UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark one)

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

For the fiscal year ended December 22, 2013

OR

¨ 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 001-32627

(Exact name of registrant as specified in its charter)

Delaware	74-3123672
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4064 Colony Road, Suite 200, Charlotte, North Carolina 28211

(Address of principal executive offices)

(704) 973-7000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common stock, par value $0.01 per share	OTCQB

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	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

The aggregate market value of common stock held by non-affiliates, computed by reference to the closing price of the common stock as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3.9 million.

As of March 3, 2014, 38,924,441 shares of common stock, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required in Part III of this Form 10-K is incorporated by reference to the registrant’s definitive proxy statement to be filed for the Annual Meeting of Stockholders to be held June 5, 2014.

Horizon Lines, Inc.

FORM 10-K INDEX

		Page
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		8
Item 1B.	Unresolved Staff Comments		27
Item 2.	Properties		28
Item 3.	Legal Proceedings		28
Item 4.	Mine Safety Disclosures		29
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		30
Item 6.	Selected Financial Data		32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		60
Item 8.	Financial Statements and Supplementary Data		61
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		61
Item 9A.	Controls and Procedures		61
Item 9B.	Other Information		61
PART III
Item 10.	Directors and Executive Officers of the Registrant		62
Item 11.	Executive Compensation		62
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		62
Item 13.	Certain Relationships and Related Transactions		62
Item 14.	Principal Accountant Fees and Services		62
PART IV
Item 15.	Exhibits and Financial Statement Schedules		63

Safe Harbor Statement

This Form 10-K (including the exhibits hereto) contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. 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:

• unfavorable economic conditions in the markets we serve, despite general economic improvement elsewhere,

• our substantial leverage may restrict cash flow and thereby limit our ability to invest in our business,

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• the vessels in our fleet continue to age, and we may not have the resources to replace our vessels,

• our ability to obtain financing on acceptable terms to pay for the potential vessel repowering project,

• our ability to manage the potential vessel repowering project effectively to deliver the results we hope to achieve,

• volatility in fuel prices,

• decreases in shipping volumes,

• our ability to maintain adequate liquidity to operate our business

• our ability to make interest payments on our outstanding indebtedness,

• work stoppages, strikes, and other adverse union actions,

• government investigations and legal proceedings,

• suspension or debarment by the federal government,

• failure to comply with safety and environmental protection and other governmental requirements,

• failure to comply with the terms of our probation,

• increased inspection procedures and tighter import and export controls,

• the start-up of any additional Jones-Act competitors,

• repeal or substantial amendment of the coastwise laws of the United States, also known as the Jones Act,

• catastrophic losses and other liabilities,

• failure to comply with the various ownership, citizenship, crewing, and build requirements dictated by the Jones Act,

• the arrest of our vessels by maritime claimants,

• severe weather and natural disasters, or

• unexpected substantial dry-docking or repair costs for our vessels.

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-K (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if new information or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.

See the section entitled “Risk Factors” in this Form 10-K for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described in this Form 10-K are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.

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Part I.

Item 1. Business

Background

Horizon Lines, Inc., a Delaware corporation, (the “Company” and together with its subsidiaries, “we”) operates as a holding company for Horizon Lines, LLC (“Horizon Lines”), a Delaware limited liability company and wholly-owned subsidiary, Horizon Lines of Alaska, LLC (“Horizon Lines of Alaska”), a Delaware limited liability company and wholly-owned subsidiary, Horizon Logistics, LLC (“Horizon Logistics”), a Delaware limited liability company and wholly-owned subsidiary, Horizon Lines of Puerto Rico, Inc. (“HLPR”), a Delaware corporation and wholly-owned subsidiary, Hawaii Stevedores, Inc. (“HSI”), a Hawaii corporation and wholly-owned subsidiary, as well as Road Raiders Transportation, Inc. and Road Raiders Logistics, Inc. (collectively, “Road Raiders”), Delaware corporations and wholly-owned subsidiaries.

Our long operating history dates back to 1956, when Sea-Land Service, Inc. (“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 1964 we pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing container shipping services between the U.S. west coast and Hawaii and Guam through our acquisition from an existing carrier of all of its vessels and certain other assets that were already serving that market. Today, as the only Jones Act vessel 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.

