercompany accounts and transactions have been eliminated.



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



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



Fiscal Year



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



Critical Accounting Policies



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



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



Revenue Recognition



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



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



18



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##### Table of Contents

Allowance for Doubtful Accounts



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



Casualty Claims



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



Goodwill, Purchase Costs and Other Identifiable Intangible Assets



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



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



Shipping Rates



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



Vessel Drydocking



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



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



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Deferred Tax Assets



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



Union Plans



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



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



Property And Equipment



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



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



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which
replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supersedes Accounting Principles Board opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income statement based upon their fair values in the first fiscal year beginning after June 15, 2005, with early adoption permitted. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the first quarter of fiscal year 2006. Under SFAS 123R, the Company must determine the
appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation costs and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption
options. As a result of the exercise of all of the Predecessor Companys remaining outstanding options on September 26, 2005, HLHC does not have any outstanding employee stock options. On September 27, 2005, the Company granted
nonqualified stock options under its amended and restated equity incentive plan to members of management to purchase up to 705,100 shares in the aggregate of the Companys common stock at a price per share equal to the initial public offering
price per share.



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



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addition, we assess fuel surcharges on a basis consistent with industry practice and at times may incorporate these surcharges into our basic transportation
rates. At times, there is a timing disparity between volatility in our fuel costs and related adjustments to our fuel surcharges (or the incorporation of adjusted fuel surcharges into our basic transportation rates) that may result in insufficient
recovery of our fuel costs during sharp increases in the price of fuel and recoveries in excess of our fuel costs when fuel prices level off or decline.



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



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



Operating Expense Overview



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



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



|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|----------------------------------- |  | ----------------------------- | ------- | - | ----------------------------- | - | ------- | -------- |  | ----- | --
|                                    |  | QuarterEndedSeptember 19,2004 |         |   | QuarterEndedSeptember 25,2005 |   |         | % Change | 
|                                    |  | ($ in thousands)              |         |   |                               |  
|Operating revenue                   |  | $                             | 251,105 |   |                               | $ | 289,075 |          |  | 15.1  | % 
|Operating expense:                  |  |                               |         |   |                               |   |         |          |  |       |   
|Vessel                              |  |                               | 59,277  |   |                               |   | 76,282  |          |  | 28.7  | % 
|Marine                              |  |                               | 46,987  |   |                               |   | 49,514  |          |  | 5.4   | % 
|Inland                              |  |                               | 42,441  |   |                               |   | 49,902  |          |  | 17.6  | % 
|Land                                |  |                               | 32,297  |   |                               |   | 35,709  |          |  | 10.6  | % 
|Rolling stock rent                  |  |                               | 9,599   |   |                               |   | 10,561  |          |  | 10.0  | % 
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Operating expense                   |  |                               | 190,601 |   |                               |   | 221,968 |          |  | 16.5  | % 
|Selling, general and administrative |  |                               | 21,339  |   |                               |   | 31,229  |          |  | 46.3  | % 
|Depreciation and amortization       |  |                               | 7,169   |   |                               |   | 13,085  |          |  | 82.5  | % 
|Amortization of vessel drydocking   |  |                               | 3,767   |   |                               |   | 3,815   |          |  | 1.3   | % 
|Miscellaneous expense, net          |  |                               | 844     |   |                               |   | 585     |          |  | (30.7 | %)
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Total operating expenses            |  |                               | 223,720 |   |                               |   | 270,682 |          |  | 21.0  | % 
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Operating income                    |  | $                             | 27,385  |   |                               | $ | 18,393  |          |  | (32.8 | %)
|                                    |  |                               |         |   |                               |   |         |          |  |       |   
|Operating ratio                     |  |                               | 89.1    | % |                               |   | 93.6    | %        |  | (5.1  | %)
|Revenue containers (units)          |  |                               | 77,970  |   |                               |   | 80,316  |          |  | 3.0   | % 



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



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



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



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



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



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



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



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ended September 25, 2005 from the quarter ended September 19, 2004, primarily due to increased revenue container volumes, additional ground moves
in the yard due to yard congestion, and increased labor costs due to normal contractual rate increases.



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



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



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



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



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



Selling, General and Administrative.Selling, general and administrative costs increased to $31.2 million for the quarter ended
September 25, 2005 compared to $21.3 million for the quarter ended September 19, 2004, an increase of $9.9 million or 46.3%. Approximately $7.5 million of the period over period increase is a result of a charge related to the termination
of the ongoing management services and related fee provisions of a management agreement with Castle Harlan. Approximately $1.6 million of this increase is a result of non-cash compensation expenses related to a restricted stock plan for certain
members of management and certain non-employee directors. In addition, approximately $1.5 million of the increase is attributable to transaction related expenses.



