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 ~~June 26~~September 24, ~~2005~~2006

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

For the transition period from ~~___________~~ to ~~____________~~

Commission File Number 333-123681

HORIZON LINES HOLDING CORP.

(Exact name of registrant as specified in its charter)


Delaware		55-0816583
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(704) 973-7000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a shorter 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

~~Yes ¨ No x~~Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

~~Indicate~~Large ~~by check mark whether the Registrant is an~~ accelerated filer ~~(as~~¨ ~~defined~~Accelerated infiler ~~Rule~~¨ ~~12b~~Non-2accelerated offiler ~~the Exchange Act).~~ 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 ~~July 28~~October 30, ~~2005~~2006, 800,000 shares of common stock, par value $.01 per share, were outstanding.

HORIZON LINES HOLDING CORP.

Form 10-Q Index

		Page No.	~~Page No.~~
Part I.	Financial Information	3	3
	1.	Financial Statements	3
	1. Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	~~Unaudited Condensed Consolidated Balance Sheets~~3	3
	Unaudited Condensed Consolidated Statements of Operations	~~Unaudited Condensed Consolidated Statements of Operations~~4	4
	Unaudited Condensed Consolidated Statements of Cash Flows	~~Unaudited Condensed Consolidated Statements of Cash Flows~~5	5
	Notes to Unaudited Condensed Consolidated Financial Statements	~~Notes to Unaudited Condensed Consolidated Financial Statements~~6	6
	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	3.	Quantitative and Qualitative Disclosures About Market Risk	30
	3. Quantitative and Qualitative Disclosures About Market Risk	31
	4.	Controls and Procedures	30
	4. Controls and Procedures	32
Part II.	Other Information	33	31
	1.	Legal Proceedings	31
	1. Legal Proceedings	33
	2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	1A. Risk Factors	33
	3.	Defaults Upon Senior Securities	32
	2. Unregistered Sales of Equity Securities and Use of Proceeds	33
	4.	Submission of Matters to a Vote of Security-Holders	32
	3. Defaults Upon Senior Securities	33
	5.	Other Information	32
	4. Submission of Matters to a Vote of Security Holders	33
Signature			33
	5. Other Information	33
	6. Exhibits
Signature		34

PART I. FINANCIAL INFORMATION

1. Financial Statements

Horizon Lines Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

($ in thousands)

	December 26, 2004(1)			June 26, 2005
	September 24, 2006				December 25, 2005(1)
Assets
Current assets
Cash and cash equivalents	$	5681,~~264~~601		$	~~60,475~~$	41,083
Accounts receivable, net of allowance of $7,938 and $9,372 at December 26, 2004 and June 26, 2005, respectively		110,801			127,781
Accounts receivable, net of allowance		149,416				119,838
Income taxes receivable		9,354			9,354
Deferred tax asset		6,422				6,892
Deferred tax asset		4,055			4,843
Materials and supplies		25,223				26,355
Materials and supplies		21,680			23,304
Other current assets		7,211				5,101
Other current assets		7,019			5,479
Total current assets		269,873				199,269
Total current assets		209,173			231,236
Property and equipment, net		186,639				200,597
Property and equipment, net		190,123			177,019
Goodwill		306,724				306,724
Deferred tax assets		80,280			73,257
Intangible assets, net		172,027				188,343
Intangible assets, net		517,556			506,558
Other long term assets		22,509				18,034
Other long term assets		15,640			20,873
Total assets	$	957,772			$	912,967
Total assets	$	1,012,772		$	1,008,943
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2526,~~275~~359		$	~~21,240~~$	22,368
Deferred tax liability		1,683			1,278
Current portion of long term debt		7,013				2,500
Current portion of long term debt		2,500			2,500
Other accrued liabilities		130,163				121,849
Other accrued liabilities		114,167			121,351
Total current liabilities		163,535				146,717
Total current liabilities		143,625			146,369
Long term debt, net of current		439,514				445,902
Long term debt, net of current		496,875			495,625
Deferred tax liability		39,036				58,065
Deferred tax liability		136,538			129,581
Deferred rent		37,121				40,476
Deferred rent		44,949			42,712
Other long term liabilities		2,623				2,284
Other long term liabilities		2,429			3,206
Total liabilities		681,829				693,444
Total liabilities		824,416			817,493
Stockholders’ equity
Common stock, $.01 par value, 800,000 shares authorized and 800,000 shares issued and outstanding at December 26, 2004 and June 26, 2005		8			8
Common stock, $.01 par value. 800,000 shares authorized and outstanding at September 24, 2006 and December 25, 2005 respectively		8				8
Additional paid in capital		~~179~~186,~~486~~681			~~179,789~~	185,383
Accumulated other comprehensive income (loss)		71			(58	)
Accumulated other comprehensive (loss) income		(403	)			74
Retained earnings		889,~~791~~657			~~11,711~~	34,058
Total stockholders’ equity		~~188~~275,~~356~~943			~~191,450~~	219,523
Total liabilities and stockholders’ equity	$	1957,~~012,~~772		$	~~1,008,943~~$	912,967

(1) The balance sheet at December 2625, ~~2004~~2005 has been derived from the audited financial statements of Horizon Lines Holding Corp.

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

Horizon Lines Holding Corp. and Subsidiaries ~~and Predecessor Company~~

Unaudited Condensed Consolidated Statements of Operations

($ in thousands, except share and per share amounts)

	Predecessor-A			Horizon Lines Holding Corp.			Predecessor-A			Horizon Lines Holding Corp.
	Quarters Ended						Nine Months Ended
	For the PeriodMarch 22,2004 throughJune 20, 2004			For the PeriodMarch 28,2005 throughJune 26, 2005			For the PeriodDecember 22,2003 throughJune 20, 2004			For the PeriodDecember 27,2004 throughJune 26, 2005
	September 24, 2006				September 25, 2005		September 24, 2006				September 25, 2005
Operating revenue	$	~~235~~304,~~855~~657		$	~~270,544~~$	289,075	$	~~455~~869,~~849~~438		$	~~528,106~~$	817,181
Operating expenses:
Operating expense		186,450			216,266			368,933			422,469
Operating expense (excluding depreciation expense)		229,072				221,968		673,421				644,437
Selling, general and administrative		1923,~~108~~751			~~21,121~~	28,097		3869,~~043~~934			~~44,222~~	72,319
Depreciation and amortization		912,~~216~~445			~~12,548~~	13,085		1937,~~785~~539			~~25,441~~	38,526
Amortization of vessel drydocking		43,~~069~~362			~~4,746~~	3,815		811,~~211~~332			~~8,544~~	12,359
Miscellaneous expense, net		666			(94	)		1,871			1,220
Miscellaneous (income) expense, net		(406	)			585		786				1,805
Total operating expenses		219,509			254,587			436,843			501,896
Total operating expense		268,224				267,550		793,012				769,446
Operating income		1636,~~346~~433			~~15,957~~	21,525		1976,~~006~~426			~~26,210~~	47,735
Other expense:
Interest expense		2,255			10,066			4,603			19,745
Interest expense, net		9,831				9,588		29,105				29,333
Interest expense – preferred units of subsidiary		1,206			—			2,387			—
Other expense (income), net		2				16		(184	)			17
Other expense, net		2			(2	)		7			1
Income before income taxes		26,600				11,921		47,505				18,385
Income before income taxes		12,883			5,893			12,009			6,464
Income tax expense (benefit)		(29,230	)			4,731		(20,817	)			7,356
Income tax expense		4,902			2,407			4,564			2,625
Net income	$	55,830			$	7,190	$	68,322			$	11,029
Net income	$	7,981		$	3,486		$	7,445		$	3,839

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

Horizon Lines Holding Corp. and Subsidiaries ~~and Predecessor Company~~

Unaudited Condensed Consolidated Statements of Cash Flows

($ in thousands)

	Predecessor-A					Horizon Lines Holding Corp.
	Nine Months Ended
	For the PeriodDecember 22,2003 throughJune 20, 2004					For the PeriodDecember 27,2004 throughJune 26, 2005
	September 24, 2006			September 25, 2005
Cash flows from operating activities:
Net income	$	768,~~445~~322		$	11,029	$	~~3,839~~
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1822,~~358~~868			23,855		~~15,660~~
Amortization of other intangible assets		114,~~427~~671			14,671		~~9,781~~
Amortization of vessel drydocking		811,~~211~~332			12,359		~~8,544~~
Amortization of deferred financing costs		~~505~~2,087			2,071		~~1,172~~
Deferred income taxes		—(18,321	)		(115	)	~~(1,127~~	)
Loss (gain) on equipment disposals		61					(114	)
Gain on equipment disposals		(471	)		(253	)
Accretion of preferred units of subsidiary		2,387					—
Stock-based compensation		686			—
Changes in operating assets and liabilities:
Changes in operating assets and liabilities
Accounts receivable		(529,~~929~~579	)		(26,095	)	~~(16,980~~	)
Materials and supplies		(1,~~497~~254	)		(4,112	)	~~(1,624~~	)
Other current assets		(12,~~796~~109	)		875		~~1,540~~
Accounts payable		13,~~982~~991			(1,666	)	~~(4,035~~	)
Accrued liabilities		~~(13~~10,~~852~~283	)		22,958		~~3,423~~
Vessel drydocking payments		(913,~~879~~703	)		(12,621	)	~~(9,991~~	)
Other assets/liabilities		3(4,~~468~~890	)		(1,815	)	~~(2,114~~	)
Net cash provided by operating activities		1066,~~891~~421			41,141		~~7,974~~
Cash flows from investing activities:
Purchases of property and equipment		(1710,~~543~~381	)		(29,481	)	~~(2,217~~	)
Proceeds from the sale of property and equipment		1,224					413
Other investing activities		(1,537	)		—
Other investing activities		(150	)				—
Proceeds from the sale of property and equipment		1,819			904
Net cash used in investing activities		(1610,~~469~~099	)		(28,577	)	~~(1,804~~	)
Cash flows from financing activities:
Principal payments on long term debt		—(1,875	)		(1,875	)	~~(1,250~~	)
Dividend to parent							(919	)
Dividends to parent		(12,723	)		(3,040	)
Capital contribution		—					303
Payment of financing costs		(1,057	)		(1,023	)
Payments on capital lease obligation		(87	)				(93	)
Capital contribution		—			303
Net cash used in financing activities		(87	)				(1,959	)
Payments on capital lease obligation		(149	)		(134	)
Net (decrease) increase in cash and cash equivalents		(5,665	)				4,211
Net cash used in financing activities		(15,804	)		(5,769	)
Cash and cash equivalents at beginning of period		41,811					56,264
Net increase in cash and cash equivalents		40,518			6,795
Cash and cash equivalents at end of period	$	36,146				$	60,475
Cash and cash equivalents at beginning of period		41,083			56,264
Cash and cash equivalents at end of period	$	81,601		$	63,059

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

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(UNAUDITED)~~

1.(UNAUDITED) ~~Basis of Presentation and Operations~~

~~Unaudited~~1. ~~Interim Financial Statements~~ Organization

~~The accompanying~~Horizon ~~unaudited~~Lines ~~condensed~~Holding ~~consolidated~~Corp. ~~financial~~(“HLHC” ~~statements~~or ~~have~~the ~~been~~“Company”) ~~prepared~~operates inas ~~accordance~~a ~~with~~holding ~~accounting~~company ~~principles~~for ~~generally~~Horizon ~~accepted~~Lines, inLLC (“HL” ~~the~~or ~~United~~“Horizon ~~States~~Lines”), ofa ~~America~~Delaware ~~for~~Limited ~~interim~~company ~~financial~~and ~~information~~indirect wholly-owned subsidiary and Horizon Lines of Puerto Rico, Inc. ~~Accordingly~~(“HLPR”), ~~they~~a doDelaware ~~not~~corporation ~~include~~and ~~all~~ indirect wholly-owned subsidiary of the ~~information~~Company. ~~and~~HL operates ~~footnotes~~a ~~required~~domestic byliner ~~generally~~business ~~accepted~~with ~~accounting~~primary ~~principles~~service ~~for~~to ~~complete~~ports ~~financial~~within ~~statements.~~the Incontinental ~~the~~United ~~opinion~~States, ofPuerto ~~management~~Rico, ~~all~~Alaska, ~~adjustments~~Hawaii, ~~(consisting~~and ofGuam. ~~normal~~HL ~~recurring~~also ~~accruals)~~offers ~~considered~~terminal ~~necessary~~services and ground transportation services. HLPR operates as an agent for aHL ~~fair~~and ~~presentation~~also ~~have~~provides ~~been~~terminal ~~included~~services in ~~the~~Puerto ~~interim~~Rico. ~~financial~~The ~~statements.~~Company ~~Operating~~is ~~results~~a ~~for~~direct ~~the~~wholly-owned ~~three~~subsidiary ~~and~~of ~~six~~H-Lines ~~month~~Finance ~~periods~~Holding ~~ended~~Corp. ~~June~~(“HLFHC”) ~~26,~~and ~~2005~~HLFHC ~~are~~is ~~not~~a ~~necessarily~~direct ~~indicative~~wholly owned subsidiary of Horizon Lines, Inc. (the ~~results~~“Parent”). ~~that~~The Parent ~~may~~was beformed ~~expected~~on ~~for~~July 7, 2004 at the ~~year~~direction ~~ending~~of ~~December~~Castle 25Harlan Partners I.V. L.P., ~~2005~~a private equity investment fund managed by Castle Harlan, Inc. (“Castle Harlan”).

~~Operations~~2. Basis of Presentation

~~Horizon~~The ~~Lines~~condensed ~~Holding~~consolidated ~~Corp.~~financial ~~(the~~statements ~~“Company”)~~include ~~operates~~the asaccounts ~~a holding company for Horizon Lines, LLC (“HL”), a Delaware limited liability company and indirect wholly-owned subsidiary and Horizon Lines~~ of ~~Puerto Rico, Inc. (“HLPR”), a Delaware corporation and direct wholly-owned subsidiary. HL~~the ~~operates~~Company ~~a domestic liner business with primary service to ports within the continental United States, Puerto Rico, Alaska, Hawaii~~ and ~~Guam.~~its ~~HL also offers terminal services and ground transportation services~~subsidiaries. ~~HLPR~~All ~~operates~~significant asintercompany anitems ~~agent~~have ~~for~~been HLeliminated ~~and also provides terminal services~~ in ~~Puerto Rico~~consolidation. ~~The Company, during the period from February 27, 2003 through July 6, 2004, is referred to as “Predecessor-A”.~~

~~Basis~~The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of ~~Presentation~~Regulation S-X, and accordingly, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 25, 2005. The Company uses a 52 or 53 week (every sixth or seventh year) fiscal year that ends on the Sunday before the last Friday in December. The following are the dates represented by each fiscal period in these condensed consolidated financial statements: quarter ended September 24, 2006 represents the period from June 26, 2006 – September 24, 2006, quarter ended September 25, 2005 represents the period from June 27, 2005 – September 25, 2005, nine months ended September 24, 2006 represents the period from December 26, 2005 – September 24, 2006, and nine months ended September 25, 2005 represents the period from December 27, 2004 – September 25, 2005.

The ~~accompanying~~financial ~~condensed~~statements ~~consolidated~~as ~~financial~~of ~~statements~~September 24, ~~include~~2006 and the ~~consolidated~~financial ~~accounts~~statements offor the ~~Company~~three and ~~its~~nine ~~subsidiaries~~months asended ofSeptember 24, ~~December~~2006 26and September 25, ~~2004 and~~2005 ~~June~~are ~~26,~~unaudited; ~~2005~~however, in the ~~related~~opinion ~~consolidated~~of ~~statement~~management, ofsuch ~~operations~~statements include all adjustments necessary for the ~~periods~~financial ~~from~~information ~~March~~included ~~22,~~herein. ~~2004~~The ~~through~~preparation ~~June~~of ~~20,~~consolidated ~~2004,~~financial ~~from~~statements ~~March~~in ~~28, 2005,~~conformity ~~through~~with GAAP ~~June~~requires ~~26,~~management ~~2005,~~to ~~from~~make ~~December~~estimates ~~27,~~and ~~2004~~assumptions ~~through~~that ~~June~~affect ~~26,~~the ~~2005,~~reported ~~from~~amounts ~~December~~of ~~22,~~assets ~~2003 through~~and ~~June~~liabilities ~~20,~~and ~~2004~~disclosure of contingent assets and liabilities at the ~~related~~date ~~statement~~of the consolidated financial statements and reported amounts of revenues ~~cash~~and ~~flows~~expenses ~~for~~during the period. Actual results will differ from ~~December~~those ~~22,~~estimates. ~~2003~~Results ~~through~~of ~~June~~operations ~~20,~~for ~~2004~~interim ~~and~~periods ~~from~~are ~~December~~not ~~27,~~necessarily ~~2004~~indicative ~~through~~of ~~June~~results ~~26,~~for ~~2005.~~the ~~All~~full ~~significant~~year. ~~intercompany~~Certain ~~accounts~~prior ~~and~~period ~~transactions~~balances have been ~~eliminated.~~reclassified to conform with the current period presentation.

~~On July 7, 2004, the Company, H-Lines Subcorp~~3., aAdoption ~~wholly owned subsidiary~~ of Horizon Lines, Inc., Predecessor-A, a majority-owned subsidiary of Carlyle-Horizon Partners, L.P., and TC Group, L.L.C., an affiliate of Carlyle-Horizon Partners, L.P., amended and restated a merger agreement dated as of May 22, 2004, between the ~~same~~Tonnage ~~parties,~~Tax and, pursuant to such amended and restated merger agreement, H-Lines Subcorp. merged, on such date, with and into Predecessor-A, with Predecessor-A as the surviving corporation (such merger, the “Merger”). Upon the consummation of the Merger, the issued and outstanding shares of the common stock of Predecessor-A and the outstanding options granted by Predecessor-A to purchase shares of its common stock were converted into the right to receive the applicable portion of the aggregate merger consideration of approximately $650.0 million, whereupon Horizon Lines, Inc. became the holder of all of the outstanding common stock of Predecessor-A. In lieu of receipt of all or a portion of the applicable portion of the aggregate merger consideration, certain members of the management of Horizon Lines, LLC, an indirect subsidiary of Predecessor-A, who were stockholders or option holders of Predecessor-A immediately prior to the Merger elected to receive shares of common stock and preferred stock of Horizon Lines, Inc. or to retain their existing options for shares of the common stock in the Company. Under a certain put/call agreement dated July 7, 2004 (the “Put/Call Agreement”), the shares of common stock issued by the Company upon the exercise of such retained options are subject to exchange, at the option of the Company (or the holders of such shares), with the Company for shares of common stock and preferred stock of Horizon Lines, Inc. Approximately 92.4% of the equity of Predecessor-A was purchased pursuant to the Merger. The Merger was accounted for using the purchase method of accounting; accordingly, the consideration paid was allocated based on the estimated fair market values of the assets acquired and liabilities assumed. The excess of the consideration paid over the

The American Jobs Creation Act of 2004 (“the Act”) instituted an elective alternative tax on qualifying shipping activities (“tonnage tax”) for corporations operating U.S.-flag vessels in U.S. foreign trade. The Act defines U.S. foreign trade as transportation between a U.S. location and a foreign location or between foreign locations. This provision of the Act was intended to provide a federal corporate tax incentive for certain operators of U.S. flag vessels, thereby helping to revitalize the U.S. flag vessel industry and create more U.S. jobs. During

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(~~UNAUDITED~~Continued)

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

~~The~~ the ~~following~~quarter ~~table~~ended ~~sets~~September 24, ~~forth~~2006, after evaluating the ~~allocation~~merits and requirements of the tonnage tax, the Company elected the application of the tonnage tax instead of the ~~purchase~~federal ~~price~~corporate income tax on income from its qualifying shipping activities. This third quarter 2006 election of the tonnage tax was made in connection with the ~~Merger~~filing ($of the Company’s 2005 federal corporate income tax return and will also apply to all subsequent federal income tax returns unless the Company revokes this alternative tonnage tax treatment. The Company does not intend to revoke its election of the tonnage tax in ~~thousands~~the foreseeable future. The Company is accounting for this election as a change in the tax status of its qualifying shipping activities. The impact of this tonnage tax election resulted in a decrease in income tax expense of approximately $39.4 million during the quarter and nine months ended September 24, 2006. Approximately $10.4 million and $19.9 million relate to the benefit reported on the 2005 federal income tax return and revaluation of the deferred taxes related to the qualifying activities, respectively. The Company’s effective tax rate for the quarter and nine months ended September 24, 2006 is (109.9%): and (43.8%), respectively. Excluding the impact of the benefit reported on the 2005 federal income tax return and revaluation of the deferred taxes related to qualifying activities, the Company’s effective tax rate for the three and nine months ended September 24, 2006 would be 19.5%.