Operations

We believe that we are one of the nation’s leading Jones Act container shipping and integrated logistics companies. In addition, we are the only ocean carrier serving all three noncontiguous domestic markets of Alaska, Hawaii, and Puerto Rico from the continental United States. We own 13 vessels, all of which are fully qualified Jones Act vessels, and own or lease approximately 22,900 cargo containers. We have access to terminal facilities in each of our ports, operating our terminals in Alaska, Hawaii, and Puerto Rico, as well as contracting for terminal services in the seven ports in the continental U.S.

We transport a wide spectrum of consumer and industrial items used every day in our markets, ranging from foodstuffs (refrigerated and non-refrigerated) to household goods and auto parts to building materials and various materials used in manufacturing. Many of these cargos are consumer goods vital to the populations in our markets, thereby providing us with a relatively stable base of demand for our shipping and logistics services. We have many long-standing customer relationships with large consumer and industrial products companies, such as Costco Wholesale Corporation, Johnson & Johnson, Lowe’s Companies, Inc., Safeway, Inc., and Wal-Mart Stores, Inc. We also serve several agencies of the U.S. government, including the Department of Defense and the U.S. Postal Service. Our customer base is broad and diversified, with our top ten customers accounting for approximately 34% of revenue during 2013 and our largest customer accounting for approximately 9% of total revenue during 2013. We also provide certain third-party logistics services via our recently formed Road Raiders subsidiaries.

The Jones Act

Our revenues are generated from our shipping and integrated logistics services in markets where the marine trade is subject to the coastwise laws of the United States, also known as the Jones Act.

The Jones Act is a long-standing cornerstone of U.S. maritime policy. Under the Jones Act, all vessels transporting cargo between covered U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies

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that are controlled and 75% owned by U.S. citizens. U.S.-flagged vessels are generally required to be maintained at higher standards than foreign-flagged vessels and are supervised by, as well as subject to rigorous inspections by, or on behalf of the United States Coast Guard (“Coast Guard”), which requires appropriate certifications and background checks of the crew members. Our trade routes between Alaska, Hawaii and Puerto Rico and the continental U.S. represent the three non-contiguous Jones Act markets. Vessels operating on these trade routes are required to be fully qualified Jones Act vessels.

Cabotage laws, which reserve the right to ship cargo between domestic ports to domestic vessels, are not unique to the United States. According to an April 2013 trade and industry report, over 550,000 TEUs are deployed on domestic cabotage trades worldwide. Countries with a significant maritime cabotage fleet include China, Indonesia, Brazil, the Philippines, Malaysia, India, Vietnam, Russia and Japan. In general, all interstate and intrastate marine commerce within the U.S. falls under the Jones Act, which is a cabotage law. We believe the Jones Act enjoys broad support from President Obama and both major political parties in both houses of Congress. We believe that the ongoing war on terrorism has further solidified political support for the Jones Act, as a vital and dedicated U.S. merchant marine is a cornerstone for a strong homeland defense, as well as a critical source of trained U.S. mariners for wartime support.

Market Overview and Competition

The Jones Act distinguishes the U.S. domestic shipping market from international shipping markets. Given the limited number of existing Jones Act-qualified vessels, the high capital investment and long delivery lead times associated with building a new containership in the U.S., the substantial investment required in infrastructure and the need to develop a broad base of customer relationships, the markets in which we operate have been less vulnerable to overcapacity and volatility than international shipping markets.

To ensure on-time pick-up and delivery of cargo, shipping companies must maintain strict vessel schedules and efficient terminal operations for expediting the movement of containers in and out of terminal facilities. The departure and arrival of vessels on schedule is heavily influenced by both vessel maintenance standards (i.e., minimizing mechanical breakdowns) and terminal operating discipline. Marine terminal gate and yard efficiency can be enhanced by efficient yard layout, high-quality information systems, and streamlined gate processes.

The Jones Act markets are not as fragmented as international shipping markets. We are one of only two major container shipping operators currently serving the Alaska market. Horizon Lines and Totem Ocean Trailer Express, Inc. (“TOTE”) serve the Alaska market. Horizon Lines and Matson Navigation Company, Inc. (“Matson”) serve the Hawaii market. The Pasha Group also serves the Hawaii market with a roll-on/roll-off vessel, and expects to introduce a second vessel into the Hawaii market during the second half of 2014. The Puerto Rico market is currently served by three containership companies. National Shipping of America began operating one containership in the Puerto Rico market in May 2013, and Horizon Lines and Sea Star Lines continue to operate in the Puerto Rico market. Two barge operators, Crowley Maritime Corporation (“Crowley”) and Trailer Bridge, Inc., also currently serve this market.