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



Interest Expense, Net.Interest expense increased
to $12.9 million for the quarter ended September 25, 2005 compared to $8.1 million for the quarter ended September 19, 2004, an increase of $4.8 million or 58.9%. Approximately $3.2 million of this increase is attributable to the 11%
senior discount notes, which were issued on December 10, 2004. In addition, the senior credit facility bears interest at variable interest rates that are based on LIBOR plus an applicable margin. Approximately $1.0 million of the increase in
interest expense is due to a 1.9% increase in the LIBOR rate in the quarter ended September 25, 2005 as compared to the quarter ended September 19, 2004. The remaining $0.6 million increase in interest expense is due to the incurrence of
approximately $340.0 million of additional debt in conjunction with the consummation on July 7, 2004 of the acquisition transaction.



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



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



|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|----------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | ------- | -------- |  | ----- | --
|                                    |  | Nine MonthsEndedSeptember 19,2004 |         |   | Nine MonthsEndedSeptember 25,2005 |   |         | % Change | 
|                                    |  | ($ in thousands)                  |         |   |                                   |  
|Operating revenue                   |  | $                                 | 706,954 |   |                                   | $ | 817,181 |          |  | 15.6  | % 
|Operating expense:                  |  |                                   |         |   |                                   |   |         |          |  |       |   
|Vessel                              |  |                                   | 177,783 |   |                                   |   | 220,716 |          |  | 24.1  | % 
|Marine                              |  |                                   | 137,285 |   |                                   |   | 146,786 |          |  | 6.9   | % 
|Inland                              |  |                                   | 120,047 |   |                                   |   | 140,331 |          |  | 16.9  | % 
|Land                                |  |                                   | 93,986  |   |                                   |   | 104,614 |          |  | 11.3  | % 
|Rolling stock rent                  |  |                                   | 30,433  |   |                                   |   | 31,990  |          |  | 5.1   | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating expense                   |  |                                   | 559,534 |   |                                   |   | 644,437 |          |  | 15.2  | % 
|Selling, general and administrative |  |                                   | 59,382  |   |                                   |   | 85,863  |          |  | 44.6  | % 
|Depreciation and amortization       |  |                                   | 26,954  |   |                                   |   | 38,526  |          |  | 42.9  | % 
|Amortization of vessel drydocking   |  |                                   | 11,978  |   |                                   |   | 12,359  |          |  | 3.2   | % 
|Miscellaneous expense, net          |  |                                   | 2,715   |   |                                   |   | 1,805   |          |  | (33.5 | %)
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Total operating expenses            |  |                                   | 660,563 |   |                                   |   | 782,990 |          |  | 18.5  | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating income                    |  | $                                 | 46,391  |   |                                   | $ | 34,191  |          |  | (26.3 | %)
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating ratio                     |  |                                   | 93.4    | % |                                   |   | 95.8    | %        |  | (2.4  | %)
|Revenue containers (units)          |  |                                   | 225,172 |   |                                   |   | 233,341 |          |  | 3.6   | % 



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



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



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



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



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



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



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



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



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



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



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



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



Selling, General and Administrative.Selling, general and administrative costs increased to $85.9 million for the nine months ended September 25, 2005 compared to $59.4 million for the nine
months ended September 19, 2004, an increase of $26.5 million or 44.6%. Approximately $8.8 million of the period over period increase is due to higher management fees, including a $7.5 million charge related to the termination of the ongoing
management services and related fee provisions of a management agreement with Castle Harlan. Also, approximately $12.0 million of this increase is a result of non-cash compensation expenses related to a restricted stock plan for certain members of
management and certain non-employee directors and approximately $1.5 million of the increase is attributable to transaction related expenses. In addition, approximately $3.5 million of the period over period increase is a result of increased
expenses related to the timing of an accrual for a bonus plan which covers all of our



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non-union employees. The remaining $2.2 million increase in selling, general and administrative costs primarily result from increased costs related to
preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and general inflationary costs increases.



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



Interest Expense, Net.Interest expense increased to $39.2 million for the nine months ended September 25, 2005 compared to
$12.7 million for the nine months ended September 19, 2004, an increase of $26.4 million. This increase is due to significantly higher levels of debt outstanding during the nine months ended September 25, 2005, as a result of the
consummation on July 7, 2004 of the acquisition transaction as well as to higher overall interest rates on the senior credit facility.



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



Income Tax Expense.Income tax expense for the nine months ended September 25, 2005 totaled $2.4 million
compared to income tax expense of $12.2 million for the nine months ended September 19, 2004, which represent effective annual tax rates of 49% and 39%, respectively. The difference between the federal statutory rate and the effective annual
tax rate for these periods is primarily due to state income taxes and permanent differences. In addition, during the nine months ended September 25, 2005, we adjusted our tax balance sheet accounts for the twelve month period ended
December 26, 2004 to reflect tax adjustments reported on our income tax return for such twelve month period.