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

4. Stock-Based Compensation

~~Prior~~On toJuly 27, 2006, the ~~Merger~~Compensation onCommittee of the Board of Directors of the Parent (the ~~July~~“Board 7of Directors”) approved the grant by the Parent, ~~2004~~pursuant to its Amended and ~~subsequent~~Restated Equity Incentive Plan, of nonqualified stock options to certain employees of the Company and its subsidiaries to purchase ~~transaction~~an aggregate of 38,075 shares of its common stock at a price of $15.97 per share. These options were granted on ~~February~~such date. No such option is currently vested or exercisable. Each such option is scheduled to vest and become fully exercisable on July 27, ~~2003~~2009, provided the ~~consolidated~~employee ~~accounts~~who ~~and~~was granted such option is employed by the ~~condensed~~Company and ~~consolidated~~its ~~statements~~subsidiaries ofon ~~operations~~such ~~and~~date. ~~cash~~The ~~flows~~Company ~~represent~~recorded ~~that~~$7 thousand of ~~Predecessor-A.~~compensation ~~All~~expense ~~significant~~during ~~intercompany~~the ~~accounts and~~quarter ~~transactions~~ended ~~have~~September 24, ~~been~~2006 ~~eliminated~~related to the options.

AsOn aApril 7, ~~result~~2006, the Compensation Committee of the ~~Merger~~ onBoard ~~July~~of 7Directors approved the grant by the Parent, ~~2004~~pursuant to its Amended and ~~the~~Restated ~~application~~Equity Incentive Plan, of nonqualified stock options to certain employees of the Company and its subsidiaries to purchase ~~accounting~~an aggregate of 617,500 ~~financial~~shares ~~information~~of ~~for~~its ~~the~~common ~~period~~stock ~~after~~at ~~July~~a price of $12.54 per share. No option is currently vested or exercisable. These options were granted on such date. Each such option is scheduled to vest and become fully exercisable on April 7, ~~2004~~2009, ~~represents~~provided ~~that~~the ofemployee who was granted such option is employed by the Company, ~~which~~and isits ~~presented~~subsidiaries on asuch ~~different~~date. ~~basis~~The Company recorded $0.1 million and $0.3 million of ~~accounting~~compensation ~~than~~expense ~~that~~during the quarter and nine months ended September 24, 2006, respectively, related to the options. None of ~~Predecessor-A~~these options were exercised and 11,889 of these options were forfeited during the quarter and nine months ended September 24, 2006.

~~Recent~~On ~~Accounting~~February 1, ~~Pronouncements~~2006, the Parent entered into a restricted stock agreement for 70,000 shares with a member of management. The Company recorded $0.1 million of compensation expense during the nine months ended September 24, 2006 and will record compensation expense of $0.9 million over the five year vesting period.

InThe ~~December~~Company ~~2004,~~recorded ~~the~~$0.1 million ~~FASB~~and ~~issued SFAS No~~$0.3 ~~123~~million ~~(revised~~of ~~2004), “Share-Based~~compensation ~~Payment”~~expense ~~(SFAS~~during ~~123R),~~the ~~which~~quarter ~~replaces~~and ~~SFAS~~nine ~~No.~~months ~~123~~ended September 24, ~~“Accounting for Stock-Based Compensation~~2006,” ~~(SFAS 123) and supercedes APB opinion No. 25~~respectively, ~~“Accounting~~related ~~for Stock Issued~~ to ~~Employees.”~~the ~~SFAS 123R requires all share-based payments to employees~~705,100 ~~including~~nonqualified ~~grants of employee~~ stock options, granted to bemembers ~~recognized~~of management in ~~the~~September ~~income statement based upon their fair values beginning with the first annual period that begins after June 15,~~ 2005~~, with early adoption encouraged~~. ~~The~~None ~~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~~these ~~2006.~~options ~~Under~~were ~~SFAS~~exercised ~~123R,~~and ~~the Company must determine the appropriate fair value model to be used for valuing share-based payments~~10,956 ~~the amortization method for compensation costs and the transition method to be used at date~~ of ~~adoption.~~these ~~The transition methods include prospective and retroactive adoption~~ options. ~~The~~were ~~Company~~forfeited isduring ~~evaluating~~ the ~~requirements~~quarter ~~of SFAS 123R~~ and ~~has~~nine months ~~not~~ended ~~yet~~September 24, ~~determined~~2006. ~~the~~87,500 ~~method~~ of ~~adoption~~these oroptions ~~the~~became ~~effect~~fully ofvested ~~adopting~~on ~~SFAS 123R~~September 27, ~~and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123~~2006.

~~Reclassifications~~The Company recorded $0.3 million and $0.7 million in the quarter and nine months ended September 24, 2006, respectively, related to all stock-based compensation.

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

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(~~UNAUDITED~~Continued)

2.(UNAUDITED) ~~Stock-Based Compensation~~

~~Predecessor-A~~On ~~was~~April 19, a2006, ~~party~~the Compensation Committee of the Board of Directors voted to aimplement an employee stock ~~option~~purchase plan ~~under~~(as ~~which~~amended, the “ESPP”) effective July 1, 2006. The Parent has reserved 308,866 shares of its common stock ~~options~~for ~~were~~issuance ~~granted~~under ~~prior~~the ESPP. Employees generally are eligible to ~~July~~participate 7in the ESPP if they are employed before the beginning of the applicable purchase period, ~~2004.~~are ~~All~~customarily ~~such~~employed more than five months in a calendar year and more than twenty hours per week, and are not, and would not become as a result of being granted an option ~~options~~under ~~vested~~the onESPP, 5% stockholders of the Parent or ~~prior~~any toof ~~July~~its 7,designated ~~2004~~subsidiaries. ~~Certain~~Participation in the ESPP will end automatically upon termination of ~~these~~employment. ~~vested~~Eligible ~~options~~employees ~~remain~~are ~~outstanding~~permitted atto ~~June~~acquire ~~26,~~shares ~~2005~~of common stock through payroll deductions within a percentage range of their salary as determined by the Parent’s Compensation Committee. Such employee purchases are subject to maximum purchase limitations.

AsThe ~~permitted~~ESPP byis ~~SFAS~~intended ~~No.~~to ~~123,~~qualify as an “~~Accounting~~employee ~~for~~stock ~~Stock-based~~purchase ~~Compensation~~plan” ~~(FAS~~under ~~123),~~Section 423 ~~Predecessor-A~~of ~~chose~~the toInternal ~~continue~~Revenue toCode ~~account~~of ~~for~~1986, ~~stock-based~~as amended. ~~compensation~~The ~~using~~ESPP ~~the~~will ~~intrinsic~~terminate ~~value~~on ~~method~~July 1, ~~prescribed~~2016 inunless ~~Accounting~~it ~~Principles~~terminates ~~Board~~earlier ~~(APB)~~under ~~Opinion~~the Noterms of the ESPP. ~~25,~~The ~~“Accounting~~Board ~~for~~of ~~Stock~~Directors ~~Issued~~and the Compensation Committee have the authority to ~~Employees~~amend, ~~and~~terminate ~~its~~or ~~related~~extend ~~interpretations”.~~the ~~Accordingly~~term of the ESPP, ~~compensation~~except ~~cost~~that ~~for~~no ~~stock~~action may adversely affect any outstanding options ~~was measured~~previously asgranted under the ~~excess,~~plan ifand ~~any,~~stockholder ofapproval ~~the~~is ~~quoted~~required ~~market~~to ~~price~~increase the number of ~~the~~shares ~~Predecessor-A’s~~issued ~~stock~~or atto change the ~~date~~terms of ~~the~~eligibility. ~~grant~~The ~~over~~Board of Directors and the ~~amount~~Compensation anCommittee are ~~employee~~able ~~must~~to ~~pay~~make amendments to ~~acquire~~the ESPP as it determines to be advisable if the ~~stock.~~financial ~~Had~~accounting ~~compensation~~treatment ~~costs~~for ~~been~~the ~~determined~~ESPP ~~based~~changes onfrom the ~~fair~~financial ~~value~~accounting attreatment in effect on the ~~grant~~ date ~~consistent~~the ~~with~~ESPP ~~provisions~~was ofadopted ~~FAS~~by ~~123,~~the ~~Predecessor-A’s~~Board ~~pro~~of ~~forma~~Directors. ~~net~~The Company ~~income~~believes ~~and~~that ~~earnings~~stock-based ~~per~~compensation ~~share~~associated ~~would~~with ~~have~~the ~~been~~ESPP ~~impacted~~will asbe ~~follows~~approximately ($0.1 inmillion ~~thousands):~~per year.

	Predecessor-A
	For the Period March 22, 2004 through June 20, 2004
Net income as reported	$	7,981
Deduct: total stock-based compensation expense determined under the fair value method net of related tax effects		148
Pro forma net income	$	7,833

5. Total Comprehensive Income

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

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

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


	Quarter ended September 24, 2006			Quarter ended September 25, 2005
Net income	$	55,830		$	7,190
Change in fair value of fixed price fuel contract		(177	)		—

Comprehensive income	$	55,653		$	7,190

Expected life of option	10 years
	Nine months ended September 24, 2006			Nine months ended September 25, 2005
Risk-free interest rate	5 %
Net income	$	68,322		$	11,029
Expected volatility of stock	0 %
Change in fair value of fixed price fuel contract		(477	)		(129	)
Expected dividend yield	0 %
Comprehensive income	$	67,845		$	10,900

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(~~UNAUDITED~~Continued)

3.(UNAUDITED) ~~Other Comprehensive Income~~

~~Other~~6. ~~comprehensive~~Property ~~income~~and isEquipment ~~as follows ($ in thousands):~~

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

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

4. Property and Equipment

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

	December 26, 2004			June 26, 2005
	September 24, 2006			December 25, 2005
Vessels	$	~~106~~136,~~686~~626		$	~~107~~135,~~598~~164
Containers		2528,~~366~~105			2427,~~993~~420
Chassis		13,~~443~~534			13,~~521~~453
Cranes		1314,~~284~~230			13,~~661~~997
Machinery and equipment		1119,~~569~~173			1217,~~803~~322
Facilities and land improvement		4,250			4,311
Facilities and land improvements		7,664			5,508
Software		2930,~~099~~860			2930,~~533~~149
Other		1,~~613~~662			1,~~121~~244
Total property and equipment		~~205~~251,~~310~~854			~~207~~244,~~541~~257
Accumulated depreciation		(1565,~~187~~215	)		(3043,~~522~~660	)
Property and equipment, net	$	~~190~~186,~~123~~639		$	~~177~~200,~~019~~597

7. Intangible Assets

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


	September 24, 2006			December 25, 2005
Customer contracts	$	137,675		$	137,675
Trademarks		63,800			63,800
Deferred financing costs		20,016			19,575

Total intangibles with definite lives		221,491			221,050
Accumulated amortization		(49,464	)		(32,707	)

Net intangibles with definite lives		172,027			188,343
Goodwill		306,724			306,724

Intangible assets, net	$	478,751		$	495,067

8. Accrued Liabilities

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


	September 24, 2006		December 25, 2005
Marine operations	$	12,946	$	11,236
Terminal operations		13,984		9,537
Vessel and rolling stock rent		23,107		24,735
Vessel operations		19,040		22,049
Fuel		9,863		9,043
Bonus		7,195		8,347
Interest		12,037		6,636
Other liabilities		31,991		30,266

Total other accrued liabilities	$	130,163	$	121,849

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —(~~UNAUDITED~~Continued)

5.(UNAUDITED) ~~Intangible Assets~~

~~Intangible~~9. ~~assets~~Long-Term ~~consist~~Debt ~~of the following ($ in thousands):~~

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

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

6. Commitments and Contingencies


	September 24, 2006			December 25, 2005
Senior credit facility	$	245,000		$	246,875
9% senior notes		197,014			197,014
Notes issued by the owner trustees of the owner trusts and secured by mortgages on the vessels owned by such trusts		4,513			4,513

Total long-term debt		446,527			448,402
Less: current portion		(7,013	)		(2,500	)

Long-term debt, net of current	$	439,514		$	445,902

10. Commitments and Contingencies

Environmental Contingency

During ~~2001~~ 1999, the Alaska State Department of Environmental Conservation (the “Department”) notified athe predecessor company about contaminants from an underground storage tank in Anchorage. A $0.9 million reserve was established by such predecessor company. In September 2005, HL engaged a third party to remove and dispose of the ~~Company~~underground ~~has~~storage ~~maintained~~tanks, ~~this~~supply ~~reserve balance~~and ~~through~~place ~~June~~all 26back fill material, and conduct testing of soils. The third party completed the engagement during the fourth quarter of 2005 asand nosubmitted ~~further~~an ~~action~~underground ~~has~~storage ~~been~~tank ~~taken~~removal byreport to the Department. ~~Current~~The ~~exposure~~Department’s isrequired ~~estimated~~sampling of the wells was conducted in April 2006 and additional bio-venting quality sampling was conducted in June 2006. The results of the well sampling were submitted to ~~range~~the ~~from~~Department $0in June 2006, and the results of the additional bio-venting quality sampling were submitted in July 2006.9 ~~million~~In addition, HL submitted a proposed monitoring plan to $1the Department.0 The ~~million~~Department reviewed the results and the proposed monitoring plan and has requested that HL (i) sample the wells and perform bio-venting monitoring twice a year, (ii) install two monitoring wells in the fall of 2006 and (iii) provide reports on an annual basis detailing the results of such monitoring and sampling. ~~The~~In ~~period~~conjunction ~~over~~with ~~which~~the approval by the ~~estimated~~Department ~~accrual~~of ~~will~~HL’s bemonitoring ~~paid~~plan ~~out~~in ~~cannot~~the bequarter ~~estimated~~ended atSeptember 24, ~~this~~2006, HL reduced its reserve ~~time~~from $0.8 million to $0.2 million, the expected costs to perform such monitoring.

Legal Proceedings

~~There~~In ~~are two actions currently pending before~~ the ~~Surface~~ordinary ~~Transportation Board~~course ~~(the~~of ~~“STB”) involving Horizon Lines~~business, ~~LLC.~~from ~~The~~time ~~first~~to ~~action~~time, ~~brought by~~ the ~~Government~~Company ~~of Guam in 1998 on behalf of itself~~ and its ~~citizens~~subsidiaries ~~against~~become ~~Horizon~~involved ~~Lines,~~in ~~LLC~~various ~~and~~legal ~~Matson~~proceedings. ~~Navigation~~These ~~Co.,~~relate primarily ~~seeks~~to aclaims ~~ruling~~for ~~from~~loss ~~the~~or ~~STB~~damage ~~that~~to ~~Horizon Lines~~cargo, ~~LLC~~employees’s ~~Guam~~personal ~~shipping~~injury ~~rates~~claims, ~~during~~and ~~1996-1998~~claims ~~were~~for ~~unreasonable~~loss ~~under~~or ~~the~~damage ~~ICC~~to ~~Termination Act of 1995 (~~the ~~“ICCTA”),~~person ~~and~~or anproperty ~~order~~of ~~awarding~~third ~~reparations~~parties. toThe ~~Guam~~Company and its ~~citizens.~~subsidiaries ~~The~~generally ~~STB~~maintain ~~has~~insurance, ~~asked~~subject ~~the parties~~ to ~~brief the threshold~~customary ~~issue~~deductibles ofor ~~what~~self-retention ~~methodology should be applied in determining rate reasonableness under the ICCTA. This issue was fully briefed in June 2002~~amounts, and/or ~~the~~reserves ~~parties~~to ~~are~~cover ~~awaiting~~these atypes ~~ruling~~of claims. AnThe ~~adverse~~Company ~~ruling could result in significant damages~~ and ~~could affect Horizon Lines, LLC’s current and future rate structure for~~ its ~~Guam~~subsidiaries ~~shipping. An adverse decision could~~ also ~~affect the rates that Horizon Lines~~, ~~LLC~~from ~~would~~time ~~be permitted~~ to ~~charge on its other routes. The likelihood of an unfavorable outcome is reasonably possible. However~~time, abecome ~~range~~involved ofin ~~potential~~routine ~~damages~~employment-related ~~cannot~~disputes beand ~~determined~~disputes atwith ~~this~~parties ~~stage~~with inwhich ~~the~~they ~~action against Horizon Lines, LLC~~have contracts.

OnThere ~~June~~are 8,two ~~2005,~~actions ~~upon~~currently ~~the~~pending ~~motion~~before ofthe ~~Horizon~~Surface ~~Lines,~~Transportation Board (the “STB”) ~~issued~~involving aHL. ~~decision~~The ~~which~~first action, ~~ordered~~brought by the Government of Guam toin ~~show~~1998 ~~cause~~on bybehalf ~~June~~of ~~28,~~itself ~~2005~~and ~~why~~its ~~the action~~citizens ~~should~~against ~~not~~HL beand ~~dismissed~~Matson Navigation Co. ~~The~~(“Matson”), ~~Government~~seeks ofa ~~Guam~~ruling ~~has~~from ~~responded~~the toSTB ~~this~~that ~~decision~~HL’s byGuam ~~asserting~~shipping ~~their~~rates, ~~intent~~which toare ~~participate~~based inon ~~the~~published ~~proceeding~~tariff rates, ~~and~~during ~~attending~~1996-1998 ~~oral~~were ~~argument~~“unreasonable” inunder the ~~second~~Interstate ~~phase~~Commerce ofCommission ~~the~~Termination ~~case~~Act atof 1995 (the ~~STB.~~“ICCTA”), ~~Horizon~~and ~~Lines~~an ~~has~~order ~~filed~~awarding ~~a response~~reparations ~~thereto~~to ~~asserting~~Guam ~~that~~and ~~the~~its ~~Government~~citizens. ofThe ~~Guam’s~~STB ~~response~~ is ~~not~~addressing ~~sufficient~~this tomatter ~~show~~in ~~cause~~three phases. NoDuring ~~assurance~~the ~~can~~first bephase, ~~given~~which ~~that~~has been completed, the ~~final~~STB ~~decision~~reviewed ~~with~~the ~~respect~~allegations toset ~~this~~forth ~~matter~~in ~~will~~the becomplaints ~~favorable~~that towere ~~us.~~filed by the Government of Guam and dismissed certain

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

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

OnNOTES ~~December~~TO ~~13,~~CONDENSED ~~2004,~~CONSOLIDATED ~~the~~FINANCIAL ~~STB~~ STATEMENTS—(iContinued) dismissed all of the allegations of unlawful activity contained in DHX’s complaint; (ii) found that Horizon Lines, LLC met all of its tariff filing obligations; and (iii) reaffirmed the STB’s earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which was repealed by the ICCTA, are no longer applicable to our business. On June 13, 2005, the STB issued a decision that denied DHX’s motion for reconsideration and denied the alternative request by DHX for clarification of the STB’s December 13, 2004 decision. No assurance can be given that the final decision with respect to this matter will be favorable to us.

~~Standby~~(UNAUDITED) ~~Letters of Credit~~

~~The~~ complaints ~~Company~~while ~~has~~allowing ~~standby~~certain ~~letters~~other complaints to be addressed in phase two. During the currently ongoing second phase, at the request of ~~credit~~the STB, ~~primarily~~the parties ~~related~~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 ~~its~~issue ~~property~~a ruling in 2006 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 ~~casualty~~in ~~insurance~~what ~~programs~~amounts. On June 8, 262005, upon the motion of HL, the STB issued a decision that ordered the Government of Guam to show cause by June 28, 2005 as to why the action should not be dismissed. The Government of Guam has responded to this decision by asserting its intent to participate in the proceeding and by 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, ~~amounts~~2005 ~~outstanding~~canceling its order to show cause and notifying the parties that it had scheduled oral argument on the merits of the phase two issues. The oral argument took place 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 ~~letters~~damages. In the event that the STB were to issue a ruling whereby it accepted the Government of ~~credit~~Guam’s ~~totaled~~proposed $6standard 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.7 ~~million~~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. (“Sea-Land”), which included transportation, logistics, and terminal services between and at ports in Asia, Guam, Hawaii and the U.S. west coast. Separate financial statements were not prepared for the operations of Sea-Land that related to marine container shipping to and from Guam. Accordingly, we believe that the actual rates of return that were earned by 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” as defined 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. We have not accrued a liability relating to this litigation because we do not believe that an unfavorable outcome is probable nor can we reasonably estimate the Company’s exposure in the event there is an unfavorable outcome.