Vessel Fleet

We manage and maintain our vessels in accordance with procedures and regulations promulgated by the Coast Guard. Our vessels are subject to periodic inspection and certification by the American Bureau of Shipping (commonly referred to as “ABS”), on behalf of the Coast Guard, for compliance with these standards. Our on-shore vessel management team manages all of our ongoing maintenance and dry-docking activity through strategic locations in New Jersey, Florida, Washington, California and Texas.

In 2011, we instituted a maintenance and planning tool developed by ABS Nautical Systems that automates the integration of conditional monitoring, preventive maintenance, job scheduling, and vessel and machinery inspections into the maintenance cycle of each vessel in our fleet. These procedures are intended to protect our fleet, crew, cargo, and the environment and to preserve the usefulness of our vessels.

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The table below lists our vessel fleet, which is the largest containership fleet within the Jones Act markets. As of the date hereof, our vessel fleet consists of 13 owned and fully Jones Act-qualified vessels of varying classes and specifications. Two of our vessels are spare vessels available for seasonal and dry-dock needs and to respond to potential new revenue opportunities. One additional spare vessel could be available for deployment after undergoing dry-docking for inspection and maintenance.

Vessel Name	Market	Year Built		TEU(1)		Reefer Capacity(2)		Max. Speed
Horizon Anchorage	Alaska		1987		1,668		280		20.0 kts
Horizon Tacoma	Alaska		1987		1,668		280		20.0 kts
Horizon Kodiak	Alaska		1987		1,668		280		20.0 kts
Horizon Pacific	Hawaii		1980		2,302		170		21.0 kts
Horizon Enterprise	Hawaii		1980		2,302		170		21.0 kts
Horizon Spirit	Hawaii		1980		2,436		150		22.0 kts
Horizon Reliance	Hawaii		1980		2,436		150		22.0 kts
Horizon Producer	Puerto Rico		1974		1,680		170		22.0 kts
Horizon Navigator	Puerto Rico		1972		2,250		188		21.0 kts
Horizon Trader	Puerto Rico		1973		2,250		188		21.0 kts
Horizon Fairbanks(3)	—		1973		1,468		170		22.5 kts
Horizon Discovery(4)	—		1968		1,374		108		21.2 kts
Horizon Consumer(4)	—		1973		1,690		170		22.0 kts

(1) Twenty-foot equivalent unit, or TEU, is a standard measure of cargo volume correlated to the volume of a standard 20-foot dry cargo container.

(2) Reefer capacity, or refrigerated container capacity, refers to the total number of 40-foot equivalent units, or FEUs, which the vessel can hold. The FEU is a standard measure of refrigerated cargo volume correlated to the volume of a standard 40-foot reefer, or refrigerated cargo container.

(3) Horizon Fairbanks could serve as a spare vessel available for deployment in any of our markets and seasonal operation in the Alaska trade after undergoing inspection and maintenance (dry-docking). Given the investment necessary for the vessel to be available for deployment and our current vessel needs, we may make a decision to sell, or otherwise dispose of, this spare vessel. The carrying value of Horizon Fairbanks as of December 22, 2013 is less than $0.1 million.

(4) Vessels are available for seasonal needs and dry-dock relief, and thus are not specific to any given market.

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Container Fleet

As summarized in the table below, our container fleet as of December 22, 2013 consists of owned and leased containers of different types and sizes. All but one of our container leases are accounted for as operating leases.