Uncertainty Related to Renewal of Our Arrangements with Maersk



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



Liquidity and Capital Resources



Our
principal sources of funds have been (i) earnings before non-cash charges, (ii) borrowings under debt arrangements and (iii) equity capitalization. Our principal uses of funds have been (i) capital expenditures on our container
fleet, our terminal operating equipment, improvements to our owned and leased vessel fleet, and our information technology systems, (ii) vessel drydocking expenditures, (iii) the purchase of vessels upon expiration of operating leases,
(iv) working capital consumption, and (v) principal and interest payments on our existing indebtedness. Cash and cash equivalents totaled $64.0 million at September 25, 2005. As of September 25, 2005, $18.3 million was available
for borrowing by us under the existing $25.0 million revolving credit facility, after taking into account $6.7 million utilized for outstanding letters of credit.



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Operating Activities



|                                                                                  |  |                                      |         |   |                                      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -
|                                                                                  |  | Nine Months Ended September 19, 2004 |         |   | Nine Months Ended September 25, 2005 |  
|                                                                                  |  | ($ in thousands)                     |        
|Cash flows provided by operating activities                                       |  |                                      |         |   |                                      |   |         |  
|Net income (loss)                                                                 |  | $                                    | 18,777  |   |                                      | $ | (7,428  | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                      |         |   |                                      |   |         |  
|Depreciation                                                                      |  |                                      | 24,814  |   |                                      |   | 23,855  |  
|Amortization of other intangible assets                                           |  |                                      | 2,140   |   |                                      |   | 14,671  |  
|Amortization of vessel drydocking                                                 |  |                                      | 11,978  |   |                                      |   | 12,359  |  
|Amortization of deferred financing costs                                          |  |                                      | 876     |   |                                      |   | 2,528   |  
|Deferred income taxes                                                             |  |                                      | 2,968   |   |                                      |   | 1,818   |  
|Stock-based compensation                                                          |  |                                      | 1,765   |   |                                      |   | 12,039  |  
|Accretion of interest on 11% senior discount notes                                |  |                                      |         |   |                                      |   | 9,384   |  
|Accretion of preferred units of subsidiary                                        |  |                                      | 2,686   |   |                                      |   |        |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Subtotal                                                                          |  |                                      | 47,227  |   |                                      |   | 76,653  |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Earnings adjusted for non-cash charges                                            |  |                                      | 66,004  |   |                                      |   | 69,226  |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Changes in operating assets and liabilities:                                      |  |                                      |         |   |                                      |   |         |  
|Accounts receivable                                                               |  |                                      | (11,171 | ) |                                      |   | (26,095 | )
|Materials and supplies                                                            |  |                                      | (2,423  | ) |                                      |   | (4,112  | )
|Other current assets                                                              |  |                                      | (4,885  | ) |                                      |   | 766     |  
|Accounts payable                                                                  |  |                                      | (5,131  | ) |                                      |   | (1,666  | )
|Accrued liabilities                                                               |  |                                      | (4,706  | ) |                                      |   | 19,366  |  
|Other assets / liabilities                                                        |  |                                      | (3,136  | ) |                                      |   | (1,296  | )
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Subtotal                                                                          |  |                                      | (31,452 | ) |                                      |   | (13,039 | )
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Loss (gain) on equipment disposals                                                |  |                                      | 24      |   |                                      |   | (253    | )
|Vessel drydocking payments                                                        |  |                                      | (10,793 | ) |                                      |   | (12,621 | )
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash provided by operating activities                                         |  | $                                    | 23,783  |   |                                      | $ | 43,315  |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  



Operating Activities



Net cash provided by operating activities increased
by $19.5 million to $43.3 million for the nine months ended September 25, 2005 compared to $23.8 million of net cash provided by operating activities for the nine months ended September 19, 2004. This increase is primarily driven by
improved profitability after non-cash charges and by a positive net change in working capital. Net earnings adjusted for depreciation, amortization, deferred income taxes, accretion and other non-cash operating activities resulted in cash flow
generation of $69.2 million for the nine months ended September 25, 2005 compared to $66.0 million for the nine months ended September 19, 2004. Changes in working capital resulted in a use of cash of $13.0 million for the nine months
ended September 25, 2005 compared to a use of cash of $31.5 million for the nine months ended September 19, 2004. Approximately $17.7 million of the increase in accrued liabilities is primarily a result of vessel lease payments of $37.7
million for the nine months ended September 19, 2004 as compared to $20.0 million for the nine months ended September 25, 2005. Our vessel lease payments, which are made in January and July of each year, are not straight lined throughout
the lease terms. Other contributing factors to the increase in accrued liabilities include the timing of interest payments associated with indebtedness incurred in connection with the consummation on July 7, 2004 of the acquisition transaction.
In addition, our accounts receivable balances typically trend down in the fourth quarter of each year due to year end collection activity as well as lower revenues in the fourth quarter. Additionally, our accounts receivable have grown by $26.1
million for the nine months ended September 25, 2005 primarily as a result of revenue growth.