2.The second action currently pending before the STB involving HL, brought by DHX, ~~Management’s~~Inc. ~~Discussion~~(“DHX”) in 1999 against HL and ~~Analysis~~Matson, challenges the reasonableness of ~~Financial~~certain ~~Condition~~rates and ~~Results~~practices of ~~Operations~~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

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

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

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

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

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

~~Executive~~NOTES ~~Overview~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

(UNAUDITED)

~~Operating~~ to ~~revenue~~charge on its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHX’s ~~increased~~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 were repealed by ~~$34.7~~the ~~million~~ICCTA, orare 14no longer applicable to our business.7% ~~from~~On June 13, 2005, the ~~quarter~~STB ~~ended~~issued ~~June~~a 20decision that denied DHX’s motion for reconsideration and denied the alternative request by DHX for clarification of the STB’s December 13, 2004 todecision. On August 5, 2005, DHX filed a Notice of Appeal with the ~~quarter~~United ~~ended~~States ~~June~~Court 26of Appeals for the Ninth Circuit challenging the STB’s order dismissing its complaint. DHX filed an appellate brief on November 10, 2005. ~~This~~HL ~~revenue~~has ~~growth~~prepared isand submitted ~~primarily~~its ~~attributable~~response to anthe ~~increase~~DHX inbrief, ~~revenue~~and ~~containers~~all ~~shipped,~~parties ~~increased~~are ~~bunker~~waiting ~~fuel~~for ~~surcharges,~~the ~~other~~court ~~rate improvements~~to ~~resulting~~schedule ~~from~~oral ~~increases~~argument. inNo ~~other~~assurance ~~surcharges,~~can be given that the final decision with respect to this matter will be favorable ~~changes~~to inus. ~~cargo~~We ~~mix~~have ~~and~~not ~~general~~accrued ~~rate~~a ~~increases~~liability relating ~~and~~to ~~revenue~~this ~~increases~~litigation ~~from~~because ~~non-transportation~~we ~~and~~do ~~other~~not ~~revenue~~believe ~~services~~than an unfavorable outcome is probable.

~~Operating~~Standby ~~expense~~Letters ~~increased by $35.1 million or 16.0% from the quarter ended June 20, 2004 to the quarter ended June 26, 2005, primarily as a result~~ of ~~higher costs associated with the growth in total revenue container volume and increases in non-transportation and other revenue services. Other factors contributing to the~~Credit increase in operating expense included higher vessel fuel costs and higher rail and truck transportation costs as a result of higher fuel prices, higher deprecation and amortization due to the purchase price accounting step-up in basis of customer contracts and trademarks related to the consummation of the acquisition transaction on July 7, 2004, in addition to higher selling, general, and administrative costs.

~~Operating~~HL ~~income~~has ~~decreased~~standby byletters ~~$0.4~~of ~~million~~credit, orprimarily ~~2.4%~~related ~~from~~to ~~the~~its ~~quarter~~agreements ~~ended~~with ~~June~~Ship ~~20,~~Finance ~~2004~~International toLimited ~~the~~(“SFL”) ~~quarter~~and ~~ended June 26, 2005.~~its ~~This~~property ~~decrease~~and incasualty ~~operating~~insurance ~~income~~programs. isOn ~~primarily~~September 24, ~~due~~2006 toand ~~the increased operating expenses during the quarter ended June 26~~December 25, 2005, ~~specifically~~amounts ~~driven~~outstanding byon ~~the~~these ~~growth~~letters inof ~~total~~credit ~~revenue~~totaled ~~containers~~$37.2 ~~shipped,~~million ~~higher fuel costs,~~ and ~~additional amortization of intangible assets~~$6.9 ~~These~~million, ~~increased operating expenses are partially offset by increased operating revenue during the same period~~respectively.

~~Operating~~SFL ~~revenue~~Agreements increased by $72.3 million or 14.5% from the six months ended June 20, 2004 to the six months ended June 26, 2005. This revenue growth is primarily attributable to an increase in revenue containers shipped, increased bunker fuel surcharges, other rate improvements resulting from increases in other surcharges, favorable changes in cargo mix and general rate increases and revenue increases from non-transportation and other revenue services.

~~Operating~~In ~~expense~~April ~~increased~~2006, bywe completed ~~$65.1~~a ~~million~~series orof ~~14.9%~~agreements ~~from~~with ~~the~~SFL ~~six~~and ~~months~~certain ~~ended~~of ~~June~~its ~~20,~~subsidiaries ~~2004~~that will enable us to ~~the~~charter ~~six~~five ~~months~~new ~~ended~~non-Jones ~~June~~Act 26qualified container vessels, ~~2005~~each with a capacity of 2,824 ~~primarily~~twenty-foot asequivalent units (“TEUs”) and capable of a ~~result~~service speed of ~~higher~~up ~~costs~~to ~~associated~~23 ~~with~~knots (the ~~growth~~“new vessels”). All five of the new vessels are being built in ~~total~~a ~~revenue~~South ~~container~~Korean ~~volume~~shipyard pursuant to contracts between the shipyard and various third parties (the “sellers”). To date, one of ~~increases~~the invessels ~~non-transportation~~has been delivered and ~~other~~is ~~revenue~~trading ~~services.~~by ~~Other~~the ~~factors~~seller ~~contributing~~until the second quarter 2007 when the vessel will be delivered to Horizon Lines. We expect the ~~increase~~second innew ~~operating~~vessel ~~expense~~will ~~include~~be ~~higher~~delivered to us on November 30, 2006. We intend to sub-charter the vessel ~~fuel~~that ~~costs~~will ~~and~~be ~~higher~~delivered ~~rail~~on November 30, 2006 to a third party for the period between delivery and ~~truck~~the ~~transportation~~deployment ~~costs~~in asour trade routes in March 2007. The new vessels are expected to be deployed, over a ~~result~~five ofmonth ~~higher~~period ~~fuel~~in ~~prices~~2007, ~~higher~~on our ~~depreciation~~trade routes between the U.S. west coast and ~~amortization~~Asia ~~due~~and Guam. This deployment will enable us to redeploy Jones Act qualified active vessels to other Jones Act routes. Upon the ~~purchase~~deployment ~~price~~of ~~accounting~~the ~~step-up~~new invessels, ~~basis~~the redeployment of ~~customer~~certain ~~contracts~~Jones Act qualified vessels, and ~~trademarks~~the ~~related~~shifting of certain older vessels to our standby fleet, the ~~consummation~~average age of ~~the~~an ~~acquisition~~active ~~transaction~~vessel onin ~~July 7,~~our ~~2004~~fleet, inwill ~~addition~~by toreduced ~~higher~~from ~~selling,~~31 ~~general,~~years ~~and administrative~~to ~~costs~~20 years.

~~Operating~~Our ~~income~~contractual ~~increased~~arrangements bywith ~~$7.2~~SFL and its subsidiaries include an Agreement to Acquire and Charter to which HL is a party and pursuant to which SFL ~~million~~and orits 37subsidiaries are required to acquire the new vessels from the sellers and then charter them to HL.9% SFL Holdings has entered into five separate memoranda of agreement (“the MoAs”) with the sellers pursuant to which the new vessels will be acquired from the ~~six~~sellers ~~months~~following ~~ended~~their ~~June~~completion. ~~20,~~Upon ~~2004~~the delivery of each vessel to SFL Holdings by the ~~six~~applicable ~~months~~seller, ~~ended~~SFL ~~June~~Holdings 26will transfer the vessel to one of its wholly-owned subsidiaries. In connection with each such transfer, ~~2005~~the transferred vessel will be reflagged as a U.S. ~~This~~vessel ~~improvement~~and inbareboat ~~operating~~chartered ~~income~~by the applicable Shipowner to HL (the “Shipowner”). The bareboat charter for each new vessel is ~~primarily~~a ~~due~~“hell or high water” charter, and the obligation of HL to pay charter hire thereunder for the ~~substantial~~vessel ~~increase~~is inabsolute ~~operating~~and ~~revenue~~unconditional. ~~during~~The estimated aggregate annual charter hire for all of the ~~six~~five ~~months~~new ~~ended~~vessels ~~June~~is 26approximately $32.0 million, ~~2005~~based on certain assumptions with respect to ~~partially~~final ~~offset~~vessel byprice ~~expenses~~and ~~associated~~applicable ~~with~~interest rates that will be adjusted on the ~~growth~~date inof ~~total~~the ~~revenue~~delivery ~~containers~~of ~~shipped~~the particular vessel. Under the charters, ~~higher~~HL ~~fuel~~is ~~costs~~responsible for crewing, insuring, maintaining, and ~~additional~~repairing ~~depreciation~~each vessel and ~~amortization~~for ~~during~~all other operating costs with respect to each vessel. The term of each of the ~~same~~bareboat ~~period~~charters is twelve years from the date of delivery of the related vessel, with a three year renewal option exercisable by HL.

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

~~General~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We(UNAUDITED) are the nation’s leading Jones Act container shipping and logistics company, accounting for approximately 37% of total U.S. marine container shipments from the continental U.S. to Alaska, Puerto Rico and Hawaii, constituting the three non-contiguous Jones Act markets, and to Guam. Under the coastwise laws of the United States, also known as the Jones Act, all vessels transporting cargo between U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominately U.S. crews and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. We operate the largest Jones Act containership fleet with 16 vessels and approximately 22,200 cargo containers. We provide comprehensive shipping and logistics services in our markets. We have long-term access to terminal facilities in each of our ports, operating our terminals in Alaska, Hawaii, and Puerto Rico and contracting for terminal services in our seven ports in the continental U.S. and in our ports in Guam, Hong Kong and Taiwan.

~~History~~ In addition, HL has the option to purchase all of the new vessels following the five, eight, twelve, and, ~~Transactions~~if applicable, fifteen year anniversaries of the date of delivery at pre-agreed purchase prices. If HL elects to purchase all of the vessels after the five or eight year anniversary date, it will have the right to assume the outstanding debt under the Fortis Capital Corp. (“Fortis”) credit facility, and the amount of the debt so assumed will be credited against the purchase price paid by it for the vessels. If HL elects not to purchase the new vessels at the end of the initial twelve-year period and the Shipowners sell the new vessels for less than a specified amount, HL is responsible for paying the amount of such shortfall, which shall not exceed $3.8 million per new vessel. If the new vessels are to be sold by the Shipowners to an affiliated party for less than a different specified amount, HL has the right to purchase the new vessels for that different specified amount.

~~Our~~In ~~long~~order ~~operating~~to ~~history~~facilitate ~~dates~~our charter ~~back~~of tothe ~~1956~~new vessels, ~~when~~our ~~Sea-Land~~contractual ~~Service,~~arrangements ~~Inc. pioneered~~with ~~the~~SFL ~~marine~~and ~~container~~its ~~shipping~~subsidiaries ~~industry~~include ~~and~~various ~~established~~agreements ~~our~~that ~~business.~~support Inthe ~~1958,~~obligations weof ~~introduced~~SFL ~~container~~and ~~shipping~~its subsidiaries to the ~~Puerto~~sellers ~~Rico~~under ~~market~~the memoranda of agreement and inthe ~~1964~~syndicate weof ~~pioneered~~bank lenders ~~container~~led ~~shipping~~by inFortis ~~Alaska~~that ~~with~~is providing the ~~first~~debt ~~year-round~~financing ~~scheduled~~for ~~vessel service~~the acquisition. In ~~1987,~~order wefor ~~began~~HL ~~providing~~to ~~container~~secure ~~shipping~~certain ~~services~~of ~~between~~its ~~the~~obligations ~~West~~to ~~Coast~~SFL, ~~and~~SFL ~~Hawaii~~Holdings, and ~~Guam~~the ~~through~~SFL ~~our~~Shipowners ~~acquisition~~under ~~from~~the anReimbursement ~~existing~~Agreement, ~~carrier~~HL ofhas ~~all~~delivered letters of ~~its~~credit to ~~vessels~~Fortis ~~and~~in ~~certain~~an ~~other~~aggregate ~~assets~~amount ~~that~~of ~~were~~$29.3 ~~already~~million. ~~serving~~These ~~that~~letters ~~market.~~of ~~In 2000,~~credit weare ~~introduced~~comprised ~~HITS,~~of ~~our~~$25.5 ~~industry-leading~~million ~~ocean~~issued ~~shipping~~as ~~and~~collateral ~~logistics~~for ~~information~~SFL’s ~~technology~~obligations ~~system~~in ~~enabling~~respect usof tosecurity ~~capture~~deposits ~~all~~for ~~critical~~three ~~aspects~~ of ~~every~~the ~~shipment~~new vessels and ~~allowing~~$3.8 ~~our~~million ~~customers~~issued toas collateral ~~book,~~for ~~track~~SFL’s ~~and~~obligations ~~trace~~with ~~shipments~~respect onto ~~a real~~interest-~~time basis~~rate swap breakage fees. ~~Today,~~These asletters of credit will be cancelled upon the ~~only~~return ~~Jones~~by ~~Act~~the ~~vessel~~sellers ~~operator~~to ~~serving~~SFL ~~each~~Holdings of the ~~Alaska,~~security ~~Puerto~~deposits ~~Rico,~~that ~~and~~the ~~Hawaii~~sellers ~~and~~received ~~Guam~~from ~~markets,~~SFL weHoldings pursuant ~~are~~to ~~uniquely~~certain ~~positioned~~of tothe ~~serve~~memoranda ~~our~~of ~~customers~~agreement. ~~that~~We ~~require~~expect ~~shipping~~$8.5 ~~and~~million ~~logistics~~in ~~services~~letters of credit to be cancelled in ~~multiple~~the ~~markets~~fourth quarter of 2006.

OnThe ~~February~~agreement 27of HL, ~~2003~~SFL, SFL Holdings, and the ~~Company~~Shipowners ~~(which~~with atrespect to the ~~time~~aforementioned ~~was~~transactions ~~indirectly majority-owned~~is byreflected ~~Carlyle-Horizon~~in ~~Partners~~an Agreement to Acquire and Charter, ~~L.P.)~~a ~~acquired~~Reimbursement ~~from~~Agreement, ~~CSX~~and ~~Corporation~~five ~~(referred~~separate tobareboat ~~herein~~charters. asIn ~~CSX)~~addition, ~~which~~the Parent ~~was~~has issued a Guarantee in favor of the ~~successor~~Shipowners with respect to ~~Sea-Land,~~the ~~84.5%~~performance by HL of ~~CSX~~its ~~Lines,~~obligations ~~LLC~~under ~~(referred~~the Agreement to ~~herein~~Acquire asand Charter, the ~~Predecessor~~Reimbursement ~~Company)~~Agreement, the bareboat charters, and ~~100%~~an ofInterest ~~CSX~~and ~~Lines~~L/C ofLiability ~~Puerto~~Agreement, ~~Rico~~among HL, ~~Inc~~SFL, and Fortis. ~~(referred~~Copies of the Agreement to ~~herein~~Acquire and Charter, Guarantee, Reimbursement Agreement, and Interest and L/C Liability Agreement were filed as exhibits to the ~~Predecessor~~Parent’s ~~Puerto~~Form ~~Rico~~8-K ~~Entity),~~filed ~~which~~with ~~together~~the ~~constitute~~Securities ~~our~~and Exchange ~~business~~Commission ~~today.~~(the ~~This~~“SEC”) ~~transaction~~on isApril 18, ~~referred~~2006. toCopies inof ~~this~~the ~~quarterly~~bareboat ~~report~~charters were filed as exhibits to the ~~February~~Parent’s 27Registration Statement on Form S-1, ~~2003~~filed ~~purchase~~with ~~transaction.~~the ~~CSX~~SEC ~~Lines~~on May 19, ~~LLC~~2006. isAdditional ~~now~~information ~~known~~regarding asthis ~~Horizon~~transaction ~~Lines,~~was ~~LLC~~disclosed ~~and~~within ~~CSX~~the ~~Lines~~Parent’s ofForm ~~Puerto~~8-K ~~Rico~~filed with the SEC on April 18, ~~Inc.~~2006 isand ~~now~~the ~~known~~Parent’s asRegistration ~~Horizon~~Statement ~~Lines~~on ofForm ~~Puerto~~S-1 ~~Rico~~filed with the SEC on May 19, ~~Inc~~2006.

~~On July 7, 2004, H-Lines Subcorp~~11., aRecent ~~wholly-owned~~Accounting ~~subsidiary~~Pronouncements of Horizon Lines, Inc., merged with and into the Company, with the latter entity as the survivor of such merger. As a result, the Company became a wholly-owned subsidiary of Horizon Lines, Inc. The foregoing merger and related financing and other transactions are referred to in this quarterly report as the “acquisition transaction.” On July 7, 2004, as part of the acquisition transaction, the Company and HL issued $250.0 million aggregate principal amount of 9% senior notes due 2012 (“senior notes”).

OnIn ~~December 6~~September 2006, ~~2004~~the Financial Accounting Standards Board (the “FASB”) issued FASB Statement No. 158 (“FASB 158”), ~~Horizon~~“Employers’ ~~Lines~~Accounting for Defined Benefit Pension and Other Postretirement Plans, ~~Inc~~an amendment of FASB Statements No. 87, ~~formed~~88, ~~H-Lines~~106, ~~Finance~~and ~~Holding~~132(R),” ~~Corp~~which requires companies to recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets. FASB 158 asdoes anot ~~wholly-owned~~change ~~direct~~how ~~subsidiary,~~pensions and ~~contributed~~other ~~all~~postretirement ofbenefits ~~its~~are ~~shares~~accounted offor and reported in the ~~capital~~income ~~stock~~statement. The required transition method of adoption is a prospective application and recognizing the ~~Company~~funded status of a company’s benefit plans will require an offsetting adjustment to ~~H-Lines~~accumulated ~~Finance~~other ~~Holding~~comprehensive ~~Corp~~income in shareholders equity. AsThe Company has a ~~result,~~non-contributory pension plan covering approximately 27 union employees. The pension plan is in an underfunded status and the Company ~~became~~expects to record a ~~direct~~decrease ~~wholly-owned~~to ~~subsidiary~~accumulated other comprehensive income of ~~H-Lines~~approximately ~~Finance~~$0.7 ~~Holding~~million ~~Corp~~upon adoption. ~~and~~FASB ~~an indirect~~158 ~~wholly-owned~~is ~~subsidiary~~effective offor ~~Horizon~~fiscal ~~Lines~~years ending after December 15, ~~Inc~~2006.

Basis of Presentation

The accompanying condensed consolidated financial statements include the consolidated accounts of the Company and its subsidiaries as of December 26, 2004 and June 26, 2005, and the related consolidated statement of operations for the periods from March 22, 2004 through June 20, 2004, from March 28, 2005 through June 26, 2005, December 27, 2004 through June 26, 2005, from December 22, 2003 through June 20, 2004 and the related statement of cash flows for the period from December 22, 2003 through June 20, 2004 and from December 27, 2004 through June 26, 2005. All significant intercompany accounts and transactions have been eliminated.

HORIZON LINES HOLDING CORP. AND SUBSIDIARIES

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

~~Fiscal~~(UNAUDITED) ~~Year~~

WeIn ~~have~~September 2006, the FASB issued FASB Statement No. 157 (“FASB 157”), “Fair Value Measurements,” which addresses how companies should measure fair value when they are required to use a 52fair value measure for recognition or ~~53-week~~disclosure ~~(every~~purposes ~~seventh~~under ~~year)~~generally ~~fiscal~~accepted ~~year~~accounting principles. As a result of FASB 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that ~~ends~~the onnew standard will make the ~~Sunday~~measurement ~~before~~of fair value more consistent and comparable and improve disclosures about those measures. FASB 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the ~~last~~adoption ~~Friday~~of inFASB ~~December~~157 will have a material impact on its statement of operations.

~~Critical~~In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting ~~Policies~~for Income Taxes” (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company has not yet completed the process of evaluating what effect, if any, the adoption of FIN 48 will have on its consolidated statement of operations or financial position.