Container Type	Owned		Leased		Combined
20’ Standard Dry		4		473		477
20’ High-Cube Reefer		10		—		10
20’ Miscellaneous		46		—		46
40’ Standard Dry		19		1,135		1,154
40’ Flat Rack		324		301		625
40’ High-Cube Dry		1,482		6,277		7,759
40’ Standard Insulated		1		—		1
40’ High-Cube Insulated		355		—		355
40’ Standard Opentop		—		52		52
40’ Miscellaneous		46		—		46
40’ Car Carrier		164		—		164
40’ High-Cube Reefer		3,343		2,400		5,743
45’ High-Cube Dry		2,962		2,388		5,350
45’ High-Cube Flatrack		25		—		25
45’ High-Cube Insulated		453		—		453
45’ High-Cube Reefer		317		—		317
48’ High-Cube Dry		276		—		276
Total		9,827		13,026		22,853

Capital Construction Fund

The Merchant Marine Act, 1936, as amended, permits the limited deferral of U.S. federal income taxes on earnings from eligible U.S.-built and U.S.-flagged vessels and U.S.-built containers if the earnings are deposited into a Capital Construction Fund (“CCF”), pursuant to an agreement with the U.S. Maritime Administration, (“MARAD”). Any amounts deposited in a CCF can be withdrawn and used for the acquisition, construction or reconstruction of U.S.-built and U.S.-flagged vessels or U.S.-built containers.

Horizon Lines had a CCF agreement with MARAD under which it could deposit earnings attributable to the operation of its Jones Act-qualified vessels into the CCF and make withdrawals of funds from the CCF to acquire U.S.-built and U.S.-flagged vessels. From 2003-2005, Horizon Lines utilized CCF deposits totaling $50.4 million to acquire six U.S.-built and U.S.-flagged vessels (Horizon Enterprise, Horizon Pacific, Horizon Hawaii, Horizon Fairbanks, Horizon Navigator, and Horizon Trader). On January 23, 2013, Horizon Lines terminated its CCF Agreement with MARAD. There were no deposits in the CCF on the termination date.

Any amounts deposited in a CCF could not have been withdrawn for other than the qualified purposes specified in the CCF agreement. Any nonqualified withdrawals were subject to federal income tax at the highest marginal rate. In addition, such tax was subject to an interest charge based upon the number of years the funds have been on deposit. If Horizon Lines’ CCF agreement was terminated and if Horizon Lines had funds on deposit when its CCF Agreement was terminated, those funds then on deposit in the CCF would have been treated as nonqualified withdrawals for that taxable year. In addition, if a vessel built, acquired, or reconstructed with CCF funds is operated in a nonqualified operation, the owner must repay a proportionate amount of the tax benefits as liquidated damages. These restrictions apply for (i) 20 years after delivery in the case of vessels built with CCF funds, (ii) ten years in the case of vessels reconstructed or acquired with CCF funds more than one year after delivery from the shipyard, and (iii) ten years after the first expenditure of CCF funds in the case of

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vessels in regard to which qualified withdrawals from the CCF fund have been made to pay existing indebtedness (five years if the vessels are more than 15 years old on the date the withdrawal is made). In addition, the sale or mortgage of a vessel acquired with CCF funds requires MARAD’s approval.

Our consolidated balance sheets at December 22, 2013 and December 23, 2012 include liabilities of approximately $5.6 million and $6.4 million, respectively, for deferred taxes on deposits previously made in our CCF.

Sales and Marketing

We manage a sales and marketing team of 85 employees strategically located in our various ports, as well as in five regional offices across the continental U.S., including our headquarters in Charlotte, North Carolina and from our office in Compton, California. Senior sales and marketing professionals are responsible for developing sales and marketing strategies and are closely involved in serving our largest customers. All pricing activities are also coordinated from Charlotte, North Carolina; Irving, Texas; and from Renton, Washington, enabling us to manage our customer relationships. The marketing team located in Charlotte is responsible for providing appropriate market intelligence and direction to the Puerto Rico sales organization. The marketing team located in Irving is responsible for providing appropriate market intelligence and direction to the members of the organization who focus on the Hawaii market and our Renton marketing team focuses on the Alaska market.

Our regional sales and marketing presence ensures close and direct interaction with customers on a daily basis. Many of our regional sales professionals have been serving the same customers for over ten years. We believe that we have the largest sales force of all container shipping and integrated logistics companies active in our domestic markets. We believe that the breadth and depth of our relationships with our customers is the principal driver of repeat business from our customers.

Customers

We serve a diverse base of long-standing, established customers consisting of many of the world’s largest consumer and industrial products companies. Such customers include Costco Wholesale Corporation, Johnson & Johnson, Lowe’s Companies, Inc., Safeway, Inc., and Wal-Mart Stores, Inc. In addition, we serve several agencies of the U.S. government, including the Department of Defense and the U.S. Postal Service.