Investing Activities



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



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Financing Activities



Net cash used for financing activities during the nine months ended September 25, 2005 was $7.5 million compared to
$0.1 million for the nine months ended September 19, 2004, excluding our initial capitalization as part of the acquisition transaction. The net cash used for financing activities during the nine months ended September 25, 2005 primarily
includes $4.5 million of fees paid in conjunction with the Companys initial public offering, $1.6 million in fees paid in conjunction with registration statements for the 9% senior notes and the 11% senior discount notes, and $1.9 million of
principal payments on long-term debt.



Common Stock Offering



On September 30, 2005, the Company issued and sold 12,500,000 shares
(the Initial Shares) of its common stock, in the initial public offering, at a price to the public of $10.00 per share. The net proceeds to the Company from the sale of these shares were $116.5 million (net of underwriter discounts and
commissions). Other fees and expenses associated with the initial public offering totaled approximately $5.7 million, of which approximately $4.5 million was paid prior to or on September 30, 2005. On September 30, 2005, $44.7 million of
these net proceeds were contributed to HLFHC and $43.6 million of these net proceeds were contributed, via HLFHC, to HLHC, and, immediately thereafter, HLHC paid a dividend of $40.0 million to HLFHC, which then remitted such funds, as a dividend, to
the Company, which, using such funds and a portion of the proceeds of the initial public offering, redeemed, for a total redemption price of $62.2 million, all of its outstanding shares of its Series A redeemable preferred stock. In addition, on
September 30, 2005, HLHC and HL submitted a redemption notice to the indenture trustee for the 9% senior notes for the voluntary redemption, on November 2, 2005, of $40.0 million of the then outstanding aggregate principal amount of the 9%
senior notes with the proceeds from the issuance and sale of the Initial Shares. Also, on September 30, 2005, HLFHC submitted a redemption notice to the indenture trustee for the 11% senior discount notes for the voluntary redemption, on
November 2, 2005, of $40.3 million of accreted value or $52.3 million of aggregate principal amount at maturity of the 11% senior discount notes with the proceeds from the issuance and sale of the Initial Shares.



On October 14, 2005, the Company issued and sold the additional shares
of its common stock to the underwriters of its initial public offering at a net price of $9.30 per share, representing the initial public offering price to the public of $10.00 per share, less the underwriters discount of 7% per share.
These shares were issued and sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares from the Company granted to them with respect to the initial public offering. The net proceeds to the Company from
the sale of these shares were $17.4 million (net of underwriter discounts and commissions). On October 14, 2005, $3.2 million of these net proceeds were contributed to HLFHC and $14.2 million of these net proceeds were contributed, via HLFHC to
HLHC. On October 20, 2005, HLHC and HL submitted a redemption notice to the indenture trustee for the 9% senior notes for the voluntary redemption, on November 21, 2005, of $2.9 million of the then-outstanding aggregate principal amount of
the 9% senior notes with the proceeds from the issuance and sale of the Additional Shares. Also, on October 20, 2005, HLFHC submitted a redemption notice to the indenture trustee for the 11% senior discount notes for the voluntary redemption,
on November 21, 2005, of $2.9 million of accreted value or $3.7 million of aggregate principal amount at maturity of the 11% senior discount notes with the proceeds from the issuance and sale of the Additional Shares.



The early redemption of the 9% senior notes and the 11% senior discount notes
will result in a reduction of approximately $10.0 million per annum in interest expense during fiscal year 2006 and will result in a reduction of approximately $11.0 million per annum once the 11% senior discount notes are fully accreted in March
2008.