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

Revenue Recognition

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

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

Allowance for Doubtful Accounts

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

Casualty Claims

We purchase insurance coverage for a portion of our exposure related to employee injuries (workers’ compensation and compensation under the Longshore and Harbor Workers’ Compensation Act), vehicular and vessel collision, accidents and personal injury and cargo claims. Most insurance arrangements include a level of self-insurance (self-retention or deductible) applicable to each claim or vessel voyage, but provide an umbrella policy to limit our exposure to catastrophic claim costs. The amounts of self-insurance coverage change from time to time. Our current insurance coverage specifies that the self-insured limit on claims ranges from $2,500 to

~~HORIZON~~ 2. ~~LINES~~Management’s ~~HOLDING~~Discussion ~~CORP.~~and Analysis of Financial Condition and Results of Operations

~~$1,000,000.~~The ~~Our~~following ~~safety~~discussion ~~and~~of ~~claims~~the ~~personnel~~results ~~work~~of ~~directly~~operations ~~with~~and ~~representatives~~financial ~~from~~condition ~~our~~of ~~insurance companies to continually update~~ the ~~anticipated~~Company ~~residual exposure~~should ~~for~~be ~~each~~read ~~claim.~~in Inconjunction ~~establishing~~with ~~accruals~~the ~~and~~financial ~~reserves~~statements ~~for~~of ~~claims~~the ~~and~~Company ~~insurance expenses, we evaluate~~ and ~~monitor~~notes ~~each~~thereto ~~claim~~included ~~individually,~~elsewhere ~~and~~in wethis ~~use~~quarterly ~~factors~~report. ~~such~~In asthis quarterly ~~historical experience~~report, ~~known~~unless ~~trends and third-party estimates to determine~~ the ~~appropriate~~context ~~reserves~~otherwise ~~for~~requires ~~potential~~references ~~liability.~~to ~~Changes~~“we,” ~~in the perceived severity of previously reported claims~~“us,” ~~significant changes in medical costs~~ and ~~legislative~~“our” ~~changes~~mean ~~affecting~~ the ~~administration~~Company, oftogether ~~our~~with ~~plans~~its ~~could~~subsidiaries, ~~significantly~~on ~~impact~~a ~~the determination~~consolidated ~~of appropriate reserves~~basis.

~~Goodwill~~This Form 10-Q includes “forward-looking statements,” ~~Purchase~~within ~~Costs~~the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E ~~Other~~of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to our financial condition, results of operations, and business. Forward-looking statements, written, oral, or otherwise, are those that ~~Identifiable~~do ~~Intangible~~not ~~Assets~~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,” “think,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “projects,” “likely,” “will,” “would,” “could” and similar expressions or phrases identify forward-looking statements.

~~Under~~All ~~SFAS~~forward-looking ~~No.~~statements ~~142 “Goodwill~~involve risks and ~~Other~~uncertainties. ~~Intangible~~The occurrence ~~Assets”,~~of ~~previously~~the ~~recorded~~events ~~goodwill~~described, and ~~other~~the ~~intangible~~achievement ~~assets~~of ~~with~~the ~~indefinite~~expected ~~lives~~results, ~~are~~depend ~~not~~on ~~amortized~~many ~~but are subject to annual undiscounted cash flow impairment tests. If there is an apparent impairment~~events, a ~~new~~some ~~fair~~or ~~value~~all of ~~the~~which ~~reporting~~are ~~unit~~not ~~would~~predictable beor ~~determined.~~within Ifour ~~the~~control. ~~new~~Actual ~~fair~~results ~~value~~may isdiffer ~~less~~materially ~~than~~from ~~the~~expected ~~carrying amount, an impairment loss would be recognized~~results.

~~Customer~~Factors ~~contracts~~that ~~and~~may ~~trademarks~~cause ~~were~~actual ~~valued~~results onto ~~July~~differ 7,from ~~2004,~~expected asresults ~~part~~include: ofour ~~the~~substantial ~~acquisition~~debt; ~~transaction,~~restrictive bycovenants anunder ~~independent~~our ~~third-party~~debt; ~~valuation~~decreases ~~company~~in ~~using~~shipping ~~the~~volumes; ~~income~~our ~~appraisal~~failure ~~methodology.~~to ~~The~~renew ~~income~~our ~~appraisal~~commercial ~~methodology~~agreements ~~includes~~with aMaersk; ~~determination~~rising offuel ~~the~~prices; ~~present~~labor ~~value~~interruptions ofor ~~future~~strikes; ~~monetary~~job-related ~~benefits~~claims; toliability beunder ~~derived~~multi-employer ~~from~~pension ~~the~~plans; ~~anticipated~~compliance ~~income,~~with orsafety ~~ownership,~~and ofenvironmental ~~the~~protection and ~~subject~~other ~~asset.~~governmental ~~The~~requirements; ~~value~~new ofstatutory ~~our customer~~and ~~contracts~~regulatory ~~includes~~directives in the ~~value~~United ~~expected~~States toaddressing behomeland ~~realized~~security ~~from~~concerns; ~~existing~~the ~~contracts~~successful asstart-up ~~well~~of asany ~~from~~Jones ~~expected~~Act ~~renewals~~competitor; delayed delivery or non-delivery of ~~such~~our ~~contracts~~new ~~and~~vessels; increased isinspection ~~calculated~~procedures ~~using~~and ~~unweighted~~tight import and ~~weighted~~export ~~total~~controls; ~~undiscounted~~restrictions ~~cash~~on ~~flows~~foreign asownership ~~part~~of our vessels; repeal or substantial amendment of the ~~income~~Jones ~~appraisal methodology.~~Act; ~~The~~escalation ~~value~~ of ~~our~~insurance ~~trademarks~~costs; catastrophic losses and ~~service~~other ~~marks~~liabilities; isthe arrest ~~based~~of onour ~~various~~vessels ~~factors~~by ~~including~~maritime ~~the~~claimants; ~~strength~~severe ofweather ~~the~~and ~~trade~~natural ordisasters; ~~service~~our ~~name~~inability into ~~terms~~exercise ofour ~~recognition~~purchase ~~and~~options ~~generation~~for our chartered vessels; the aging of ~~pricing~~our ~~premiums~~vessels; ~~and~~unexpected ~~enhanced~~substantial ~~margins.~~drydocking Wecosts ~~amortize~~for ~~customer~~our vessels; the loss ~~contracts~~of ~~and~~our ~~trademarks~~key ~~and~~management ~~service~~personnel; ~~marks~~actions onby aour ~~straight-line~~significant ~~method~~stockholders; ~~over~~changes in tax laws or the ~~estimated~~interpretation ~~useful~~thereof, ~~life~~an ofadverse ~~nine~~tax toaudit ~~fifteen~~and ~~years.~~other Wetax ~~evaluate~~matters; ~~these~~and ~~assets~~legal ~~annually~~or ~~for~~other ~~potential~~proceedings ~~impairment~~to inwhich ~~accordance~~we ~~with~~are, ~~SFAS~~or ~~No.~~may ~~142.~~become, subject.

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

WeSee ~~publish~~the ~~tariffs~~section entitled “Risk Factors” in our Form 10-K for the fiscal year ended December 25, 2005 as filed with ~~fixed~~the ~~rates~~SEC or in the Parent’s prospectus filed with the SEC pursuant to Rule 424(b)(4) on September 13, 2006 for ~~all~~a ~~three~~more complete discussion of ~~our~~these ~~Jones~~risks ~~Act~~and ~~trade~~uncertainties ~~routes~~and for other risks and uncertainties. ~~These~~Those ~~rates~~factors ~~are~~and ~~subject~~the toother ~~regulation~~risk byfactors described therein are not necessarily all of the ~~Surface~~important ~~Transportation~~factors ~~Board,~~that ~~referred~~could cause actual results or developments to asdiffer ~~the~~materially ~~STB~~from those expressed in ~~this~~any ~~quarterly~~of ~~report~~our forward-looking statements. ~~However,~~Other inunknown ~~the~~or ~~case~~unpredictable offactors also could harm our ~~Puerto~~results. ~~Rico~~Consequently, ~~and~~there ~~Alaska~~can ~~trade~~be ~~routes~~no assurance that actual results or developments anticipated by us will be realized or, weeven ~~primarily~~if ~~ship~~substantially ~~containers~~realized, onthat they will have the ~~basis~~expected ofconsequences ~~confidential~~to, ~~negotiated~~or ~~transportation~~effects ~~service~~on, ~~contracts~~us. Given these ~~that~~uncertainties, prospective investors are cautioned not ~~subject~~ to ~~rate~~place ~~regulation~~undue byreliance ~~the~~on ~~STB~~such forward-looking statements.

Vessel Drydocking

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

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

Deferred Tax Assets

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

~~HORIZON~~Executive ~~LINES~~Overview ~~HOLDING CORP.~~

Union Plans


	Quarter Ended September 24, 2006			Quarter Ended September 25, 2005			Nine Months Ended September 24, 2006			Nine Months Ended September 25, 2005
	($ in thousands)
Operating revenue	$	304,657		$	289,075		$	869,438		$	817,181
Operating expense		268,224			267,550			793,012			769,446

Operating income	$	36,433		$	21,525		$	76,426		$	47,735

Operating ratio		88.0	%		92.6	%		91.2	%		94.2	%
Revenue containers (units)		77,108			80,316			224,313			233,341

WeOperating ~~contribute~~revenue toincreased ~~multiemployer~~by ~~health,~~$15.6 ~~welfare~~million ~~and~~or ~~pension~~5.4% ~~plans~~from ~~for~~the ~~employees~~quarter ~~covered~~ended bySeptember 25, 2005 ~~collective~~to ~~bargaining~~the ~~agreements.~~quarter ~~The~~ended ~~amounts of these contributions~~September 24, ~~absent~~2006 aand ~~termination,~~by ~~withdrawal~~$52.3 million or ~~determination~~6.4% byfrom the ~~Internal~~nine ~~Revenue~~months ~~Service~~ended September 25, ~~are~~2005 ~~determined~~to inthe ~~accordance~~nine ~~with~~months ~~these~~ended ~~agreements~~September 24, 2006. ~~Our~~This ~~health~~revenue ~~and~~growth ~~welfare~~is ~~plans~~primarily ~~provide~~attributable ~~health~~to ~~care~~rate ~~and~~improvements resulting ~~disability~~from ~~benefits~~favorable tochanges ~~active~~in ~~employees~~cargo mix and ~~retirees.~~ ~~The~~general ~~pension~~rate ~~plans~~increases, ~~provide~~and ~~defined~~increased ~~benefits~~bunker toand ~~retired~~intermodal ~~participants.~~fuel ~~The~~surcharges ~~pension~~more ~~plans~~than ~~provide~~offsetting ~~defined~~some ~~benefits~~volume ~~to retired participants~~softness. WeIn ~~recognize~~addition, asthe ~~net~~revenue ~~pension~~growth ~~cost~~in the ~~required~~nine ~~contribution~~month ~~for~~period ~~the~~ended September 24, ~~applicable~~2006 ~~period~~is ~~and~~due ~~recognize~~to asrevenue ~~a liability~~increases ~~any~~from ~~contributions~~non-transportation ~~due~~ and ~~unpaid~~other revenue services.

WeOperating ~~have~~expense aincreased by ~~noncontributory~~$0.7 ~~pension~~million ~~plan~~or ~~that~~0.3% ~~covered~~from 20the ~~union~~quarter ~~employees~~ended ~~as of June 26~~September 25, 2005. ~~Costs~~to of the ~~plan~~quarter ~~are~~ended ~~charged~~September 24, to2006 ~~current operations~~ and ~~consist~~increased ofby ~~several~~$23.6 ~~components~~million ofor ~~net~~3.1% ~~periodic~~from ~~pension~~the ~~cost~~nine ~~based~~months onended ~~various~~September 25, ~~actuarial~~2005 ~~assumptions~~to ~~regarding future experience of~~ the ~~plans.~~nine Inmonths ~~addition~~ended September 24, 2006 ~~certain~~primarily ~~other~~as ~~union~~a ~~employees~~result ~~are~~of ~~covered~~higher byvessel ~~plans~~fuel ~~provided~~costs byand ~~their~~higher ~~respective~~rail ~~union~~and ~~organizations.~~truck Wetransportation ~~expense~~costs ~~amounts~~ as ~~paid~~a inresult ~~accordance~~of ~~with~~higher ~~the~~fuel ~~applicable~~prices, ~~union~~and ~~agreements.~~an ~~Amounts~~increase ~~recorded~~in ~~for~~rolling ~~the pension~~stock ~~plan~~rent ~~covering~~due ~~the~~to 20new ~~union~~container ~~employees~~fleet ~~reflect~~leases. ~~estimates~~This ~~related~~nine tomonth ~~future~~period ~~interest~~increase ~~rates,~~is offset ~~investment~~by ~~returns~~a ~~and~~decrease ~~employee~~in ~~turnover.~~selling, Wegeneral, ~~review all assumptions~~ and ~~estimates~~administrative onexpenses andue ~~ongoing~~to ~~basis.~~the Weelimination ~~record~~of anthe ~~additional~~Castle ~~minimum~~Harlan ~~pension~~management ~~liability adjustment,~~fee ~~when~~and ~~necessary,~~a ~~for~~decrease ~~the~~in ~~amount~~variable ofoperating ~~underfunded~~costs ~~accumulated~~as ~~pension~~a ~~obligations~~result inof ~~excess~~lower ofrevenue ~~accrued~~container ~~pension~~volumes ~~costs~~shipped.

~~Property~~Operating ~~And~~income ~~Equipment~~increased by $14.9 million or 69.3% from the quarter ended September 25, 2005 to the quarter ended September 24, 2006 and by $28.7 million or 60.1% from the nine months ended September 25, 2005 to the nine months ended September 24, 2006. This increase in operating income is primarily due to revenue growth in excess of operating expense growth as well as a reduction in selling, general, and administrative expenses due to the elimination of the Castle Harlan management fee.

We ~~capitalize~~believe ~~property~~that ~~and~~in addition ~~equipment~~to asGAAP ~~permitted~~based orfinancial ~~required~~information, byearnings ~~applicable~~before ~~accounting~~net ~~standards~~interest expense, ~~including~~income ~~replacements~~taxes, depreciation, and ~~improvements~~amortization ~~when~~(“EBITDA”) ~~costs incurred~~is a meaningful disclosure for ~~those~~the ~~purposes~~following ~~extend~~reasons: (i) EBITDA is a component of the ~~useful~~measure used ~~life~~by our Board of Directors and management team to evaluate our operating performance, (ii) the ~~asset.~~senior Wecredit ~~charge~~facility ~~maintenance~~contains covenants that require HLHC and ~~repairs~~its subsidiaries to maintain certain interest expense coverage and leverage ratios, which contain EBITDA as ~~incurred.~~a ~~Depreciation~~component, onand ~~capital~~restrict ~~assets~~upstream cash payments if certain ratios are not met, subject to certain exclusions, and our management team uses EBITDA to monitor compliance with such covenants, (iii) EBITDA is ~~computed~~a component ~~using~~of the ~~straight-line~~measure ~~method~~used ~~and~~by ~~ranges~~our ~~from~~management 3team to 25make ~~years.~~day-to-day ~~Our~~operating decisions, (iv) EBITDA is a component of the measure used by our management ~~makes~~to facilitate internal comparisons to competitors’ results and the marine ~~assumptions~~container ~~regarding~~shipping ~~future~~and ~~conditions~~logistics industry in ~~determining~~general ~~estimated~~and ~~useful~~(v) the ~~lives~~payment ~~and~~of ~~potential~~discretionary ~~salvage~~bonuses ~~values.~~to ~~These~~certain ~~assumptions~~members ~~impact~~of our management is contingent upon, among other things, the ~~amount~~satisfaction by the Parent of ~~depreciation~~certain ~~expense~~targets, which contain EBITDA as a component. We acknowledge that there are limitations when using EBITDA. EBITDA is not a recognized interm ~~the~~under ~~period~~GAAP and ~~any~~does ~~gain~~not purport to be an alternative to net income as a measure of operating performance or ~~loss~~to ~~once~~cash ~~the~~flows ~~asset~~from operating activities as a measure of liquidity. Additionally, EBITDA is ~~disposed~~not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as tax payments and debt service requirements. Because all

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

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) and supersedes APB opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based upon their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. We are required to adopt SFAS 123R in the first quarter of fiscal 2006. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation costs and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. We are evaluating the requirements of SFAS 123R and have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

~~HORIZON~~ companies ~~LINES~~do ~~HOLDING~~not ~~CORP~~use identical calculations, this presentation of EBITDA may not be comparable to other similarly titled measures of other companies. A reconciliation of net income (loss) to EBITDA is included below ($ in thousands):

Results of Operations


	Quarter Ended September 24, 2006			Quarter Ended September 25, 2005		Nine Months Ended September 24, 2006			Nine Months Ended September 25, 2005
Net income	$	55,830		$	7,190	$	68,322		$	11,029
Interest expense, net		9,831			9,588		29,105			29,333
Income tax expense (benefit)		(29,230	)		4,731		(20,817	)		7,356
Depreciation and amortization		15,807			16,900		48,871			50,885

EBITDA	$	52,238		$	38,409	$	125,481		$	98,603

~~Operating~~General ~~Revenue Overview~~

We ~~derive~~believe ~~our~~that ~~revenue~~we ~~primarily~~are ~~from~~the ~~providing~~nation’s ~~comprehensive~~leading Jones Act container shipping and integrated logistics ~~services~~company, toaccounting ~~and~~for ~~from~~approximately ~~the~~36% ~~continental~~of total U.S. ~~and~~marine container shipments from the continental United States to Alaska, Puerto Rico, and Hawaii, constituting the three non-contiguous Jones Act markets, and to Guam. WeUnder ~~charge~~the ~~our~~coastwise ~~customers~~laws onof athe ~~per~~United ~~load~~States, ~~basis~~also ~~and~~known ~~price~~as ~~our~~the ~~services~~Jones ~~based~~Act, onall ~~the~~vessels ~~length~~transporting ofcargo ~~inland~~between ~~and~~U.S. ~~ocean~~ports ~~cargo~~must, subject ~~transportation~~to ~~hauls~~limited exceptions, ~~type~~be ofbuilt ~~cargo~~in ~~and~~the ~~other~~U.S., ~~requirements~~registered under the U.S. flag, ~~such~~manned asby ~~shipment~~predominately ~~timing~~U.S. crews and ~~type~~owned ofand ~~container~~operated by U.S.-organized Incompanies ~~addition, we~~that ~~assess~~are ~~fuel~~controlled ~~surcharges~~and on75% aowned ~~basis~~by ~~consistent~~U.S. citizens. We operate the largest Jones Act containership fleet with ~~industry~~16 ~~practice.~~vessels Atand ~~times~~approximately 23,500 ~~there~~cargo iscontainers. aWe ~~timing~~provide ~~disparity~~comprehensive ~~between~~shipping ~~fuel~~and ~~surcharges~~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 ~~fuel~~Puerto ~~costs~~Rico ~~that~~and ~~may~~contracting ~~result~~for terminal services in ~~insufficient~~our ~~surcharges~~seven ~~during~~ports ~~sharp~~in ~~fuel~~the ~~price~~continental ~~hikes~~U.S. and ~~excess~~in ~~surcharges~~our ~~when fuel~~ports ~~prices~~in ~~level~~Guam, ~~off~~Hong orKong ~~decline~~and Taiwan.

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

AsOur ~~used~~long operating history dates back to 1956, when Sea-Land pioneered the marine container shipping industry and established our business. In 1958 we introduced container shipping to the Puerto Rico market, and in ~~this~~1964 ~~quarterly~~we ~~report~~pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing container shipping services between the ~~term~~U.S. ~~“revenue~~west ~~containers”~~coast ~~connotes~~and ~~containers~~Hawaii and Guam through our acquisition from an existing carrier of all of its vessels and certain other assets that ~~are~~were ~~transported~~already ~~for~~serving that market. In December 1999, the Company’s former parent, CSX Corporation, sold the international marine container operations of Sea-Land to Maersk, and the Company continued to be owned and operated as CSX Lines, LLC, a ~~charge~~division of CSX Corporation. On February 27, 2003, the Company (which at the time was indirectly majority-owned by Carlyle-Horizon Partners, L.P.) acquired from CSX Corporation, which was the successor to Sea-Land, 84.5% of CSX Lines, LLC, and 100% of CSX Lines of Puerto Rico, Inc., which together constitute our business today. CSX Lines, LLC is now known as ~~opposed~~Horizon Lines, LLC and CSX Lines of Puerto Rico, Inc. is now known as Horizon Lines of Puerto Rico, Inc. On July 7, 2004, the Parent, formerly known as H-Lines Holding Corp., was formed as an acquisition vehicle to ~~empty~~acquire the equity interest in the Company. The Parent was formed at the direction of Castle Harlan Partners IV, L. P., a private equity investment fund managed by Castle Harlan, Inc. Today, as the only Jones Act vessel ~~containers~~operator with one integrated organization serving Alaska, Hawaii, and Puerto Rico, we are uniquely positioned to serve customers requiring shipping and logistics services in more than one of these markets.