We believe that we are uniquely positioned to serve these and other large national customers due to our position as the only shipping and integrated logistics company serving all three non-contiguous Jones Act markets. Approximately 50% of our transportation revenue in 2013 was derived from customers shipping with us in more than one of our markets and approximately 31% of our transportation revenue in 2013 was derived from customers shipping with us in all three domestic markets.

We generate most of our revenue through customer contracts with specified rates and volumes, and with durations ranging from one to six years, providing stable revenue streams. The majority of our customer contracts contain provisions that allow us to adjust fuel surcharges based on fluctuations in our fuel costs. In addition, our relationships with many of our customers extend far beyond the length of any given contract. For example, some of our customer relationships extend back over 40 years and our top ten customer relationships average 32 years.

We serve customers in numerous industries and carry a wide variety of cargos, mitigating our dependence upon any single customer or single type of cargo. During 2013, our top ten largest customers comprised approximately 34% of total revenue, with our largest customer accounting for approximately 9% of total revenue. Total revenue includes transportation, non-transportation and other revenue.

Industry and market data used throughout this Form 10-K, including information relating to our relative position in the shipping and integrated logistics industries are approximations based on the good faith estimates

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of our management. These estimates are generally based on internal surveys and sources, and other publicly available information, including local port information. Unless otherwise noted, financial, industry and market data presented herein are for the period ending in December 2013.

Operations Overview

Our operations are primarily managed on a centralized basis from Irving, Texas. Local activities are managed at our terminal locations.

We book and monitor all of our shipping and integrated logistics services with our customers through the Horizon Information Technology System (“HITS”). HITS, our proprietary ocean shipping and logistics information technology system, provides a platform to execute a shipping transaction from start to finish in a cost-effective, streamlined manner. HITS provides an extensive database of information relevant to the shipment of containerized cargo and captures all critical aspects of every shipment booked with us. In a typical transaction, our customers go on-line to book a shipment or call, fax or e-mail our customer service department. Once applicable shipping information is input into the booking system, a booking number is generated. The booking information then downloads into other systems used by our dispatch team, terminal personnel, vessel planners, documentation team, integrated logistics team and other teams and personnel who work together to produce a seamless transaction for our customers.

We strive to minimize our empty repositioning costs. Our dispatch team coordinates truck and/or rail shipping between inland locations and ports on intermodal bookings. We currently purchase rail services directly from the railroads involved through confidential transportation service contracts. Our terminal personnel schedule equipment availability for containers picked up at the port. Our vessel planners develop stowage plans and our documentation teams process the cargo bill. We review space availability and inform our other teams and personnel when additional bookings are required and when bookings need to be changed or pushed to the next vessel. After containers arrive at the port of origin, they are loaded on board the vessel. Once the containers are loaded and are at sea, our destination terminal staff initiates the process of receiving and releasing containers to our customers. Customers accessing HITS via our internet portal have the option to receive e-mail alerts as specific events take place throughout this process. All of our customers have the option to call our customer service department or to access HITS via our internet portal, 24 hours a day, seven days a week, to track and trace shipments.

Our operations share corporate and administrative functions such as finance, information technology, human resources, and legal. Centralized functions are performed primarily at our Charlotte headquarters and at our operations center in Irving.

Insurance

We maintain insurance policies to cover risks related to physical damage to our vessels and vessel equipment, other equipment (including containers, chassis, terminal equipment and trucks) and property, as well as with respect to third-party liabilities arising from the carriage of goods, the operation of vessels and shoreside equipment, and general liabilities which may arise through the course of our normal business operations. We also maintain workers compensation insurance, business interruption insurance, and insurance providing indemnification for our directors, officers, and certain employees for some liabilities.

Security

Heightened awareness of maritime security needs, brought about by the events of September 11, 2001 and numerous maritime piracy attacks around the globe, have caused the United Nations through its International Maritime Organization (“IMO”), the U.S. Department of Homeland Security, through its Coast Guard, and the states and local ports to adopt a more stringent set of security procedures relating to port facility security, including the interface between port facilities and vessels. In addition, the U.S. Congress has enacted legislation requiring the implementation of Coast Guard-approved vessel and facility security plans.