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



Capital Requirements



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



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



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



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



Contractual Obligations



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



|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|------------------------------ |  | ----------------- | --------- | -------------- | - | ------ |  | ---- | ------- | ---- | - | ------- |  | ---------- | ------ |  | - | ------ |  | - | -------
|                               |  | Total Obligations |           | Remaining 2005 |   | 2006   |  | 2007 |         | 2008 |   | 2009    |  | After 2009
|Principal obligations:         |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  | $                 | 247,500   |                | $ | 625    |  | $    | 2,500   |      | $ | 2,500   |  | $          | 2,500  |  | $ | 2,500  |  | $ | 236,875
|Notes issued by owner trustees |  |                   | 4,514     |                |   |       |  |      |        |      |   | 4,514   |  |            |       |  |   |       |  |   |       
|9% senior notes                |  |                   | 250,000   |                |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   | 250,000
|11% senior discount notes      |  |                   | 160,000   |                |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   | 160,000
|Operating leases               |  |                   | 368,196   |                |   | 10,802 |  |      | 57,760  |      |   | 74,535  |  |            | 33,446 |  |   | 33,283 |  |   | 158,370
|Capital lease obligations      |  |                   | 596       |                |   | 48     |  |      | 193     |      |   | 193     |  |            | 162    |  |   |       |  |   |       
|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                   | 1,030,806 |                |   | 11,475 |  |      | 60,453  |      |   | 81,742  |  |            | 36,108 |  |   | 35,783 |  |   | 805,245
|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Interest obligations:          |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  |                   | 92,321    |                |   | 4,024  |  |      | 17,046  |      |   | 17,341  |  |            | 17,301 |  |   | 17,234 |  |   | 19,375 
|Series B notes                 |  |                   | 624       |                |   | 139    |  |      | 485     |      |   |         |  |            |        |  |   |        |  |   |        
|9% senior notes                |  |                   | 165,000   |                |   | 11,250 |  |      | 22,500  |      |   | 22,500  |  |            | 22,500 |  |   | 22,500 |  |   | 63,750 
|11% senior discount notes      |  |                   | 83,600    |                |   |       |  |      |        |      |   |        |  |            | 8,800  |  |   | 17,600 |  |   | 57,200 
|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                   | 341,545   |                |   | 15,413 |  |      | 40,031  |      |   | 39,841  |  |            | 48,601 |  |   | 57,334 |  |   | 140,325
|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Total principal and interest   |  | $                 | 1,372,351 |                | $ | 26,888 |  | $    | 100,484 |      | $ | 121,583 |  | $          | 84,709 |  | $ | 93,117 |  | $ | 945,570
|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Other commercial commitments:  |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|Standby letters of credit      |  | $                 | 6,745     |                | $ |       |  | $    |        |      | $ |        |  | $          |       |  | $ |       |  | $ | 6,745  
|Surety bonds                   |  |                   | 8,575     |                |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   | 8,575  
|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        
|                               |  | $                 | 15,320    |                | $ |       |  | $    |        |      | $ |        |  | $          |       |  | $ |       |  | $ | 15,320 
|                               |  |                   |           |                |   |        |  |      |         |      |   |         |  |            |        |  |   |        |  |   |        

---

|(1) | Included in contractual obligations are scheduled interest payments. Interest payments on the senior credit facility are variable and are based as of September 25, 2005, upon
the London Inter-Bank Offering Rate (LIBOR) plus 2.50%. The three-month LIBOR / swap curve has been utilized to estimate interest payments on the senior credit facility. Interest on the 9% senior notes is fixed and is paid semi-annually on
May 1 and November 1 of each year until maturity on November 1, 2012. Interest on the 11% senior discount notes is fixed. However, no cash interest will accrue prior to April 1, 2008. Thereafter, cash interest will accrue at a
rate of 11.0% per annum and be payable on April 1 and October 1 of each year, commencing on October 1, 2008 and continuing until maturity on April 1, 2013.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|------------------------------ |  | ----------------- | --------- | -------------- | - | ------ |  | ---- | ------ | ---- | - | ------- |  | ---------- | ------ |  | - | ------ |  | - | -------
|                               |  | Total Obligations |           | Remaining 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009    |  | After 2009
|Principal obligations:         |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  | $                 | 247,500   |                | $ | 625    |  | $    | 2,500  |      | $ | 2,500   |  | $          | 2,500  |  | $ | 2,500  |  | $ | 236,875
|Notes issued by owner trustees |  |                   | 4,514     |                |   |       |  |      |       |      |   | 4,514   |  |            |       |  |   |       |  |   |       
|9% senior notes                |  |                   | 197,014   |                |   |       |  |      |       |      |   |        |  |            |       |  |   |       |  |   | 197,014
|11% senior discount notes      |  |                   | 104,000   |                |   |       |  |      |       |      |   |        |  |            |       |  |   |       |  |   | 104,000
|Operating leases               |  |                   | 368,196   |                |   | 10,802 |  |      | 57,760 |      |   | 74,535  |  |            | 33,446 |  |   | 33,283 |  |   | 158,370
|Capital lease obligations      |  |                   | 596       |                |   | 48     |  |      | 193    |      |   | 193     |  |            | 162    |  |   |       |  |   |       
|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                   | 921,820   |                |   | 11,475 |  |      | 60,453 |      |   | 81,742  |  |            | 36,108 |  |   | 35,783 |  |   | 696,259
|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Interest obligations:          |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Senior credit facility         |  |                   | 89,083    |                |   | 3,870  |  |      | 16,432 |      |   | 16,733  |  |            | 16,699 |  |   | 16,639 |  |   | 18,710 
|Series B notes                 |  |                   | 624       |                |   | 139    |  |      | 485    |      |   |         |  |            |        |  |   |        |  |   |        
|9% senior notes                |  |                   | 130,029   |                |   | 8,866  |  |      | 17,731 |      |   | 17,731  |  |            | 17,731 |  |   | 17,731 |  |   | 50,239 
|11% senior discount notes      |  |                   | 54,340    |                |   |       |  |      |       |      |   |        |  |            | 5,720  |  |   | 11,440 |  |   | 37,180 
|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Subtotal                       |  |                   | 274,076   |                |   | 12,875 |  |      | 34,648 |      |   | 34,464  |  |            | 40,150 |  |   | 45,810 |  |   | 106,129
|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Total principal and interest   |  | $                 | 1,195,896 |                | $ | 24,350 |  | $    | 95,101 |      | $ | 116,206 |  | $          | 76,258 |  | $ | 81,593 |  | $ | 802,388
|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Other commercial commitments:  |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|Standby letters of credit      |  | $                 | 6,745     |                | $ |       |  | $    |       |      | $ |        |  | $          |       |  | $ |       |  | $ | 6,745  
|Surety bonds                   |  |                   | 8,575     |                |   |       |  |      |       |      |   |        |  |            |       |  |   |       |  |   | 8,575  
|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        
|                               |  | $                 | 15,320    |                | $ |       |  | $    |       |      | $ |        |  | $          |       |  | $ |       |  | $ | 15,320 
|                               |  |                   |           |                |   |        |  |      |        |      |   |         |  |            |        |  |   |        |  |   |        