~~Operating~~Recent ~~Expenses~~Accounting ~~Overview~~Pronouncements

~~Our~~In ~~operating~~September ~~expenses consist primarily of marine operating costs~~2006, ~~inland~~ ~~transportation~~the ~~costs,~~FASB ~~vessel~~issued ~~operating~~FASB ~~costs~~158, ~~land~~which ~~costs,~~requires ~~fuel~~companies ~~costs,~~to ~~and~~recognize ~~rolling~~a ~~stock~~net ~~rent.~~liability ~~Our~~or ~~marine~~asset ~~operating costs consist of stevedoring, port charges, wharfage and various other costs~~ to ~~secure~~report ~~vessels at~~ the ~~port~~funded ~~and~~status ~~to load and unload containers to and from vessels. Our inland transportation costs consist primarily~~ of ~~the~~their ~~costs~~defined tobenefit ~~move~~pension ~~containers to~~ and ~~from~~other ~~the~~postretirement ~~port~~benefit ~~via~~plans ~~rail,~~on ~~truck~~their orbalance ~~barge~~sheets. ~~Our~~FASB ~~vessel~~158 ~~operating~~does ~~costs~~not ~~consist~~change ~~primarily of crew payroll and benefits, vessel~~how ~~maintenance,~~pensions ~~space charter costs, vessel insurance~~ and ~~vessel~~other ~~rent.~~postretirement ~~Our~~benefits ~~land~~are ~~costs~~accounted consist primarily of maintenance, yard and gate operations, warehousing operations and terminal overhead in the terminals in which we operate. We view our fuel costs as substantially fixed with respect to unit consumption but subject to potential fluctuation as a result of changes in unit prices in the fuel market. Rolling stock rent consists primarily of rent for ~~street tractors, yard equipment, chassis, gensets~~ and ~~various dry and refrigerated containers.~~

~~HORIZON~~ reported ~~LINES~~in ~~HOLDING~~the ~~CORP~~income statement. The required transition method of adoption is a prospective application and recognizing the funded status of a company’s benefit plans will require an offsetting adjustment to accumulated other comprehensive income in shareholders equity. The Company has a non contributory pension plan covering approximately 27 union employees. The pension plan is in an underfunded status and the Company expects to record a decrease to accumulated other comprehensive income of approximately $0.7 million upon adoption. FASB 158 is effective for fiscal years ending after December 15, 2006.

~~Quarter~~In ~~Ended~~September ~~June~~2006, 26the FASB issued FASB 157, ~~2005~~which ~~Compared~~addresses ~~with~~how ~~Quarter~~companies ~~Ended~~should ~~June~~measure 20fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of FASB 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. FASB 157 is effective for fiscal years beginning after November 15, ~~2004~~2007.

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

In July 2006, the FASB issued FIN 48, which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB No. 109. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company has not yet completed the process of evaluating what effect, if any, the adoption of FIN 48 will have on its consolidated statement of operations or financial position.

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

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

The preparation of our financial statements in conformity with GAAP 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.

~~The~~We ~~increased~~believe ~~revenue due~~that tothe ~~revenue~~application ~~container~~of ~~volume~~our ~~growth~~critical ~~for~~accounting policies, and the ~~quarter~~estimates ~~ended~~and ~~June~~assumptions 26inherent in those policies, ~~2005~~are ~~compared~~reasonable. toThese ~~the~~accounting ~~quarter~~policies ~~ended~~and ~~June~~estimates ~~20,~~are ~~2004~~constantly ~~reflects~~reevaluated ~~stronger~~and adjustments ~~market~~are ~~demand~~made ~~for~~when ~~transportation~~facts ~~services.~~or ~~Bunker~~circumstances ~~fuel~~dictate ~~surcharges~~a change. Historically, ~~which~~we ~~are~~have ~~included~~found inthe ~~our~~application ~~transportation revenue,~~of ~~accounted~~accounting ~~for~~policies ~~approximately~~to 7%be ofappropriate ~~total~~and ~~revenue~~actual inresults ~~the~~have ~~quarter~~not ~~ended~~differed ~~June~~materially ~~26,~~from ~~2005~~those ~~and~~determined ~~approximately~~using 5%necessary ofestimates. There ~~total~~have ~~revenue~~been inno material changes to the Company’s critical accounting policies during the quarter ~~ended~~and ~~June~~nine 20months ended September 24, ~~2004~~2006. ~~Bunker~~The ~~fuel~~critical ~~surcharges~~accounting ~~are~~policies ~~evaluated~~can ~~regularly~~be asfound in the ~~price~~Company’s ofAnnual ~~fuel~~Report ~~fluctuates~~on ~~and~~Form 10-K wefor ~~may~~the atfiscal ~~times~~year ~~incorporate~~ended ~~these~~December 25, ~~surcharges~~2005 ~~into~~as ~~our~~filed ~~base~~with ~~transportation~~the ~~rates that we charge~~SEC.

~~Operating~~Results ~~Expense. Operating expense increased to $216.3 million for the quarter ended June 26, 2005 compared to $186.5 million for the quarter ended June 20, 2004, an increase~~ of ~~$29.8~~Operations million or 16.0%. The increase in operating expense primarily reflects the increase in total revenue container volume and the effect of rising fuel prices, as well as the additional incurred costs associated with the growth in our non-transportation and other revenue. Vessel expense, which is not primarily driven by revenue container volume, increased to $77.2 million for the quarter ended June 26, 2005 from $58.5 million for the quarter ended June 20, 2004, an

Operating Revenue Overview

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

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

~~increase~~As ofused ~~$18.7~~in ~~million or 32.0%. Approximately $5.3 million of~~ this ~~increase~~Form ~~in vessel expense is attributable to additional costs related to a contract~~10-Q, ~~to manage seven oceanographic vessels which was awarded to us in~~ the ~~fourth~~term ~~quarter~~“revenue ofcontainers” ~~the~~connotes ~~twelve~~containers ~~month~~that ~~period~~are ~~ended~~transported ~~December~~for 26, 2004. Approximately $10.0 million of the remaining increase in vessel expenses is attributable to additional bunker fuel expenses. Vessel fuel cost quarter over quarter increased by 49.8% driven by a ~~significant~~charge ~~rise~~(as inopposed ~~fuel prices for the quarter ended June 26, 2005 compared~~ to ~~the~~empty ~~quarter ended June 20, 2004~~containers). ~~The remaining increase in vessel expenses is primarily attributable to higher labor costs as a result of contractual labor increases and additional overtime hours.~~

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

~~Inland~~Our ~~cost~~operating ~~increased~~expenses toconsist ~~$46.2~~primarily ~~million~~of ~~for~~marine ~~the~~operating ~~quarter~~costs, ~~ended~~inland ~~June~~transportation 26costs, ~~2005~~vessel ~~from~~operating ~~$40~~costs, land costs, and rolling stock rent.1 ~~million~~Our ~~for~~marine ~~the~~operating ~~quarter~~costs ~~ended~~consist ~~June~~of 20stevedoring, ~~2004~~ port charges, anwharfage, ~~increase~~and ofvarious $6other costs to secure vessels at the port and to load and unload containers to and from vessels.1 ~~million~~Our inland transportation costs consist primarily of the costs to move containers to and from the port via rail, truck or 15barge.~~2%,~~ asOur avessel ~~result~~operating costs consist primarily of ~~increased~~crew ~~total~~payroll ~~revenue~~costs ~~container~~and ~~volume~~benefits, ~~quarter~~vessel ~~over~~fuel ~~quarter~~costs, asvessel ~~well~~maintenance ascosts, ~~higher~~space ~~fuel~~charter costs, vessel asinsurance ~~rail~~costs and ~~truck~~vessel ~~carriers~~rent. ~~have~~We ~~substantially~~view ~~increased~~our ~~their~~vessel fuel ~~surcharges~~costs ~~quarter~~as ~~over quarter~~subject to potential fluctuation as a result of changes in unit prices in the fuel market. ~~Other~~Our ~~factors~~vessel ~~contributing~~fuel toconsumption has been generally constant for corresponding years or corresponding interim periods, since the ~~increase~~number inof ~~inland~~active ~~expense~~vessels, ~~quarter~~voyages, ~~over~~and ~~quarter~~destinations ~~were~~have ~~increases~~generally inbeen ~~linehaul~~the ~~truck~~same for corresponding years or corresponding interim periods. Our land costs consist primarily of maintenance, yard and ~~rail~~gate operations, ~~moves~~warehousing operations, and ~~increases~~terminal overhead in ~~rail~~the ~~rates~~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.

~~Land~~Quarter ~~expense~~Ended ~~increased~~September 24, to2006 ~~$33.3~~Compared ~~million~~with ~~for~~ the ~~quarter~~Quarter ~~ended~~Ended ~~June 26~~September 25, 2005 from $31.4 million for the quarter ended June 20, 2004, an increase of $1.9 million or 6.2%. The primary drivers of this quarter over quarter increase in land expense include a 3.0% increase in total revenue container volumes, increased maintenance expenses resulting from increased refrigerated containers being moved, and contractual labor increases.

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


	Quarter Ended September 24, 2006			Quarter Ended September 25, 2005			% Change
	($ in thousands)
Operating revenue	$	304,657		$	289,075		5.4	%
Operating expense:
Vessel		81,961			76,282		7.4	%
Marine		48,729			49,514		(1.6	)%
Inland		53,555			49,902		7.3	%
Land		34,195			35,709		(4.2	)%
Rolling stock rent		10,632			10,561		0.7	%

Operating expense		229,072			221,968		3.2	%
Selling, general and administrative		23,751			28,097		(15.5	)%
Depreciation and amortization		12,445			13,085		(4.9	)%
Amortization of vessel drydocking		3,362			3,815		(11.9	)%
Miscellaneous expense, net		(406	)		585		(169.4	)%

Total operating expenses		268,224			267,550		(0.3	)%

Operating income	$	36,433		$	21,525		69.3	%

Operating ratio		88.0	%		92.6	%	(4.6	)%

Revenue containers (units)		77,108			80,316		(4.0	)%

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

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

~~HORIZON~~Operating ~~LINES~~Revenue. ~~HOLDING~~Operating ~~CORP~~revenue increased to $304.7 million for the quarter ended September 24, 2006 compared to $289.1 million for the quarter ended September 25, 2005, an increase of $15.6 million or 5.4%. This revenue increase can be attributed to the following factors ($ in thousands):

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


Revenue container volume decrease	$	(10,171	)
More favorable cargo mix and general rate increases		12,128
Bunker and intermodal fuel surcharges included in rates to offset rising fuel costs		14,355
Decrease in other non-transportation services		(730	)

Total operating revenue increase	$	15,582

~~Amortization~~The ofdecreased ~~Vessel~~revenue ~~Drydocking~~due to revenue container volume declines is primarily due to overall soft market conditions in Puerto Rico, a delayed seafood season in Alaska, as well as a strategic shift away from lower margin automobile cargo to more refrigerated cargo and other higher margin freight. ~~Amortization~~This ofrevenue ~~vessel~~container ~~drydocking~~volume ~~increased~~decrease is offset by higher margin cargo mix in addition to $4general rate increases.8 ~~million~~Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 12.6% of total revenue in the quarter ended ~~June 26~~September 24, 2006 ~~2005~~and ~~from~~approximately $48.13% ~~million~~of ~~for~~total revenue in the quarter ended ~~June~~September 25, 202005. We increased our bunker and intermodal fuel surcharges several times throughout 2005 and in the first nine months of 2006 as a result of significant increases in the cost of fuel for our vessels, ~~2004~~in addition to fuel increases passed on to us by our truck, anrail, ~~increase~~and ofbarge $0carriers.7 Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into ~~million~~our orbase 16transportation rates that we charge.~~6%.~~ ~~This~~Based ~~increase~~on isrecent ~~attributed~~declines toin ~~higher~~fuel costs, ~~incurred~~we onhave ~~various~~decreased ~~recent~~our ~~vessel~~fuel ~~drydockings~~surcharges. The decrease in other non-transportation services is primarily due to decreases in equipment rentals to third parties.

~~Selling,~~Operating ~~General and Administrative~~Expense. ~~Selling,~~Operating ~~general~~expense ~~and administrative costs~~ increased to $21229.1 million for the quarter ended ~~June 26~~September 24, ~~2005~~ 2006 compared to $19222.1 0 million for the quarter ended ~~June 20~~September 25, ~~2004~~2005, an increase of $27.01 million, or 103.52%. ~~Approximately~~The ~~$0.7~~increase ~~million~~in ofoperating ~~the~~expense ~~quarter~~primarily toreflects ~~quarter~~the ~~increase~~effect isof arising ~~result~~fuel ofprices, ~~increased~~offset ~~expenses~~by ~~related~~reduced toexpenses ~~the~~associated ~~timing~~with oflower ancontainer ~~accrual~~volumes. Vessel ~~for~~expense, awhich ~~bonus~~is ~~plan which~~not ~~covers~~primarily ~~all~~driven ofby ~~our~~revenue ~~non-union~~container ~~employees.~~volume, ~~The~~increased ~~remaining~~to $182.30 million ~~increase~~for inthe ~~selling,~~quarter ~~general~~ended ~~and~~September 24, ~~administrative~~2006 ~~costs primarily result~~ from ~~increased~~$76.3 ~~costs~~million ~~related~~for tothe ~~preparation~~quarter ~~for~~ended ~~compliance~~September 25, ~~with~~2005, ~~the~~an ~~requirements~~increase of ~~Section~~$5.7 ~~404~~million, ~~of the~~or ~~Sarbanes-Oxley~~7.4%. ~~Act,~~This ~~management~~$5.7 ~~fees~~million ~~paid~~increase tocan ~~Castle~~be ~~Harlan,~~attributed ~~Inc.~~to ~~and~~the ~~general~~following ~~inflationary~~factors ~~costs~~($ ~~increases.~~in thousands):

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


Increased vessel fuel costs	$	8,036
Reduction of vessel lease expense from vessel purchases		(1,490	)
Labor and other vessel operating decreases		(867	)

Total vessel expense increase	$	5,679

~~Interest~~The ~~Expense, Net~~$8.0 ~~Interest~~million ~~expense~~increase ~~increased~~in tovessel fuel costs is comprised of an increase of $109.14 million ~~for~~due to ~~the~~a ~~quarter~~32.1% ~~ended~~increase ~~June~~in 26fuel prices, ~~2005~~offset ~~compared~~by toa decrease of $21.34 million ~~for~~due ~~the~~to ~~quarter~~lower ~~ended~~fuel ~~June~~consumption. ~~20,~~The ~~2004,~~decrease anin ~~increase~~fuel ofconsumption and the $70.89 million ordecrease ~~346.4%.~~in ~~This~~vessel ~~increase~~operating costs is primarily due to ~~significantly~~having ~~higher~~one ~~levels~~less ofvessel ~~debt~~in ~~outstanding~~service in Puerto Rico during the quarter ended ~~June 26~~September 24, ~~2005, as a result of the acquisition transaction on July 7, 2004~~2006.

~~Interest~~Marine ~~Expense~~expense –is ~~Preferred~~comprised ~~Units~~ of ~~Subsidiary.~~the ~~Interest~~costs ~~expense—preferred~~incurred ~~units~~to bring vessels into and out of ~~subsidiary~~port, ~~decreased~~and to $0load and unload containers.0 ~~million~~The ~~for~~types ~~the~~of ~~quarter~~costs ~~ended~~included ~~June~~in ~~26,~~marine ~~2005~~expense ~~compared~~are tostevedoring ~~$1.2~~and ~~million~~benefits, ~~for~~pilotage ~~the~~fees, ~~quarter~~tug ~~ended~~fees, ~~June~~government 20fees, ~~2004~~wharfage fees, ~~a decrease~~dockage offees, $1and line handler fees.2 ~~million~~Marine orexpense ~~100%~~decreased to $48.7 ~~The~~million ~~preferred~~for ~~units~~the ~~were~~quarter ~~issued~~ended inSeptember 24, ~~conjunction~~2006 ~~with~~from ~~the~~$49.5 ~~closing~~million offor ~~the~~quarter ~~February~~ended 27September 25, ~~2003~~2005, ~~purchase~~a ~~transaction~~decrease ~~and~~of ~~began~~$0.8 ~~accreting~~million, ~~interest~~or ~~at 10~~1.6%. ~~The~~This ~~holders~~decrease ofin ~~the~~marine ~~preferred~~expenses ~~units~~can ~~were~~be ~~redeemed~~attributed to a 4.0% decrease in ~~conjunction~~total ~~with~~revenue ~~the~~container ~~closing~~volume ofperiod ~~the~~over ~~acquisition~~period, ~~transaction~~offset onby ~~July~~contractual 7,labor ~~2004~~increases.

Inland expense increased to $53.6 million for the quarter ended September 24, 2006 from $49.9 million for the quarter ended September 25, 2005, an increase of $3.7 million, or 7.3%. Approximately $2.6 million of this increase was due to higher fuel surcharges primarily as a result of higher fuel costs, as rail, truck, and barge carriers have substantially increased their fuel surcharges period over period. Although total moves were lower in the quarter ended September 24, 2006 due to lower container volumes, the cost per move increased significantly

~~HORIZON~~ due ~~LINES~~to ~~HOLDING~~higher ~~CORP~~miles per move. This, together with contractual rate increases for both rail and non-rail moves, accounts for the remaining $1.1 million increase in the quarter ended September 24, 2006.

~~Six~~Land ~~Months~~expense ~~Ended~~is ~~June~~comprised 26of the costs included within the terminal for the handling, ~~2005~~maintenance, ~~Compared~~and ~~with~~storage ~~Six~~of ~~Months~~containers, ~~Ended~~including ~~June~~yard 20operations, ~~2004~~gate operations, maintenance, warehouse, and terminal overhead.

	Six MonthsEndedJune 20,2004				Six MonthsEndedJune 26,2005				% Change
	Quarter Ended September 24, 2006			Quarter Ended September 25,2005			% Change
	($ in millions)
	($ in thousands)
Operating revenue	$	455.8			$	528.1			15.9	%
Land expense:
Operating expense:
Maintenance	$	13,564		$	14,254		(4.8	)%
Vessel		118.5				144.4			21.9	%
Terminal overhead		11,980			12,097		(1.0	)%
Marine		90.3				97.3			7.7	%
Yard and gate		6,498			7,055		(7.9	)%
Inland		77.6				90.4			16.5	%
Warehouse		2,153			2,303		(6.5	)%
Land		61.7				68.9			11.7	%
Total land expense	$	34,195		$	35,709		(4.2	)%
Rolling stock rent		20.8				21.4			2.9	%
Operating expense		368.9				422.5			14.5	%
Selling, general and administrative		38.0				44.2			16.2	%
Depreciation and amortization		19.8				25.4			28.6	%
Amortization of vessel drydocking		8.2				8.5			4.0	%
Miscellaneous expense, net		1.9				1.2			(34.8	%)
Total operating expenses		436.8				501.9			14.9	%
Operating income	$	19.0			$	26.2			37.9	%
Operating ratio		95.8	%			95.0	%		(0.8	%)
Revenue containers (units)		147,202				153,024			4.0	%

~~Operating~~Non-vessel ~~Revenue. Operating~~related ~~revenue~~maintenance ~~increased~~expenses decreased primarily due to ~~$528.1~~a ~~million~~decline ~~for~~in maintenance expenses associated with the ~~six~~new ~~months~~refrigerated ~~ended~~container ~~June~~equipment ~~26,~~added to our fleet during 2005 ~~compared~~and tocontinued ~~$455.8~~focus ~~million~~on ~~for~~identifying ~~the~~and ~~six~~implementing ~~months~~variable ~~ended~~cost ~~June~~savings 20initiatives, ~~2004,~~offset anby ~~increase~~increased fuel costs of $720.34 million,. orYard ~~15.9%.~~and ~~This~~gate expense ~~revenue~~is ~~increase~~comprised ~~can~~of bethe ~~attributed~~costs toassociated with moving cargo into and out of the ~~following~~ ~~factors~~terminal ($ facility and the costs associated with the storage of equipment and revenue loads in ~~millions):~~ the terminal facility. Yard and gate expenses decreased primarily due to lower revenue container volumes.