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Certain aspects of our security plans require our investing in infrastructure upgrades to ensure compliance. We have applied in the past and will continue to apply going forward for federal grants to offset the incremental expense of these security investments. The current administration is continuously reviewing the criteria for awarding such grants. Such changes could have a negative impact on our ability to win grant funding in the future. Security surcharges are evaluated regularly and we may at times incorporate these surcharges into the base transportation rates that we charge.

Employees

As of December 22, 2013, we have 1,621 employees, of which approximately 1,136 were represented by eight labor unions.

The table below sets forth the unions which represent our employees, the number of employees represented by these unions as of December 22, 2013 and the expiration dates of the related collective bargaining agreements:

Union	Earliest Expiration Date of Related Collective Bargaining Agreement(s)	Number of Our Employees Represented
International Brotherhood of Teamsters	March 31, 2013(1)		247
International Brotherhood of Teamsters, Alaska	June 30, 2015		122
International Brotherhood of Teamsters, Puerto Rico	October 31, 2014		1
International Longshore & Warehouse Union (ILWU)	June 30, 2014		215
International Longshore and Warehouse Union, Alaska (ILWU-Kodiak and Dutch Harbor, Alaska)	June 30, 2015		56
Anchorage Independent Longshore	June 30, 2015		39
International Longshoremen’s Association, AFL-CIO (ILA)	September 30, 2018		N/A	(2)
International Longshoremen’s Association, AFL-CIO, Puerto Rico	September 30, 2014		86
Marine Engineers Beneficial Association (MEBA)	June 15, 2022		78
International Organization of Masters, Mates & Pilots, AFL-CIO (MMP)	June 15, 2017		52
Office & Professional Employees International Union, AFL-CIO	November 9, 2014		45
Seafarers International Union (SIU)	June 30, 2017		195

(1) Our employees covered under this agreement are continuing to work under the old agreement while we negotiate a new agreement.

(2) Workers may perform services for us but are not our employees. A disruption of port operations could affect workers who perform services for us.

The table below provides a breakdown of headcount by non-contiguous Jones Act market and function for our non-union employees as of December 22, 2013.

	Alaska Market		Hawaii Market		Puerto Rico Market		Corporate(a)		Total
Senior Management		2		2		2		9		15
Operations		36		70		40		54		200
Sales and Marketing		16		26		32		11		85
Administration(b)		2		23		7		153		185
Total Headcount		56		121		81		227		485

(a) Corporate headcount includes employees in both Charlotte, North Carolina (headquarters) and in Irving, Texas and other locations.

(b) Administration headcount is comprised of back-office functions and also includes customer service and documentation.

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Environmental Initiatives

We strive to support our commitment to protect the environment with programs that promote best practices in environmental stewardship. During 2008, we launched our Horizon Green initiative. Through our Horizon Green initiative, we strive to better understand and measure our impact on the environment, and to develop programs that incorporate environmental stewardship into our core operations. Within the Horizon Green initiative, we are addressing three key areas:

Marine Environment

To protect the marine environment, we have established several programs in addition to the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto (“MARPOL”) and ISM codes created by the International Maritime Organization (“IMO”). These include vessel management controls, low sulfur diesel fuel usage and marine terminal pollution mitigation plans.

Emissions

We are focused on reducing transportation emissions, including carbon dioxide, nitrous oxide and sulfur dioxide, through improvements in vessel fuel consumption and truck efficiency; the use of alternative fuels; and the development of more fuel-efficient transportation solutions.

Sustainability

We believe in a long-term sustainable approach to integrated logistics management that benefits the company, customers, associates, shareholders and the community. Examples include reducing empty backhaul miles through logistics network optimization and using recycled materials to build containers.

Available Information

The mailing address of the Company’s Executive Office is 4064 Colony Road, Suite 200, Charlotte, North Carolina 28211 and the telephone number at that location is (704) 973-7000. The Company’s most recent SEC filings can be found on the SEC’s website, www.sec.gov, and on the Company’s website, www.horizonlines.com. The Company’s 2013 annual report on Form 10-K will be available on the Company’s website as soon as reasonably practicable. All such filings are available free of charge. The contents of our website are not incorporated by reference into this Form 10-K. The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330.

Item 1A. Risk Factors

We have incurred significant net losses from continuing operations in the recent past, and such losses may continue in the future, which may result in a need for increased access to capital. If our cash provided by operating and financing activities is insufficient to fund our cash requirements, we could face substantial liquidity problems.