|(1) | The figures set forth in this table give effect to the offering transactions as if they had occurred as of September 25, 2005. Included in contractual obligations are scheduled
interest payments. Interest payments on the senior credit facility are variable and are based as of September 25, 2005, on a pro forma basis, upon the London Inter-Bank Offering Rate (LIBOR) plus 2.25%. The three-month LIBOR / swap curve has
been utilized to estimate interest payments on the senior credit facility. Interest on the 9% senior notes is fixed and is paid semi-annually on May 1 and November 1 of each year until maturity on November 1, 2012. Interest on the 11%
senior discount notes is fixed. However, no cash interest will accrue prior to April 1, 2008. Thereafter, cash interest will accrue at a rate of 11.0% per annum and be payable on April 1 and October 1 of each year, commencing on
October 1, 2008 and continuing until maturity on April 1, 2013.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



On December 10, 2004, HLFHC sold $160.0 million aggregate principal amount at maturity of its 11% senior discount notes. The gross proceeds of this issuance were $112.8 million. Of these proceeds, $107.4 million was used by H-Lines
Finance to pay a dividend to the Company. The Company, in turn, used a portion of this amount to repay all of the outstanding principal and interest of the 13.0% promissory notes and to repurchase a portion of its outstanding shares of Series A
redeemable preferred stock. HLFHC also used a portion of these gross proceeds to pay related fees and expenses. In order to give the holders of the 11% senior discount notes the opportunity in the future to exchange the 11% senior discount notes for
identical notes that have been registered under the Securities Act (the new 11% senior discount notes), HLFHC agreed to file a registration statement for the new 11% senior discount notes within 180 days after the issue date of the 11%
senior discount notes, cause the registration statement for the new 11% senior discount notes to become effective within 270 days after the issue date of the 11% senior discount notes, and consummate the exchange offer within 300 days after the
issue date of the 11% senior discount notes. The exchange offer referred to in this paragraph was consummated by the HLFHC in a timely manner. HLFHC has submitted redemption notices to the indenture trustee for the 11% senior discount notes for the
following: (i) voluntary redemption, on November 2, 2005, of $40.3 million of accreted value or $52.3 million of aggregate principal amount at maturity of the 11% senior discount notes with the proceeds from the issuance and sale of the
Initial Shares and (ii) voluntary redemption, on November 21, 2005, of $2.9 million of accreted value or $3.7 million of aggregate principal amount at maturity of the 11% senior discount notes with the proceeds from the issuance and sale
of the Additional Shares.



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.



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Interest Rate Risk



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



Working Capital



Working capital at September 25, 2005, was $82.4 million, compared to $67.3 million at December 26, 2004. This $15.2 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 September 25, 2005, Moodys Investors Service and Standard
and Poors Rating Services assigned the following credit ratings to our outstanding debt:



Debt/Rating Outlook:



|                                                  |  |         |  |                  
|------------------------------------------------- |  | ------- |  | -----------------
|                                                  |  | Moodys |  | Standard & Poors
|Senior Secured Credit Facility                    |  | B2      |  | B                
|$250.0 million 9% Senior Notes due 2012           |  | B3      |  | CCC+             
|$160.0 million 11% Senior Discount Notes due 2013 |  | Caa2    |  | CCC+             
|Rating Outlook                                    |  | Stable  |  | Stable           



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



Also, on December 6, 2004, Moodys Investors Service assigned a Caa2 rating to the 11% senior discount notes and affirmed the rating on all
other currently-rated financial securities.