Revenue container volume growth	$	16.5
	Quarter Ended September 24, 2006		Quarter Ended September 25, 2005		% Change
Intermodal surcharges, more favorable cargo mix, and general rate increases		23.9
	($ in thousands)
Bunker fuel surcharges included in rates to offset rising fuel cost		11.6
Depreciation and amortization:
New management contract awarded in the fourth quarter of our fiscal year ended December 26, 2004 to manage seven oceanographic vessels for the U.S. Government		11.2
Depreciation—owned vessels	$	2,731	$	2,170	25.9	%
Growth in other non-transportation services		9.1
Depreciation and amortization—other		4,824		6,026	(20.0	)%
	$	72.3
Amortization of intangible assets		4,890		4,889	0.0	%
Total depreciation and amortization	$	12,445	$	13,085	(4.9	)%
Amortization of vessel drydocking	$	3,362	$	3,815	(11.9	)%

~~The~~Depreciation ~~increased~~and ~~revenue due~~Amortization. toDepreciation ~~revenue~~and ~~container~~amortization ~~volume~~costs ~~growth~~decreased by $0.6 million for the ~~six~~quarter ~~months~~ ended ~~June 26~~September 24, ~~2005~~2006 as compared to the ~~six~~quarter ~~months~~ ended ~~June 20~~September 25, ~~2004~~2005. ~~reflects~~The ~~stronger~~$1.2 ~~market~~million ~~demand~~decrease ~~for~~in ~~transportation~~depreciation ~~services.~~and ~~Bunker~~amortization—other ~~fuel~~is ~~surcharges,~~primarily ~~which~~due ~~are~~to ~~included~~a decrease in ~~our~~leasehold improvements and in the ~~transportation~~number ~~revenue,~~of ~~accounted~~containers. ~~for~~The ~~approximately~~decrease 7%in leasehold improvement depreciation is primarily due to the acquisition of ~~total~~the ~~revenue~~rights inand beneficial interests of the ~~six~~sole ~~months~~owner ~~ended~~participant ~~June~~in 26two separate trusts, ~~2005~~the ~~and~~assets ~~approximately~~of 5%which consist primarily of ~~total~~the Horizon ~~revenue~~Enterprise and the Horizon Pacific in the ~~six~~third ~~months~~quarter ~~ended~~of ~~June~~fiscal 20year 2005, ~~2004~~and the associated reduction in leasehold improvements associated with these vessels. ~~Bunker~~Depreciation ~~fuel~~of ~~surcharges~~owned ~~are~~vessels ~~evaluated~~increased ~~regularly~~by as$0.6 million from the ~~price~~quarter ofended ~~fuel~~September 25, ~~fluctuates~~2005 ~~and~~to wethe ~~may~~quarter atended ~~times~~September 24, ~~incorporate~~2006, ~~these~~primarily ~~surcharges~~due ~~into~~to ~~our~~the ~~base~~Horizon ~~transportation~~Enterprise ~~rates~~and ~~that~~Horizon wePacific ~~charge~~transaction mentioned above.

~~Operating~~Amortization ~~Expense~~of Vessel Drydocking. ~~Operating~~Amortization ~~expense~~of ~~increased~~vessel todrydocking decreased $~~422~~0.5 million, ~~for~~or ~~the six months ended June 26~~11.9%, ~~2005 compared~~ to $~~368~~3.94 million for the ~~six months~~quarter ended ~~June 20~~September 24, ~~2004,~~2006 anfrom ~~increase of~~ $533.68 million ~~or 14.5%. The increase~~ in ~~operating expense primarily reflects~~ the quarter ~~increase~~ended ~~in total revenue container volume and the effect of rising fuel prices~~September 25, as2005 ~~well~~due asto ~~the~~more ~~additional~~drydockings ~~incurred costs associated with the growth~~ in ~~our~~2004 ~~non-transportation~~ and ~~other~~2005 ~~revenue.~~and ~~Vessel expense, which is not primarily driven by revenue container volume, increased~~ to ~~$144.4~~lower ~~million~~overall ~~for~~costs ~~the~~on ~~six~~recent ~~months ended June 26, 2005 from $118~~drydockings.5 ~~million for the six months ended June 20,~~

Selling, General and Administrative. Selling, general and administrative costs decreased to $23.8 million for the quarter ended September 24, 2006 compared to $28.1 million for the quarter ended September 25, 2005, a

~~HORIZON~~ decrease ~~LINES~~of ~~HOLDING~~$4.4 ~~CORP~~million or 15.5%. This decrease is comprised of a decrease of $8.2 million in Castle Harlan management fees, offset by approximately $2.1 million in higher legal and professional fees, and $1.7 million of other expenses, including insurance and labor related expenses. The management services and related fee provisions of a management agreement with Castle Harlan were terminated in conjunction with the Parent’s initial public offering in September 2005.

~~2004,~~Miscellaneous anExpense ~~increase~~(income), ~~of $25~~Net.9 Miscellaneous ~~million~~expense or(income), ~~21.9%.~~net ~~Approximately~~was approximately $100.24 million of ~~this~~income ~~increase~~for inthe ~~vessel~~quarter ~~expense~~ended isSeptember 24, ~~attributable~~2006 tocompared ~~additional costs related~~ to ~~a contract~~expense toof ~~manage~~$0.6 ~~seven~~million ~~oceanographic vessels which was awarded to us~~ in the ~~fourth~~ quarter ~~of the twelve month period~~ ended ~~December~~September 25, 262005, ~~2004.~~a ~~Approximately~~decrease of $~~12.~~1.0 million. ofThis decrease ~~the remaining increase in vessel expenses~~ is ~~attributable~~primarily due to ~~additional bunker~~a ~~fuel expenses~~$0.6 ~~Vessel~~million ~~fuel~~decrease ~~cost~~in ~~period~~environmental ~~over~~reserves ~~period~~related ~~increased~~to bycontaminants ~~30.1%~~from ~~driven~~an byunderground astorage ~~significant~~tank ~~rise~~ in ~~fuel prices for the six months ended June 26~~Anchorage, ~~2005 compared to the six months ended June 20~~Alaska, ~~2004.~~and ~~The~~a ~~remaining~~decrease ~~increase~~ in ~~vessel expenses~~bad isdebt ~~primarily attributable to higher labor costs as a result of contractual labor increases and additional overtime hours~~expense.

~~Marine~~Interest Expense, Net. Interest expense increased to $979.38 million for the ~~six~~quarter ~~months~~ ended ~~June 26~~September 24, ~~2005~~2006 ~~from~~compared to $909.36 million for the quarter ~~six months~~ ended ~~June 20~~September 25, ~~2004~~2005, an increase of $7.0.2 million or 72.75%. This increase inis ~~marine~~comprised ~~expenses~~of ~~can~~a be$1.2 ~~attributed~~million decrease attributable to athe 4redemption of $53.0 million of the principal amount of the 9% senior notes due 2012 (the “9% senior notes”) utilizing proceeds from the Parent’s initial public offering in September 2005. This decrease is offset by a $1.3 million increase in ~~total~~interest ~~revenue~~expense ~~container~~under ~~volume~~our ~~period~~senior ~~over~~credit ~~period~~facility due to a 200 basis point increase in interest ~~addition~~rates in the quarter ended September 24, 2006 as compared to ~~contractual~~the ~~labor~~quarter ~~increases~~ended September 25, 2005.

~~Inland~~Income ~~cost~~Tax Expense. ~~increased~~The toCompany’s ~~$90.4~~effective ~~million~~tax rate for the ~~six~~quarter ~~months~~ ended ~~June~~September 24, 262006 and September 25, 2005 ~~from~~ ~~$77~~was (109.69%) and ~~million~~39.7%, ~~for~~respectively. During the ~~six~~quarter ~~months~~ ended ~~June~~September 24, 202006, ~~2004~~after evaluating the merits and requirements of the tonnage tax, anthe ~~increase~~Company elected the application of ~~$12.8~~the ~~million~~tonnage ortax 16instead of the corporate income tax on income from its qualifying shipping activities.~~5%,~~ asThis athird ~~result~~quarter 2006 election of ~~increased~~the ~~total~~tonnage ~~revenue~~tax ~~container~~was ~~volume~~made ~~period~~in ~~over~~connection with ~~period~~the asfiling ~~well~~of asthe ~~higher~~Company’s ~~fuel~~2005 ~~costs,~~federal ascorporate ~~rail~~income tax return and ~~truck~~will ~~carriers~~also ~~have~~apply ~~substantially~~to all subsequent federal income tax returns unless the Company revokes this alternative tax treatment. The impact of this election resulted in a ~~increased~~decrease ~~their~~in ~~fuel~~income ~~surcharges~~tax ~~period~~expense ~~over~~of ~~period~~approximately $39.4 ~~Other~~million ~~factors~~during ~~contributing~~the quarter ended September 24, 2006. Approximately $10.4 million and $19.9 million relate to the ~~increase~~benefit inreported ~~inland~~on ~~expense~~the ~~period~~2005 ~~over~~federal ~~period~~income ~~were~~tax ~~increases~~return inand revaluation of the ~~average~~deferred ~~length~~taxes related to the qualifying activities, respectively. Excluding the impact of ~~haul~~the ~~for~~benefit ~~linehaul~~reported ~~truck~~on ~~moves~~the 2005 federal income tax return and ~~increases~~the inrevaluation ~~rail~~of ~~rates~~the deferred taxes related to qualifying activities, the Company’s effective tax rate for the quarter ended September 24, 2006 would be 19.5%.

~~Land~~Nine ~~expense~~Months ~~increased~~Ended ~~to $68.9 million for the six months ended June 26~~September 24, ~~2005~~ ~~from~~2006 ~~$61.7 million for the six months ended June 20, 2004, an increase of $7.2 million or 11.7%. In tandem~~ Compared with the ~~4.0%~~Nine ~~increase~~Months inEnded ~~total revenue container volume~~September 25, ~~period over period, the significant determinants of land expense increased from the six months ended June 20, 2004 to the six months ended June 26,~~ 2005, ~~as follows:~~

	Six MonthsEndedJune 20,2004		Six MonthsEndedJune 26,2005	% Change
	Nine Months Ended September 24, 2006			Nine Months Ended September 25,2005			% Change
Container lifts	526,609		540,274	2.6	%
	($ in thousands)
Container grounding moves	355,184		462,673	30.3	%
Operating revenue	$	869,438		$	817,181		6.4	%
Terminal labor hours	246,779		249,901	1.3	%
Operating expense:
Vessel		242,390			220,716		9.8	%
Marine		143,946			146,786		(1.9	)%
Inland		151,146			140,331		7.7	%
Land		102,404			104,614		(2.1	)%
Rolling stock rent		33,535			31,990		4.8	%
Operating expense		673,421			644,437		4.5	%
Selling, general and administrative		69,934			72,319		(3.3	)%
Depreciation and amortization		37,539			38,526		(2.6	)%
Amortization of vessel drydocking		11,332			12,359		(8.3	)%
Miscellaneous expense, net		786			1,805		(56.5	)%
Total operating expenses		793,012			769,446		3.1	%
Operating income	$	76,426		$	47,735		60.1	%
Operating ratio		91.2	%		94.2	%	3.0	%
Revenue containers (units)		224,313			233,341		(3.9	)%

~~HORIZON~~Operating ~~LINES~~Revenue. ~~HOLDING~~Operating ~~CORP~~revenue increased to $869.4 million for the nine months ended September 24, 2006 compared to $817.2 million for the nine months ended September 25, 2005, an increase of $52.3 million or 6.4%. This revenue increase can be attributed to the following factors ($ in thousands):

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


Revenue container volume decrease	$	(27,977	)
More favorable cargo mix and general rate increases		34,442
Bunker and intermodal fuel surcharges included in rates to offset rising fuel costs		42,079
Growth in other non-transportation services		3,713

Total operating revenue increase	$	52,257

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

The decreased revenue due to revenue container volume declines for the nine months ended September 24, 2006 compared to the nine months ended September 25, 2005 is primarily due to overall soft market conditions in Puerto Rico as well as a strategic shift away from lower margin automobile cargo to more refrigerated cargo and other higher margin freight. This revenue container volume decrease is offset by higher margin cargo mix in addition to general rate increases. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 12% of total revenue in the nine months ended September 24, 2006 and approximately 8% of total revenue in the nine months ended September 25, 2005. We increased our bunker and intermodal fuel surcharges several times throughout 2005 and in the first nine months of 2006, as a result of significant increases in the cost of fuel for our vessels and as a result of fuel increases passed on to us by our truck, rail, and barge carriers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into the base transportation rates that we charge. The growth in other non-transportation services is primarily due to increases in terminal services provided to third parties and to an increase in space charter revenue not included in transportation revenue, offset slightly by a decrease in equipment rental income.

~~Depreciation~~Operating ~~and Amortization~~Expense. ~~Depreciation~~Operating ~~and~~expense ~~amortization costs~~ increased to $25673.4 million for the ~~six~~nine months ended ~~June 26~~September 24, ~~2005~~2006 ~~from~~compared to $19644.84 million for the ~~six~~nine months ended ~~June 20~~September 25, ~~2004~~2005, an increase of $529.60 million or 284.65%. The increase in ~~depreciation~~operating ~~and amortization~~expense is primarily ~~due~~reflects to the ~~purchase~~effect ~~price~~of ~~accounting~~rising ~~step-up~~fuel inprices, ~~basis~~and ofan ~~customer~~increase ~~contracts~~in ~~and~~rolling ~~trademarks~~stock ~~related~~rent, tooffset ~~the~~by ~~consummation~~lower ofexpenses ~~the~~associated ~~acquisition~~with ~~transaction~~lower oncontainer ~~July~~volumes. 7Vessel expense, ~~2004.~~which ~~Amortization~~is ~~costs~~not primarily ~~related~~driven toby ~~customer~~revenue ~~contracts~~container ~~and trademarks~~volume, increased byto $8242.4 million ~~from~~for the ~~six~~nine months ended ~~June 20~~September 24, ~~2004~~2006 tofrom ~~the six months ended June 26, 2005. The depreciation of other assets decreased by~~ $3220.67 million ~~during~~for ~~this same period as a result of higher depreciation of leasehold improvements on leased vessels in~~ the ~~six~~nine months ended ~~June 20~~September 25, ~~2004. Three vessels under operating lease~~2005, ~~the~~an ~~Horizon~~increase ~~Fairbanks,~~of ~~Horizon~~$21.7 ~~Trader,~~million ~~and~~or ~~Horizon Navigator, were purchased during 2004~~9.8%. This ~~change~~$21.7 million ~~has~~increase ~~primarily~~can ~~contributed~~be attributed to the ~~lower depreciation~~following offactors ~~leasehold~~($ ~~improvements and higher depreciation of owned vessels~~ in ~~the~~thousands): ~~six months ended June 26, 2005.~~

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


Increased vessel fuel costs	$	28,894
Reduction of vessel lease expense from vessel purchases		(5,014	)
Labor and other vessel operating expense decreases		(2,206	)

Total vessel expense increase	$	21,674

~~Selling,~~The ~~General and Administrative~~$28.9 ~~Selling,~~million ~~general~~increase ~~and~~in ~~administrative~~fuel costs ~~increased~~is tocomprised ~~$44.2~~of ~~million~~an ~~for~~increase ~~the~~of ~~six months~~$32.5 ~~ended~~million ~~June~~due ~~26, 2005 compared~~ to $a 38.09% ~~million~~increase ~~for~~in ~~the~~fuel ~~six months ended June 20~~prices, ~~2004,~~offset anby ~~increase~~a decrease of $63.26 million ordue 16to lower fuel consumption.~~2%.~~ Approximately $30.39 million of the ~~period~~other tovessel ~~period~~operating ~~increase~~decreases is adue ~~result~~to expiration of ~~increased~~the ~~expenses~~construction ~~related~~differential tosubsidy ~~the~~restrictions ~~timing~~on oftwo anof ~~accrual~~the ~~for~~three avessels ~~bonus~~originally ~~plan~~subject ~~which~~to ~~covers~~these ~~all~~operating ofrestrictions ~~our~~in ~~non-union~~2005 ~~employees~~and the expiration in January 2006 for the third vessel. The remaining $21.93 million ~~increase~~decrease in ~~selling,~~vessel ~~general~~operating ~~and administrative~~ costs is primarily ~~result~~due ~~from increased costs related~~ to ~~preparation~~having ~~for~~one ~~compliance~~less ~~with~~vessel ~~the~~in ~~requirements~~service ofin ~~Section~~Puerto ~~404~~Rico ofduring the ~~Sarbanes-Oxley~~nine ~~Act,~~months ~~management~~ended ~~fees~~September 24, ~~paid~~2006, toslightly ~~the~~offset ~~Castle~~by ~~Harlan~~higher ~~Group~~labor and ~~general~~other ~~inflationary~~vessel ~~costs~~operating increases.

~~Miscellaneous~~Marine ~~Expense~~expense ~~(Income)~~is comprised of the costs incurred to bring vessels into and out of port, ~~Net~~and to load and unload containers. ~~Miscellaneous~~The types of costs included in marine expense are stevedoring and benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expense decreased to $1143.29 million for the ~~six~~nine months ended ~~June 26~~September 24, ~~2005~~2006 ~~compared~~from to $1146.9 8 million for the ~~six~~nine months ended ~~June 20~~September 25, ~~2004~~2005, a decrease of $02.78 million or 341.89%. ~~Miscellaneous~~This ~~expense~~decrease ~~primarily~~in ~~consists~~marine ofexpenses ~~bad~~can ~~debt~~be ~~expense~~attributed to a 3.9% decrease in total revenue container volume period over period, offset by contractual labor increases.

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

~~HORIZON~~Inland ~~LINES~~expense ~~HOLDING~~increased ~~CORP~~to $151.1 million for the nine months ended September 24, 2006 from $140.3 million for the nine months ended September 25, 2005, an increase of $10.8 million or 7.7%. Approximately $7.3 million of this increase is due to higher fuel costs, as rail, truck, and barge carriers have substantially increased their fuel surcharges period over period.

~~Interest~~Land ~~Expense~~expense –is ~~Preferred~~comprised ~~Units~~ of ~~Subsidiary.~~the ~~Interest~~costs ~~expense—preferred~~included ~~units of~~within ~~subsidiary decreased to $0.0 million for~~ the ~~six~~terminal ~~months ended June 26, 2005 compared to $2.4 million~~ for the ~~six months ended June 20~~handling, ~~2004~~maintenance, aand storage ~~decrease~~ of ~~$2.4~~containers, ~~million~~including oryard ~~100%.~~operations, ~~The~~gate ~~preferred~~operations, ~~units~~maintenance, ~~were issued in conjunction with the closing of the February 27~~warehouse, ~~2003 purchase transaction~~ and ~~began~~terminal ~~accreting interest at 10%~~overhead. ~~The holders of the preferred units were redeemed in conjunction with the closing of the acquisition transaction on July 7, 2004.~~

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


	Nine months Ended September 24, 2006		Nine months Ended September 25, 2005		% Change
	($ in thousands)
Land expense:
Maintenance	$	40,007	$	41,516	(3.6	)%
Terminal overhead		36,596		35,954	1.8	%
Yard and gate		19,664		20,461	(3.9	)%
Warehouse		6,137		6,683	(8.2	)%

Total land expense	$	102,404	$	104,614	(2.1	)%

~~Uncertainty~~Non-vessel ~~Related~~related maintenance expenses decreased primarily due to ~~Renewal~~lower maintenance expenses associated with the new refrigerated container equipment added to our fleet during 2005 and other new container equipment added to our fleet in 2006. This decrease is partially offset by an increase of ~~Our~~$1.4 ~~Arrangements~~million in fuel costs. Yard and gate expense is comprised of the costs associated with ~~Maersk~~moving cargo into and out of the terminal facility and the costs associated with the storage of equipment and revenue loads in the terminal facility. Yard and gate expenses decreased primarily due to decreased revenue container volumes.

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.


	Nine months Ended September 24, 2006		Nine months Ended September 25, 2005		% Change
	($ in thousands)
Depreciation and amortization:
Depreciation—owned vessels	$	8,169	$	6,562	24.5	%
Depreciation and amortization—other		14,699		17,293	(15.0	)%
Amortization of intangible assets		14,671		14,671	0.0	%

Total depreciation and amortization	$	37,539	$	38,526	(2.6	)%

Amortization of vessel drydocking	$	11,332	$	12,359	(8.3	)%

~~Liquidity~~Depreciation and ~~Capital~~Amortization. ~~Resources~~Depreciation of owned vessels increased by $1.6 million from the nine months ended September 25, 2005 to the nine months ended September 24, 2006. This increase is due to the acquisition of the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific in the third quarter of fiscal year 2005. The $2.6 million decrease in depreciation and amortization-other is primarily due to a decrease in depreciation of leasehold improvements and containers. The decrease in leasehold improvements is due to the write-off of certain leasehold improvements made prior to the acquisition of the rights and beneficial interests in the aforementioned trusts in September 2005.