Our net losses from continuing operations were $33.4 million, $74.4 million, and $53.2 million for the fiscal years ending 2013, 2012 and 2011, respectively. In the event we require capital in the future due to continued losses, such capital may not be available on satisfactory terms, or available at all.

Our liquidity derived from our $100.0 million principal amount asset-based revolving credit facility (the “ABL Facility”) is based on availability determined by a borrowing base. We may not be able to maintain adequate levels of eligible assets to support our required liquidity in the future.

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Our cash flows and capital resources may be insufficient to make required payments on our substantial indebtedness and future indebtedness.

We continue to have substantial indebtedness and a stockholders’ deficiency. As of December 22, 2013, on a consolidated basis, we had $502.1 million of funded long-term debt (exclusive of capital lease obligations of $12.4 million and outstanding letters of credit with an aggregate face amount of $12.9 million) compared to $426.4 million of funded long-term debt (exclusive of capital lease obligations of $7.4 million and outstanding letters of credit with an aggregate face amount of $13.2 million) as of December 23, 2012. In addition, as of December 22, 2013, we had approximately $152.1 million of aggregate trade payables, accrued liabilities and other balance sheet liabilities (other than the long-term debt referred to above) and (iii) a stockholders’ deficiency of $43.8 million, resulting in a negative funded debt-to-equity ratio. During 2014, we expect to pay $36.3 million of cash interest under our debt agreements.

Because we have substantial debt, we require significant amounts of cash to fund our debt service obligations. Our ability to generate cash to meet scheduled payments or to refinance our obligations with respect to our debt depends on our financial and operating performance which, in turn, is subject to prevailing economic and competitive conditions and to the following financial and business factors, some of which may be beyond our control:

• operating difficulties;

• increased operating costs;

• increased fuel costs;

• general economic conditions;

• decreased demand for our services;

• market cyclicality;

• tariff rates;

• prices for our services;

• the actions of competitors;

• regulatory developments; and

• delays in implementing strategic projects.

If our cash flow and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and might be forced to reduce or delay capital expenditures, dispose of material assets or operations, seek to obtain additional equity capital, or restructure or refinance our indebtedness. Such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In particular, in the event that we are required to dispose of material assets or operations to meet our debt service obligations, we cannot be sure as to the timing of such dispositions or the proceeds that we would realize from those dispositions. The value realized from such dispositions will depend on market conditions and the availability of buyers, and, consequently, any such disposition may not, among other things, result in sufficient cash proceeds to repay our indebtedness.

Our substantial indebtedness and future indebtedness could significantly impair our operating and financial condition.

We continue to face challenges in functioning as a highly leveraged company. Our substantial indebtedness, history of continuing losses, and the substantial liquidity needs we face have and continue to have important consequences to investors and significant effects on our business, including the following:

• make it difficult for us to satisfy our obligations under our indebtedness and contractual and commercial commitments and, if we fail to comply with these requirements, an event of default could result;

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• require us to use a substantial portion of our cash flow from operations to pay interest on our existing indebtedness, which reduces the funds available to us for other purposes, including our operations, capital expenditures and future business opportunities;

• limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes;

• limit our flexibility to react to changes in our industry and make us more vulnerable to adverse changes in our business or economic conditions in general; and

• we may be at a competitive disadvantage compared to our competitors that are not as highly leveraged.

The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our indebtedness.

We may not be able to obtain financing in the future, and the terms of any future financings may limit our ability to manage our business. Difficulties in obtaining financing on favorable terms would have a negative effect on our ability to execute our business strategy.

We will need to seek additional capital in the future to refinance or replace existing long-term debt and to fund capital expenditures such as the replacement or repowering of our existing vessels. We may also need to seek additional capital in the future to meet current or future business plans, meet working capital needs or for other reasons. Based on the significant amount of our existing indebtedness and current market conditions, the availability of financing is, and may continue to be, limited.

Further issuances of our common stock and the exercise of outstanding warrants could be dilutive.

The market price of our common stock could decline due to the issuance or sales of a large number of shares in the market, including the issuance of shares underlying our outstanding warrants, or the perception that these issuances could occur. These issuances could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common stock.