Ratio of Earnings to Fixed
Charges



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



|                                   |  |                                       |       
|---------------------------------- |  | ------------------------------------- | ------
|                                   |  | For theQuarter EndedSeptember 25,2005
|Pretax income                      |  | $                                     | 5,441 
|                                   | 
|Interest expense                   |  |                                       | 13,726
|Rentals                            |  |                                       | 6,203 
|                                   |  |                                       |       
|Total fixed charges                |  | $                                     | 19,929
|                                   |  |                                       |       
|Pretax earnings plus fixed charges |  | $                                     | 25,370
|                                   |  |                                       |       
|                                   | 
|Ratio of earnings to fixed charges |  |                                       | 1.27x 



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|                                   |  |                                           |        |  
|---------------------------------- |  | ----------------------------------------- | ------ | -
|                                   |  | For theNine Months EndedSeptember 25,2005 |       
|Pretax loss                        |  | $                                         | (5,000 | )
|                                   | 
|Interest expense                   |  |                                           | 40,294 |  
|Rentals                            |  |                                           | 18,764 |  
|                                   |  |                                           |        |  
|Total fixed charges                |  | $                                         | 59,058 |  
|                                   |  |                                           |        |  
|Pretax earnings plus fixed charges |  |                                           | 54,058 |  
|Ratio of earnings to fixed charges |  |                                           |       |  



For the nine months
ended September 25, 2005, our earnings were inadequate to cover fixed charges by $59.1 million. For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed
charges consists of interest expense, including amortization of net discount or premium and financing costs and the portion of operating rental expense (33%) which our management believes is representative of interest component of rent expense.



3.Quantitative and Qualitative Disclosures About Market Risk



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



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



4.Controls and Procedures



Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of September 25, 2005, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no
significant changes in our internal controls or in other factors that could significantly affect these controls during the fiscal quarter ended September 25, 2005.



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



PART II. OTHER INFORMATION



1.Legal Proceedings



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



There are two actions currently pending before the Surface Transportation
Board (referred to herein as the STB) involving HL. The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against HL and Matson Navigation Co. (referred to herein as Matson), seeks a
ruling from the STB that HLs Guam shipping rates, which are based on published tariff rates, during 1996-1998 were unreasonable under the ICC Termination Act of 1995 (referred to herein as the ICCTA), and an order



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##### Table of Contents

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



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



The second action currently pending before the STB involving HL, brought by
DHX, Inc. in 1999 against HL and Matson, challenges the reasonableness of certain rates and practices of HL and Matson. DHX is a major freight forwarder in the domestic Hawaii trade. Freight forwarders typically accept less than full container loads
of cargo, consolidate these loads into full container loads, and offer the full container load to the ocean carriers. Some freight forwarders, including DHX, also solicit full container loads from shippers. Among other things, DHX charged that HL
and Matson took actions that were intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for the full container load business. DHX is seeking $11.0 million in damages. In addition to the award of
damages, an adverse ruling could affect HLs current and future rate structure for its Hawaii shipping. An adverse STB decision could also affect the rates that HL would be permitted to charge on its other routes. On December 13, 2004, the
STB (i) dismissed all of the allegations of unlawful activity contained in DHXs complaint; (ii) found that HL met all of its tariff filing obligations; and (iii) reaffirmed the STBs earlier holdings that the
anti-discrimination provisions of the Interstate Commerce Act, which was repealed by the ICCTA, are no longer applicable to our business. On June 13, 2005, the STB issued a decision that denied DHXs motion for reconsideration and denied
the alternative request by DHX for clarification of the STBs December 13, 2004 decision. On August 5, 2005, DHX filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit challenging the STBs order
dismissing its complaint. HL has to filed a Motion to Intervene, which has been granted, so it can participate directly in the appellate process. No assurance can be given that the final decision with respect to this matter will be favorable to us.



2.Unregistered Sales of Equity Securities and Use of Proceeds



None



3.Defaults Upon Senior Securities



None



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##### Table of Contents

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



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



5.Other Information



On September 26, 2005, as set forth in the Prospectus dated September 26, 2005 (the Final IPO Prospectus), of the Company., as filed with the Securities and Exchange Commission on September 28, 2005, all options
outstanding under the Stock Option Plan, as amended on September 20, 2005, were exercised and all of the resulting shares of common stock of HLHC were exchanged for 952,325 shares of common stock and 731,448 shares of Series A preferred stock
pursuant to the provisions of the Put/Call Agreement. Immediately following such exchange, all of the shares of the common stock of HLHC that were so acquired by the Company were contributed to HLFHC, a direct wholly-owned subsidiary of the Company,
and, in turn, HLFHC contributed such shares to HLHC, a direct wholly-owned subsidiary of HLFHC. As of the date hereof, all of the outstanding shares of the common stock are directly owned by HLFHC and no options are outstanding or issuable under the
Stock Option Plan, as amended on September 20, 2005.