~~Our~~Amortization ~~principal sources~~ of ~~funds~~Vessel ~~have been (i) earnings before non-cash charges, (ii) borrowings under debt arrangements and (iii) equity capitalization~~Drydocking. ~~Our~~ ~~principal~~Amortization ~~uses~~ of ~~funds~~vessel ~~have~~drydocking ~~been~~decreased ~~(i)~~$1.0 ~~capital expenditures on our container fleet~~million, ~~our~~or ~~terminal~~8.3% ~~operating~~for ~~equipment~~the ~~and~~nine ~~our~~months ~~information technology systems~~ended September 24, ~~(ii)~~2006 ~~vessel~~from ~~drydocking expenditures, (iii)~~ the ~~purchase~~nine ofmonths ~~vessels~~ended ~~upon expiration of operating leases~~September 25, ~~(iv)~~2005 ~~working~~due ~~capital~~to ~~consumption,~~an ~~and~~increased ~~(v)~~number ~~principal~~of ~~and~~drydockings ~~interest~~in ~~payments~~2004 ~~on our existing indebtedness. Cash~~ and ~~cash equivalents totaled $60.5 million at June 26,~~ 2005. Asand ofto ~~June~~lower ~~26,~~overall ~~2005,~~costs ~~$18.3~~on ~~million~~recent ~~was undrawn under the existing $25~~drydockings.0 ~~million revolving credit facility, after taking into account $6.7 million utilized for outstanding letters of credit.~~

~~HORIZON~~Selling, ~~LINES~~General ~~HOLDING~~and ~~CORP~~Administrative. Selling, general and administrative costs decreased to $69.9 million for the nine months ended September 24, 2006 compared to $72.3 million for the nine months ended September 25, 2005, a decrease of $2.4 million or 3.3%. This decrease is comprised of a $9.7 million decrease in management fees, offset by approximately $3.2 million in higher legal and professional fees, and $4.9 million of other expenses, including labor related and insurance expenses. The management fee expenses are related to the ongoing management services and related fee provisions of a management agreement with Castle Harlan. Such management agreement was terminated in conjunction with the Parent’s initial public offering in September 2005.

Miscellaneous Expense, Net. Miscellaneous expense decreased to $0.8 million for the nine months ended September 24, 2006 compared to $1.8 million for the nine months ended September 25, 2005, a decrease of $1.0 million, or 56.5%. This decrease is primarily due to a $0.6 million decrease in environmental reserves related to contaminants from an underground storage tank in Anchorage, Alaska, and an increase in gain on the sale of fixed assets.

Interest Expense, Net. Interest expense decreased $0.2 million, or 0.8%, in the nine months ended September 24, 2006. This decrease is comprised of a $3.6 million decrease attributable to the redemption of $53.0 million of the principal amount of the 9% senior notes utilizing proceeds from the Parent’s initial public offering in September 2005. This decrease is offset by a $3.4 million increase in interest expense under our senior credit facility due to a 195 basis point increase in interest rates in the nine months ended September 24, 2006 as compared to the nine months ended September 25, 2005.

Income Tax Expense. The Company’s effective tax rate was (43.8%) and 40.0% for the nine months ended September 24, 2006 and September 25, 2005, respectively. During the quarter ended September 24, 2006, after evaluating the merits and requirements of the tonnage tax, the Company elected the application of the tonnage tax instead of the federal corporate income tax on income from its qualifying shipping activities. This third quarter 2006 election of the tonnage tax was made in connection with the filing of the Company’s 2005 federal corporate income tax return and will also apply to all subsequent federal income tax returns unless the Company revokes this alternative tax treatment. The impact of this election resulted in a decrease in income tax expense of approximately $39.4 million during the nine months ended September 24, 2006. Approximately $10.4 million and $19.9 million relate to the benefit reported on the 2005 federal income tax return and revaluation of the deferred taxes related to the qualifying activities, respectively. Excluding the impact of the benefit reported on the 2005 federal income tax return and revaluation of the deferred taxes related to the qualifying activities, the Company’s effective tax rate for the nine months ended September 24, 2006 would be 19.5%.

Seasonality

Our container volumes are subject to seasonal trends common in the transportation industry. Financial results in the first quarter are normally lower due to reduced loads during the winter months. Volumes typically build to a peak in the third quarter and early fourth quarter, which generally results in higher revenues and improved margins.

Liquidity and Capital Resources

Our principal sources of funds have been earnings before non-cash charges, borrowings under debt arrangements, and equity capitalization. Our principal uses of funds have been (i) capital expenditures on our container fleet, our terminal operating equipment, improvements to our owned and leased vessel fleet, and our information technology systems, (ii) vessel drydocking expenditures, (iii) the purchase of vessels upon expiration of operating leases, (iv) working capital consumption, (v) principal and interest payments on our existing indebtedness, and (vi) dividend payments to the Parent. Cash and cash equivalents totaled $81.6 million at September 24, 2006. As of September 24, 2006, $12.8 million was available for borrowing by us under the existing $50.0 million revolving credit facility, after taking into account $37.2 million utilized for outstanding letters of credit.

Operating Activities

	Six MonthsEndedJune 20,2004			Six MonthsEndedJune 26,2005
	Nine Months Ended September 24, 2006			Nine Months Ended September 25, 2005
	($ in thousands)
Cash flows provided by operating activities
Net income	$	7,445		$	3,839
Net income (loss)	$	68,322		$	11,029
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1822,~~358~~868			1523,~~660~~855
Amortization of other intangible assets		114,~~427~~671			914,~~781~~671
Amortization of vessel drydocking		811,~~211~~332			812,~~544~~359
Amortization of deferred financing costs		~~505~~2,087			12,~~172~~071
Deferred income taxes		—(18,321	)		(~~1,127~~115	)
Accretion of preferred units of subsidiary		2,387			—
Stock-based compensation		686
Subtotal		3033,~~888~~323			3452,~~030~~841
Earnings adjusted for non-cash charges		38101,~~333~~645			3763,~~869~~870
Changes in operating assets and liabilities:
Accounts receivable		(529,~~929~~579	)		(1626,~~980~~095	)
Materials and supplies		(1,~~497~~254	)		(14,~~624~~112	)
Other current assets		(12,~~796~~109	)		~~1,540~~875
Accounts payable		13,~~982~~991			(41,~~035~~666	)
Accrued liabilities		~~(13~~10,~~852~~283	)		322,~~423~~958
Other assets / liabilities		3(4,~~468~~890	)		(21,~~114~~815	)
Subtotal		(17,624	)		(19,790	)
Changes in operating assets and liabilities		(21,050	)		(9,855	)
Loss (gain) on equipment disposals		61			(114	)
Gain on equipment disposals		(471	)		(253	)
Vessel drydocking payments		(913,~~879~~703	)		(912,~~991~~621	)
Net cash provided by operating activities	$	1066,~~891~~421		$	741,~~974~~141

~~Operating~~Net ~~Activities~~cash provided by operating activities increased by $25.3 million to $66.4 million for the nine months ended September 24, 2006 compared to $41.1 million of net cash provided by operating activities for the nine months ended September 25, 2005. This increase is primarily driven by improved profitability after non-cash charges. Net earnings adjusted for depreciation, amortization, deferred income taxes, accretion, and other non-cash operating activities resulted in cash flow generation of $101.6 million for the nine months ended September 24, 2006 compared to $63.9 million for the nine months ended September 25, 2005. Changes in working capital resulted in a use of cash of $21.1 million for the nine months ended September 24, 2006 compared to a use of cash of $9.9 million for the nine months ended September 25, 2005. The other current assets working capital use is primarily due to an increase in prepaid insurance and an increase in prepaid taxes. The increase in accrued liabilities is primarily due to timing of interest payments and expenses associated with the secondary offering. The increase in accounts receivable balances in the first nine months of 2006 and 2005 is due to seasonality within the business. The accounts receivable balance typically rises during the first three quarters of the year, and decreases to its lowest balance in the fourth quarter. The other assets/liabilities working capital use is primarily due to $3.2 million of costs associated with the Company’s contractual arrangements with SFL.

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

Investing Activities

Net cash used in investing activities ~~decreased~~was by $1410.~~7 million to $~~1.8 ~~million~~ for the ~~six~~nine months ended ~~June 26~~September 24, ~~2005~~2006 compared to $1628.56 million for the ~~six~~nine months ended ~~June 20~~September 25, ~~2004~~2005. ~~This~~Approximately ~~decrease~~$25.2 ismillion ~~primarily attributable to the purchase~~ of the ~~Horizon~~capital ~~Fairbanks~~expenditures ~~and~~in ~~Horizon~~the ~~Navigator~~nine ~~for~~months ~~$11.9 million~~ended ~~and~~September 25, ~~investments~~2005 inis ~~various~~comprised ~~terminal~~of ~~assets during~~ the ~~six~~acquisition ~~months~~of ~~ended~~the ~~June~~rights ~~20,~~and ~~2004.~~

2526

~~HORIZON~~ beneficial ~~LINES~~interests ~~HOLDING~~of ~~CORP~~the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon Enterprise and the Horizon Pacific and the charters related thereto under which HL operates such vessels. Excluding this expenditure, capital expenditures increased approximately $6.1 million in 2006 as compared to 2005. Capital expenditures in 2006 primarily relate to the acquisition of containers, a container handler, and capital expenditures relating to the redevelopment of the San Juan, Puerto Rico terminal.

Financing Activities

Net cash used for financing activities during the ~~six~~nine months ended ~~June 26~~September 24, ~~2005~~2006 was $215.08 million compared to $05.18 million for the ~~six~~nine months ended ~~June~~ 20September 25, ~~2004~~2005. The net cash used for financing activities during the ~~six~~nine months ended ~~June 26~~September 24, ~~2005~~2006 ~~primarily~~ includes $112.37 million in dividends to the Parent and the payment of ~~principal~~$1.0 ~~payments~~million onin ~~long-term~~financing ~~debt~~costs related to fees associated with amendments to HL and the Company’s senior credit facility.

Capital Requirements

Our current and future capital needs relate primarily to debt service, maintenance, and improvement of our vessel fleet, including entering into lease transactions for new vessels, purchasing vessels upon the 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 12twelve months are expected to total approximately $1525.0 million. In addition, expenditures for vessel drydocking payments are estimated at $20.0 million for the next twelve months.

AsThree ~~required~~of byour ~~the~~vessels, ~~agreements~~Horizon ~~entered~~Anchorage, ~~into~~Horizon ~~with~~Tacoma ~~respect~~and toHorizon ~~the~~Kodiak, ~~acquisition~~are ~~transaction~~leased, onor ~~October~~chartered. 5,The ~~2004,~~charter ~~Horizon~~periods ~~Lines~~for ~~Holding~~these ~~made~~vessels aare ~~post-closing~~due to ~~reimbursement~~expire ~~payment~~in January 2015. The charters for these vessels permit us to ~~Carlyle-Horizon~~purchase ~~Partners,~~the ~~L.P.~~applicable ~~and~~vessel ~~other~~at ~~pre-acquisition~~the ~~equity~~expiration ~~holders~~of ~~totaling~~the ~~$6.1~~charter ~~million~~period for a fair market value specified in the relevant charter that is determined through a pre-agreed appraisal procedure. ~~Horizon~~During ~~Lines~~2005, ~~Holding~~we ~~disbursed~~expended $725.72 million in cash onto ~~October~~purchase 15owner participant interests in two of our previously leased vessels, Horizon Pacific and Horizon Enterprise. During 2004 toand ~~purchase~~2003, awe ~~vessel~~purchased four vessels, ~~the~~Horizon Fairbanks, Horizon Hawaii, Horizon Navigator, and Horizon Trader, ~~that~~at ~~was~~the ~~under~~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 anvessel. ~~operating~~The ~~lease~~fair ~~agreement~~market values of the vessels currently under charter at the expiration of their charters cannot be predicted with any certainty.

~~Five~~27 of our vessels are leased, or chartered. The charter periods for two of our vessels, the Horizon Pacific and Horizon Enterprise, are due to expire in July, 2007. The charter periods for three of our vessels, the Horizon Anchorage, Horizon Tacoma and Horizon Kodiak, are due to expire in January 2015. The charters for these vessels permit us, to purchase the applicable vessel at the expiration of the charter period for a fair market value specified in the relevant charter, that is determined through a pre-agreed appraisal procedure. During 2003 and 2004, we purchased four vessels, Horizon Fairbanks, Horizon Hawaii, Horizon Navigator and Horizon Trader, at the expiration of their charter periods, utilizing similar fair market value purchase option arrangements. The purchase prices of the four vessels ranged from $3.8 million to $8.2 million per vessel. The fair market values of the vessels currently under charter at the expiration of their charters cannot be predicted with any certainty.

~~HORIZON~~Contractual ~~LINES~~Obligations ~~HOLDING~~and ~~CORP.~~Off-Balance Sheet Arrangements

Contractual ~~Obligations~~obligations as of September 24, 2006 (1) are as follows ($ in thousands):

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


	Total Obligations		Remaining 2006		2007		2008		2009		2010		After 2010
Principal obligations:
Senior credit facility	$	245,000	$	625	$	2,500	$	2,500	$	2,500	$	60,625	$	176,250
Notes issued by owner trustees		4,513		—		4,513		—		—		—		—
9% senior notes		197,014		—		—		—		—		—		197,014
Operating leases		344,353		15,661		81,670		39,504		38,051		36,665		132,802
Capital lease obligations		402		48		193		161		—		—		—

Subtotal		791,282		16,334		88,876		42,165		40,551		97,290		506,066

Interest obligations:
Senior credit facility		88,165		6,820		19,432		18,734		18,408		17,941		6,830
Notes issued by owner trustees		240		—		240		—		—		—		—
9% senior notes		112,297		8,866		17,731		17,731		17,731		17,731		32,507

Subtotal		200,702		15,686		37,403		36,465		36,139		35,672		39,337

Total principal and interest	$	991,984	$	32,020	$	126,279	$	78,630	$	76,690	$	132,962	$	545,403

Other commercial commitments:
Standby letters of credit⁽²⁾	$	37,209	$	—	$	29,338	$	—	$	7,871	$	—	$	—
Surety bonds⁽³⁾		7,577		7,573		1		—		3		—

Other commercial commitments	$	44,786	$	7,573	$	29,339	$	—	$	7,874	$	—	$	—

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

⁽¹⁾

Included in contractual obligations are scheduled interest payments. Interest payments on the senior credit facility are variable and are based as of September 24, 2006 upon the London Inter-Bank Offered Rate (LIBOR) plus 2.25%. The three-month LIBOR / swap curve has been utilized to estimate interest payments on the senior credit facility. Interest on the 9% senior notes is fixed and is paid semi-annually on May 1 and November 1 of each year until maturity on November 1, 2012.

(12) ~~Included~~The instandby ~~Contractual~~letters ~~obligations~~of ~~are~~credit ~~scheduled~~include ~~interest payments~~$29.3 ~~Interest~~million ~~payments~~in onletters ~~the~~of ~~senior~~ credit ~~facility~~that ~~are~~serve ~~variable and are based~~ as ofcollateral ~~June~~related ~~26,~~to ~~2005, upon~~ the ~~London~~SFL ~~Inter-Bank~~agreements, ~~Offering Rate (LIBOR) + 2~~$4.~~50%.~~6 ~~The~~million ~~three-month~~in ~~LIBOR~~letters /of ~~swap~~credit ~~curve~~that ~~has~~serve ~~been~~as ~~utilized~~collateral ~~to estimate interest payments~~ on ~~the~~state ~~senior~~workers ~~credit~~compensation ~~facility.~~and ~~Interest~~auto onliability ~~the~~policies, ~~9% senior notes is fixed~~ and is$3.3 ~~paid~~million ~~semi-annually~~in onletters ~~May~~of 1credit ~~and~~that ~~November~~serve 1as ofsecurity ~~each~~for ~~year~~all ~~until~~bonds ~~maturity~~excluding onU.S. ~~November~~Customs ~~1, 2012~~bonds.

⁽³⁾	$5.3 million is U.S. customs bonds, $1.1 million is bonds for payment of taxes levied under the Excise Tax Act of the Commonwealth of Puerto Rico of 1987, and the remaining $1.2 million is utility or lease bonds. The Company has the financial ability and intention to satisfy its obligations.

SFL Agreements

Although HL is not the primary beneficiary of the variable interest entities created in conjunction with the April 2006 financial transactions with SFL, HL has an interest in the variable interest entities. Certain contractual obligations and off-balance sheet obligations arising from this transaction are as follows ($ in millions):


Annual operating lease obligations^(a)	$	32.0
Letters of credit^(b)	$	29.3
Residual guarantee^(c)	$	3.8
Security deposits guarantee^(d)	$	0.2

^(a)	Such operating lease obligations will commence throughout 2007 as the vessels are delivered and the bareboat charters commence. The term of each of the bareboat charters is twelve years from the date of

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

^(b)

The letters of credit were issued in April 2006 to secure certain obligations under the Reimbursement Agreement. To obtain the letters of credit, HL, together with HLHC, UBS AG, Stamford Bank, as administrative agent, UBS AG, Stamford Branch, as issuing bank, and certain lenders, entered into Amendment No. 2 (“Amendment No. 2”) to the Amended and Restated Credit Agreement, dated as of April 7, 2006, (the “Pre-Existing Horizon Credit Agreement”). Amendment No. 2 amended the Pre-Existing Horizon Credit Agreement by, among other things, (i) increasing the aggregate amount of letters of credit permitted under the Pre-Existing Horizon Credit Agreement from $20.0 million to $41.0 million and (ii) permitting HL or any of its subsidiaries to guarantee, directly or indirectly, up to $42.5 million of the obligations of SFL and/or any of its subsidiaries or affiliates in connection with the charter by HL of the vessels from the Shipowners.

^(c)

If HL elects not to purchase the vessels at the end of the initial twelve year period and the Shipowners sell the vessels for less than a specified amount, HL is responsible for paying the amount of such shortfall, which shall not exceed $3.8 million per vessel. Such residual guarantee will be recorded at its fair value of approximately $0.2 million as a liability on the Company’s balance sheet upon commencement of the bareboat charters.

^(d)

Pursuant to the Agreement to Acquire and Charter and the Reimbursement Agreement, HL has agreed to reimburse SFL, SFL Holdings, and the Shipowners for their respective losses if there is a default by SFL Holdings as the buyer under the MoAs except under certain circumstances. The losses covered include forfeiture of SFL’s security deposits, any damage claims made against SFL Holdings by the sellers under the MoAs (to the extent such claims exceed SFL’s Security Deposits), any liabilities of SFL and the Shipowners to Fortis for any draws on the letters of credit, any interest due under Fortis’s credit agreement as a result of any such draws, and any interest-rate swap breakage fees. In addition, SFL Holdings has the right, under certain circumstances, to require HL to assume its obligations to the sellers under the MoAs. Such security deposits guarantee is recorded on the balance sheet as of September 24, 2006.

Long-Term Debt

ToOn ~~finance~~July 7, 2004, HL and the ~~acquisition~~Company ~~transaction~~entered into a senior credit facility with various financial lenders. The senior credit facility, weas ~~incurred~~amended and restated, and subsequently amended by Amendment No. 2, ~~substantial~~consists of (i) a $50.0 million revolving credit facility and (ii) a $250.0 million term loan facility. We expect that we 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, ~~including~~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 ~~through~~after ~~the~~certain ~~issuance~~other ofconditions are satisfied. The term loan matures on July 7, 2011 and the 9%revolving ~~senior~~credit ~~notes~~facility inmatures on July 7, 2009. No amounts were outstanding under the ~~original~~revolving ~~principal~~credit ~~amount~~facility as of September 24, 2006 or December 25, 2005. However, $~~250~~37.02 million, ~~with~~of ~~interest~~availability ~~payments~~under onthe ~~this~~revolving ~~indebtedness~~credit ~~substantially~~facility ~~increasing~~was ~~our~~utilized ~~liquidity requirements~~for outstanding letters of credit as of September 24, 2006.

OnPrincipal ~~July~~payments 7,of ~~2004,~~approximately ~~Horizon~~$0.6 ~~Lines~~million ~~Holding~~are ~~and Horizon~~due ~~Lines~~quarterly ~~entered~~on ~~into~~the aterm ~~senior~~loan ~~credit~~ facility, ~~which~~through ~~was~~June 30, ~~amended and restated as of April 7~~2010, ~~2005.~~at ~~The~~which ~~credit~~point ~~facility~~quarterly ispayments ~~comprised~~increase ofto a $~~248~~58.18 million ~~term~~until ~~loan~~final ~~facility~~maturity ~~due~~on inJuly 7, 2011 ~~and a $25~~.0 ~~million~~Borrowings ~~revolving credit facility due in 2009,~~under ~~which, upon~~ the ~~consummation~~term ofloan ~~the~~facility ~~initial~~bear ~~public~~interest ~~offering~~at ofHL ~~Horizon Lines, Inc.~~ and the ~~redemption,~~Company’s ~~using~~choice ~~the proceeds therefrom,~~ of atLIBOR ~~least~~or ~~$40.0 million of~~ the ~~aggregate~~base ~~principal~~rate, ~~amount~~in ofeach ~~the 9% senior notes~~case, ~~will~~plus ~~increase~~an toapplicable ~~a $50~~margin.~~0 million~~ ~~revolving~~The ~~credit~~margin ~~facility.~~applicable Weto ~~expect that~~ the ~~subsidiaries~~term ofloan ~~the issuer that are the borrowers under the senior credit~~ facility ~~will~~is beequal ~~permitted~~ to ~~incur up to an additional $50~~1.025% ~~million~~for ofbase ~~senior~~rate ~~secured~~loans ~~debt~~and in2.25% ~~the~~for ~~form~~LIBOR loans. ofThe ~~term~~interest ~~loans~~rate at ~~the~~ ~~option~~September 24, of2006 ~~the~~approximated ~~participating~~7.75%. ~~lenders~~HL ~~under~~and the ~~term~~Company ~~loan~~are ~~facility,~~also ~~provided~~charged ~~that~~a nocommitment ~~default~~fee oron ~~event~~the ofdaily ~~default~~unused ~~under~~amount of the ~~senior~~revolving credit facility ~~has~~during ~~occurred~~the oravailability ~~would~~period ~~occur~~based ~~after~~upon ~~giving~~a ~~effect~~rate toof ~~such incurrence and certain other conditions are satisfied~~0. 50%.