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



On October 18, 2005, the Board of Directors of the Company approved the
vesting in full of all of the 1,724,619 shares of the Companys common stock, par value $.01 per share, that were issued and sold by the Company on January 14, 2005 to certain employees of the Company and its subsidiaries. The Boards
approval of the vesting in full of these shares was made subject to the rights of the Company with respect to these shares under the respective restricted stock agreements dated as of January 14, 2005 pursuant to which these shares were issued
and sold. The Company will record a non-cash compensation charge of $6.9 million during its fiscal quarter ending December 25, 2005 with respect to the vesting in full of all of these 1,724,619 shares.



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



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



6.Exhibits



|           |  |                                                                                                                                                                                                                                                        
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1*      |  | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of September 22, 2005, by and among Horizon Lines, LLC, UBS AG, Stamford Branch, as administrative agent, the lenders
from time to time party thereto and the other parties thereto.
|           | 
|10.13.11** |  | Amendment to the Horizon Lines Holding Corp. Stock Option Plan.                                                                                                                                                                                        
|           | 
|10.2*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Charles G. Raymond.                                                                                                                                        
|           | 
|10.3*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Charles G. Raymond.                                                                                                                                        
|           | 
|10.4*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and M. Mark Urbania.                                                                                                                                           
|           | 
|10.5*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and M. Mark Urbania.                                                                                                                                           
|           | 
|10.6*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and John V. Keenan.                                                                                                                                            
|           | 
|10.7*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and John V. Keenan.                                                                                                                                            
|           | 
|10.8*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Robert S. Zuckerman.                                                                                                                                       
|           | 
|10.9*      |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Robert S. Zuckerman.                                                                                                                                       
|           | 
|10.10*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Gabriel M. Serra.                                                                                                                                          
|           | 
|10.11*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Gabriel M. Serra.                                                                                                                                          
|           | 
|10.12*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Brian W. Taylor.                                                                                                                                           
|           | 
|10.13*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Brian W. Taylor.                                                                                                                                           
|           | 
|10.14*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Kenneth L. Privratsky.                                                                                                                                     
|           | 
|10.15*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Kenneth L. Privratsky.                                                                                                                                     
|           | 
|10.16*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Karen H. Richards.                                                                                                                                         
|           | 
|10.17*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Karen H. Richards.                                                                                                                                         
|           | 
|10.18*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Michael T. Avara.                                                                                                                                          
|           | 
|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.                                                                                                     

---

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

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



36



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##### Table of Contents



SIGNATURE



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



Date: November 2, 2005



HORIZON LINES, INC.By:

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




37



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##### Table of Contents



EXHIBIT INDEX



|          |  |                                                                                                                                                                                                                                                        
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit   |  | Description                                                                                                                                                                                                                                            
|10.1*     |  | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of September 22, 2005, by and among Horizon Lines, LLC, UBS AG, Stamford Branch, as administrative agent, the lenders from
time to time party thereto and the other parties thereto.
|          | 
|10.13.1** |  | Amendment to the Horizon Lines Holding Corp. Stock Option Plan.                                                                                                                                                                                        
|          | 
|10.2*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Charles G. Raymond                                                                                                                                         
|          | 
|10.3*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Charles G. Raymond                                                                                                                                         
|          | 
|10.4*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and M. Mark Urbania                                                                                                                                            
|          | 
|10.5*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and M. Mark Urbania                                                                                                                                            
|          | 
|10.6*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and John V. Keenan                                                                                                                                             
|          | 
|10.7*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and John V. Keenan                                                                                                                                             
|          | 
|10.8*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Robert S. Zuckerman                                                                                                                                        
|          | 
|10.9*     |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Robert S. Zuckerman                                                                                                                                        
|          | 
|10.10*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Gabriel M. Serra                                                                                                                                           
|          | 
|10.11*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Gabriel M. Serra                                                                                                                                           
|          | 
|10.12*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Brian W. Taylor                                                                                                                                            
|          | 
|10.13*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Brian W. Taylor                                                                                                                                            
|          | 
|10.14*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Kenneth L. Privratsky                                                                                                                                      
|          | 
|10.15*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Kenneth L. Privratsky                                                                                                                                      
|          | 
|10.16*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Karen H. Richards                                                                                                                                          
|          | 
|10.17*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Karen H. Richards                                                                                                                                          
|          | 
|10.18*    |  | Stock Option Award Agreement, dated as of September 27, 2005, among Horizon Lines, Inc. and Michael T. Avara                                                                                                                                           
|          | 
|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.                                                                                                     

---

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

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



38