~~Borrowings~~29 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

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

On ~~the~~July 7, ~~consummation~~2004, ofHL and the ~~initial~~Company ~~public~~completed an offering of ~~Horizon~~$250.0 ~~Lines,~~million ~~Inc~~in principal amount of 9% senior notes. ~~and~~The ~~the~~9% ~~redemption~~senior ~~specified~~notes ~~above~~mature on November 1, 2012. Interest on the ~~margin~~9% ~~applicable~~senior tonotes ~~the~~accrues ~~term~~at ~~loan~~the ~~portion~~rate of 9% per annum and ~~the~~is ~~senior~~payable ~~credit~~in ~~facility~~cash ~~will~~semi-annually ~~decrease~~on ~~from~~May 1 and November 1 of each year.50 The 9% senior notes are the general unsecured obligations of HL and HLHC and rank equally with the existing and future unsecured indebtedness and other obligations of HL and HLHC that are not, by their terms, expressly subordinated in right of payment to ~~1.25~~the 9% ~~for~~senior ~~base~~notes ~~rate~~and ~~loans~~senior in right to any future subordinated debt. HL and ~~from~~the 2Company used $57.~~50%~~8 million of the proceeds of the Parent’s initial public offering to 2redeem $53.250 million of the principal amount of the 9% ~~for~~senior ~~LIBOR~~notes ~~loans~~and pay associated redemption premiums of $4.8 million.

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

On July 7, 2004, Horizon Lines Holding and Horizon Lines sold $250.0 million of 9% senior notes, the proceeds of which, along with borrowings under the senior credit facility and proceeds from the cash equity investment in Horizon Lines Holding, were used to fund the acquisition transaction. In order to give the holders of the 9% senior notes the opportunity in the future to exchange the 9% senior notes for identical notes that have been registered under the Securities Act (the “new 9% senior notes”), Horizon Lines Holding and Horizon Lines have agreed to file a registration statement for the new 9% senior notes within 270 days after the issue date of the 9% senior notes, cause the registration statement for the new 9% senior notes to become effective within 360 days of the issue date of the 9% senior notes, and consummate the exchange offer within 390 days after the issue date of the 9% senior notes. If Horizon Lines Holding and Horizon Lines fail to meet these targets (a “9% senior notes default”), the annual interest rate on the 9% senior notes will increase by 0.25% during the first 90-day period during which the 9% senior notes default continues, up to a maximum increase of 1.0% over the interest rate that would otherwise apply to the 9% senior notes. As soon as Horizon Lines Holding cures the registration default, the interest rate applicable will revert to its original level. The registration statement referred to in this paragraph was filed by Horizon Lines Holding, Horizon Lines and their respective subsidiaries and declared effective by the SEC in a timely manner. The exchange offer has commenced and is scheduled to expire on July 31, 2005.

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

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

Our ability to make scheduled payments of principal, or to pay the interest, if any, on, orour indebtedness, to refinance our indebtedness, to make dividend payments to our common stockholders, 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~~for ~~2005~~the next twelve months. There can be no assurance that we will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized, or that future borrowings will be available under the senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs. In addition, there can be no assurance that we will be able to effect any future refinancing of our debt on commercially reasonable terms or at all.

Interest Rate Risk

Our primary interest rate exposure relates to the senior credit facility. As ~~a result~~ of ~~the acquisition transaction, as of~~ ~~June 26~~September 24, ~~2005~~2006, ~~Horizon~~the ~~Lines~~Company ~~Holding~~ and ~~Horizon~~HL ~~Lines~~had ~~have~~ outstanding a $~~248~~245.10 million term loan, which bears interest at variable rates. Each quarter point change in interest rates would result in a $0.6 million change in interest expense on the term loan. The Company and HL also have a revolving credit facility that provides for borrowings of up to $50.0 million. As of September 24, 2006, no amounts were outstanding under the revolving credit facility.

2830

HORIZON LINES HOLDING CORP.

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

Working Capital

Working capital at June 26, 2005, was $84.9 million, compared to $65.6 million at December 26, 2004. This $19.3 million increase is primarily the result of revenue growth during the period. Adequate current assets are maintained to satisfy current liabilities and maturing obligations when they come due and we have sufficient financial capacity to manage our daily cash requirements.

Credit Ratings

As of ~~June 26~~September 24, ~~2005~~2006, Moody’s Investors Service and Standard and Poor’s ~~Rating~~Ratings Services assigned the following credit ratings to our outstanding debt:

Debt/Rating Outlook:

	Moody’s	Standard & Poor’s
Senior Secured Credit Facility	B2	B
Senior secured credit facility	Ba2, LGD2, 20%	B
$250.0 million 9% Senior Notes due 2012	B3	CCC+
9% senior notes due 2012	B3, LGD4, 69%	CCC+
Rating Outlook	Stable	Stable
Rating outlook	Stable, PD	Positive

OnIn ~~December~~September 62006, ~~2004, Standard~~Moody’s ~~and~~Investors ~~Poor~~Service (“Moody’s”) ~~lowered~~implemented its ~~ratings~~new Probability-of-Default on(“PD”) ~~Horizon~~and ~~Lines~~Loss-Given-Default ~~Holding~~(“LGD”) ~~and~~rating ~~its~~methodologies ~~subsidiary~~for ~~Horizon~~the ~~Lines~~transportation ~~including~~sector. PD ratings are assigned only to issuers, innot ~~each~~specific ~~case~~debt instruments, ~~lowering~~and use the standard Moody’s alpha-numeric scale. They express Moody’s opinion about the likelihood that any entity within a corporate ~~credit~~family ~~rating~~will default on any of ~~such~~its ~~entity~~debt obligations. LGD assessments are assigned to ~~“B+”~~individual ~~from~~rated ~~“B”.~~debt Atissues ~~the~~and ~~same~~are ~~time,~~expressed ~~Standard~~as a &percentage ~~Poor’s~~of ~~lowered~~principal ~~its~~and ~~rating~~interest ofat the ~~$250.0~~resolution ~~million~~of ~~principal~~default, ~~amount~~with ofassessments ranging from LGD1 (loss expected to be 0%-9%) ~~senior~~to ~~notes~~LGD6 ~~from~~(loss ~~“B–”~~anticipated to ~~“CCC+”~~be 90%-100%).

Ratio of Earnings to Fixed Charges

Our ratio of earnings to fixed charges for the quarter and ~~six~~ nine months ended ~~June 26~~September 24, ~~2005~~2006 ~~are~~is as follows ($ in thousands):

	For theQuarter EndedJune 26, 2005
	Quarter Ended September 24, 2006			Nine Months Ended September 24, 2006
Pretax income	$	526,~~893~~600		$	47,505
Fixed charges		10,066
Interest expense		10,653			33,869
Rentals		65,~~321~~821			17,579
Total fixed charges	$	16,~~387~~474			51,448
Pretax earnings plus fixed charges	$	2243,~~280~~074			98,953
Ratio of earnings to fixed charges		12.~~36 X~~61	x		1.92	x

29For 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%) that management believes is representative of the interest component of rent expense.

HORIZON LINES HOLDING CORP.

	For theSix Months EndedJune 26, 2005
Pretax income	$	6,464
Fixed charges		19,745
Rentals		12,561
Total fixed charges	$	32,306
Pretax earnings plus fixed charges	$	38,770
Ratio of earnings to fixed charges		1.20 X

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

3. Quantitative and Qualitative Disclosures About Market Risk

~~The~~We ~~principal~~maintain ~~market~~a ~~risks~~policy tofor ~~which we are exposed that may adversely impact the results of operations and financial position include changes in interest~~managing ~~rates~~risk ~~and~~related ~~credit~~to ~~risks.~~exposure Asto avariability ~~result of the acquisition transaction, as of June 26, 2005, we have outstanding a $248.1 million term loan, which bears interest at variable rates. Each quarter point change~~ in interest rates ~~would result in a $0.6 million change in interest expense on our term loan. We also have a revolving credit facility which provides for borrowings of up to $25.0 million~~, ~~which,~~fuel ~~upon the consummation of the initial public offering of Horizon Lines~~prices, ~~Inc.~~ and ~~the redemption,~~other ~~using~~relevant ~~the~~market ~~proceeds~~rates ~~therefrom,~~and ~~of at least $40~~prices.0 ~~million~~Our ofpolicy ~~the~~includes ~~aggregate~~entering ~~principal~~into ~~amount~~derivative ofinstruments ~~the~~in ~~senior~~order ~~notes, will increase~~ to ~~$50.0~~mitigate ~~million.~~our ~~Borrowings under the revolving credit facility bear interest at variable rates~~risks. ~~As of June 26, 2005 no amounts were outstanding under the revolving credit facility.~~

WeExposure ~~are~~relating ~~also exposed~~ to ~~certain~~our senior credit ~~risks~~facility ~~related~~and to our ~~accounts~~exposure ~~receivable.~~to Webunker ~~perform~~fuel ~~ongoing~~price ~~credit~~increases ~~evaluations~~are ofdiscussed in our ~~customers~~Form to10-K ~~minimize~~for the ~~potential~~year ~~exposure. As June 26~~ended December 25, 2005. ~~and~~There ~~December~~have ~~26,~~been ~~2004,~~no wematerial ~~had~~changes ~~allowances~~to ~~for doubtful~~these ~~accounts~~market ofrisks ~~$9.4~~since ~~million and $7.9 million~~December 25, ~~respectively~~2005.

The aggregate annual charter hire for the vessels under our agreements with SFL is based on certain assumptions with respect to final vessel price and interest rates that will be adjusted on the date of the delivery of

the particular vessel. The Shipowners have entered into forward starting swaps to lock in the interest rate on the underlying bank loan with Fortis. However, if the vessel delivery date or vessel cost changes, the forward starting swap agreements will need to be adjusted. If the underlying interest rate on the bank loans to the Shipowners is changed due to any of the above reasons, the aggregate annual charter hire will also change.

Other than as discussed above, there have been no material changes in the quantitative and qualitative disclosures about market risk since December 25, 2005. Information concerning market risk is incorporated by reference to Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” of the Company’s Form 10-K for the fiscal year ended December 25, 2005.

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 defined in Rules 13a-15(e) and 15d-15(e) of ~~June~~the 26Exchange Act) as of September 24, ~~2005~~2006, and, based on their evaluation, ~~the~~our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in ~~internal~~our internal controls or in other factors that could significantly affect these controls during the fiscal quarter ended September 24, 2006.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the ~~Securities~~ Exchange Act ~~of 1934 as amended (the “Exchange Act”)~~ is recorded, processed, summarized and reported, within the time periods specified in the ~~Securities and Exchange Commission~~SEC’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 ~~the~~our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

3032

PART II. OTHER INFORMATION

1. Legal Proceedings

~~There~~During ~~are two actions currently pending before~~ the ~~Surface~~quarter ~~Transportation~~ended ~~Board~~September 24, ~~or STB~~2006, ~~involving~~there ~~Horizon~~were ~~Lines,~~no ~~LLC,~~material changes orto ~~Horizon Lines. The first action, brought by~~ the ~~Government~~Company’s ofpreviously ~~Guam~~disclosed inlegal ~~1998 on behalf of itself and its citizens against Horizon Lines and Matson Navigation Co~~proceedings., ~~seeks a ruling from the STB that Horizon Lines’ Guam shipping rates~~Additionally, ~~which~~we are ~~based on published tariff rates~~, ~~during 1996-1998 were “unreasonable” under the ICCTA,~~ and anfrom ~~order awarding~~time ~~reparations~~ to ~~Guam~~time ~~and~~may ~~its citizens. The STB is addressing this matter in three phases. During the first phase~~be, ~~which~~a ~~has~~party ~~been~~to ~~completed,~~routine ~~the~~legal ~~STB~~proceedings ~~reviewed~~incidental ~~the~~to ~~allegations set forth in~~ the ~~complaints~~operation ~~that were filed by the Government~~ of ~~Guam~~ ~~and~~our ~~dismissed certain complaints while allowing certain other complaints to be addressed in phase two~~business. ~~During~~The ~~the~~outcome ~~currently on-going second phase, at the request~~ of ~~the~~any ~~STB,~~pending ~~the~~or ~~parties fully briefed, in 2002, the threshold issue of what~~threatened ~~methodology~~proceedings ~~should be applied in determining “rate reasonableness” under the ICCTA, and the STB~~ is not expected to ~~issue~~have a ~~ruling~~material inadverse 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~~on ~~1996-1998.~~our Iffinancial ~~the STB determines that the rates charged by Horizon Lines during 1996-1998 were unreasonable~~condition, ~~the~~operating ~~STB~~results ~~will~~or ~~issue an~~cash ~~additional ruling to determine the persons entitled to damages and in what amounts. On June 8~~flows, ~~2005,~~based ~~upon~~on ~~the~~our ~~motion~~current ofunderstanding ~~Horizon Lines, the STB issued a decision which ordered the Government~~ of ~~Guam to show cause by June 28, 2005 why~~ the ~~action~~ ~~should~~relevant ~~not be dismissed~~facts. ~~The~~Legal ~~Government~~expenses ofincurred ~~Guam~~related ~~has responded~~ to ~~this~~these ~~decision~~contingencies byare ~~asserting their intent to participate in the proceeding and attending oral argument in the second phase of the case at the STB. Horizon Lines has filed a~~expensed ~~response~~as ~~thereto asserting that the Government of Guam’s response is not sufficient to show cause~~incurred. ~~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~~1A. ~~Horizon~~Risk ~~Lines~~Factors is unable to quantify the amount of these damages. In the event that the STB were to issue a ruling whereby it accepted the Government of Guam’s proposed standard for the determination of “rate reasonableness” under the ICCTA, the STB would then need to determine whether rates charged by Horizon Lines during 1996-1998 were reasonable under such standard. However, the business of Horizon Lines that provided marine container shipping to and from Guam during 1996-1998 was, at the time, part of a larger business. During 1996-1998, the Guam-related business of Horizon Lines was part of the business of Sea-Land Service, Inc., which included transportation, logistics and terminal services between and at ports in Asia, Guam, Hawaii and the U.S. west coast. Separate financial statements were not prepared for the operations of Sea-Land Service that related to marine container shipping to and from Guam. Accordingly, Horizon Lines believes that the actual rates of return that were earned by its business with respect to marine container shipments to and from Guam during 1996-1998 cannot be determined. Consequently, the absence of such actual rates of return would preclude the calculation of a reasonable rate of return based on the standard proposed by the Government of Guam in the pending action. Even if each of these matters were determined adversely to Horizon Lines, we are unable at the present time to determine how many citizens of Guam, on whose behalf the pending action has been brought by the Government of Guam, paid such rates during 1996-1998, or the amounts of their related claims, because the requisite discovery proceedings for that phase of the dispute have not yet begun. Apart from potential damages, an adverse ruling by the STB could affect Horizon Lines’ current and future rate structure for its Guam shipping by requiring it to reduce its current base tariff rates and limit future rate increases to amounts determined to be within the “zone of reasonableness” contained in the ICCTA, as determined in such ruling. An adverse STB decision could also affect the rates that Horizon Lines would be permitted to charge on its other routes where rates must be “reasonable” under the ICCTA.

~~The~~During ~~second action currently pending before~~ the ~~STB~~quarter ~~involving~~ended ~~Horizon~~September 24, ~~Lines~~2006, ~~brought~~after byevaluating ~~DHX,~~the ~~Inc.~~merits and inrequirements ~~1999~~of ~~against~~the ~~Horizon~~tonnage ~~Lines~~tax, ~~and~~the ~~Matson,~~Company ~~challenges~~elected the ~~reasonableness~~application of ~~certain~~the ~~rates~~tonnage ~~and~~tax ~~practices~~instead of ~~Horizon~~the ~~Lines~~federal ~~and~~corporate ~~Matson.~~income ~~DHX~~tax ison ~~a major~~income ~~freight~~from ~~forwarder~~its inqualifying ~~the~~shipping ~~domestic Hawaii trade~~activities. ~~Freight~~Changes ~~forwarders~~in ~~typically~~tax ~~accept~~laws ~~less~~or ~~than~~the ~~full~~interpretation ~~container~~thereof, ~~loads~~adverse ~~of cargo~~tax audits, ~~consolidate~~and ~~these~~other ~~loads~~tax ~~into~~matters ~~full~~may ~~container~~impact ~~loads,~~future ~~and~~results. ~~offer~~Other ~~the~~than ~~full~~election ~~container~~of ~~load~~the totonnage ~~the~~tax, ~~ocean~~there ~~carriers.~~have ~~Some freight~~been ~~forwarders,~~no ~~including~~material ~~DHX,~~changes ~~also~~to ~~solicit~~risk ~~full~~factors ~~container~~since ~~loads~~those ~~from~~previously ~~shippers.~~disclosed ~~Among~~in ~~other~~the ~~things,~~Parent’s ~~DHX~~prospectus ~~charged~~filed ~~that~~with ~~Horizon~~the ~~Lines~~SEC ~~and~~pursuant ~~Matson~~to ~~took~~Rule 424 ~~actions~~(b)(4) ~~that~~on ~~were~~September 13, 2006.

intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for the full container load business. DHX is seeking $11.0 million in damages. In addition to the award of damages, an adverse ruling could affect Horizon Lines’ current and future rate structure for its Hawaii shipping. An adverse STB decision could also affect the rates that Horizon Lines would be permitted to charge on its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHX’s complaint; (ii) found that Horizon Lines met all of its tariff filing obligations; and (iii) reaffirmed the STB’s earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which was repealed by the ICCTA, are no longer applicable to our business. On June 13, 2005, the STB issued a decision that denied DHX’s motion for reconsideration and denied the alternative request by DHX for clarification of the STB’s December 13, 2004 decision. No assurance can be given that the final decision with respect to this matter will be favorable to us.

2. Unregistered Sales of Equity Securities and Use of Proceeds

None .

3. Defaults Upon Senior Securities

None.

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

None.

5. Other Information

None.

6.33 ~~Exhibits~~

10.1		Second Assignment of and Third Amendment to Crane Relocation Agreement dated July 5, 2005 among SL Service, Inc. (formerly known as Sea-Land Service, Inc.), Horizon Lines, LLC, Matson Navigation Company, Inc. and Port Authority of Guam.
10.2		Port of Kodiak Preferential Use Agreement dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.
10.3		Terminal Operation Contract dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.
10.4		Amendment #2 dated February 27, 2003 to Preferential Use Agreement dated October 2, 1990 between the City of Unalaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines of Alaska, LLC).
31.1		Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d- 14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

HORIZON LINES HOLDING CORP.

SIGNATURE

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

Date: ~~July 28~~October 30, ~~2005~~ 2006


HORIZON LINES HOLDING CORP.

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

EXHIBIT INDEX

Exhibit		Description
10.1	*	Second Assignment of and Third Amendment to Crane Relocation Agreement dated July 5, 2005 among SL Service, Inc. (formerly known as Sea-Land Service, Inc.), Horizon Lines, LLC, Matson Navigation Company, Inc. and Port Authority of Guam.
10.2	*	Port of Kodiak Preferential Use Agreement dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.
10.3	*	Terminal Operation Contract dated January 1, 2005, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC.
10.4	*	Amendment #2 dated February 27, 2003 to Preferential Use Agreement dated October 2, 1990 between the City of Unalaska and Horizon Lines of Alaska, LLC (formerly known as CSX Lines of Alaska, LLC).
31.1		Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d- 14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Incorporated by reference to Amendment No. 3 to the Registration Statement on Form S-1 of Horizon Lines, Inc. (File No. 333-123073), filed on July 28, 2005.

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Filing Compare · Horizon Lines Holding Corp.