In connection with our 2011 comprehensive refinancing, we issued warrants to purchase 982,975 shares of our common stock. In addition, on January 11, 2012, we issued warrants to purchase up to 1,702,592 shares of common stock to complete the mandatory debt-to-equity conversion of approximately $49.7 million of the Series B Notes. In connection with the April 9, 2012 transactions, we issued warrants equivalent to 75,989,794 shares on an as-converted basis.

Recent transactions have significantly diluted the ownership interest of holders of our common stock. Any further issuances of our common stock, including the issuance of shares pursuant to the exercise of some or all of the outstanding warrants, could further dilute existing holders of our common stock and could cause the price of our common stock to decrease and the value of each share of our common stock to decline substantially.

We may face new competitors or increased competition which may have a substantial impact on our results from operations.

The entrant of a new competitor or increased vessel capacity serving any one of our markets may have a disproportionately substantial impact on our results from operations, even if the amount of vessel capacity introduced into that market is not significant. For example, a new competitor deployed a vessel to serve the Puerto Rico market in May of 2013. Although the vessel has limited capacity, we believe that the increase in capacity has impacted rates in the Puerto Rico trade. In addition, one of our existing competitors in the Hawaii market expects to introduce a new vessel during the second half of 2014.

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Further, one of our existing competitors in the Puerto Rico trade has announced that it has committed to the construction of two new, modern containerships for the Puerto Rico trade, with options for three more vessels for additional domestic service. The first two vessels are expected to be delivered and enter service in 2015 and 2016.

Another of our competitors in the Puerto Rico trade recently announced it intends to build two new self-propelled dual purpose (container and roll-on, roll-off) ships. The main propulsion and auxiliary engines will use liquefied natural gas as fuel. The ships are due to be delivered in the second and fourth quarter of 2017.

A competitor in the Hawaii trade has also recently announced plans to build two new containerships for use in the Hawaii market. The new ships will feature dual fuel engines that can run on liquefied natural gas and are expected to be delivered in the third and fourth quarters of 2018.

These existing and any new competitors may have access to financial resources substantially greater than our own. In addition, existing non-Jones Act-qualified shipping operators whose container ships sail between ports in Asia and the U.S. west coast could add Hawaii or Alaska as additional stops on their sailing routes for non-U.S. originated or destined cargo. Shipping operators could also add Hawaii or Alaska as additional stops on their sailing routes between the continental U.S. and ports in Europe, the Caribbean, and Latin America for non-U.S. originated or destined cargo.

The age of our vessels may make it difficult to operate profitably in the markets we serve.

We believe that each of the vessels we operate, in its existing state, currently has an estimated useful life of approximately 45 years from the year it was built. In addition, newer vessels are generally more efficient, use less fuel, are faster and have a lower environmental impact than older vessels. Our vessels that are available for seasonal needs and dry-dock relief have an age of 46 and 41 years. In addition, the three vessels that serve our Puerto Rico trade have an average age of 41 years, and the average age of all of our vessels is 35 years.

Some of our vessels will need to be replaced soon. We may not be able to replace our existing vessels with new vessels based on uncertainties related to costs, financing, timing and shipyard availability. In addition, as our fleet ages, operation and maintenance costs increase. For example, insurance rates and the costs of compliance with governmental regulations, safety or other equipment standards increase as the vessels age. Moreover, the failure to make capital expenditures to alter or add new equipment to our vessels may restrict the type of activities in which these vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

We may not be able to convert and repower our existing vessels.

We previously announced our plan to convert the power plants on two of our steam turbine cargo vessels to modern diesel engines capable of burning liquefied fuels or liquefied natural gas. We believe that these two vessels are structurally viable and the intent is to increase the efficiency of these vessels. However, we may not be able to execute our plan to repower these vessels if we are unable to obtain financing on acceptable terms. Our substantial indebtedness may make it difficult to obtain financing or to satisfy any contractual commitments in connection with the repowering effort. In addition, any shipyard that we choose to perform the repowering work may not be able to meet our specifications for the project and we may not be able to achieve the results that we would expect for the project. If our repowering project is not successful, we may not have sufficient vessel capacity to operate our business as expected and it could have a material adverse effect on our business, results of operations or prospects.

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Certain of our investors hold a significant percentage of our outstanding common stock or securities convertible into our common stock, which could reduce the ability of minority shareholders to effect certain corporate actions.

We believe a small group of investors holds over 95% of our outstanding common stock on an as-converted basis. As a result, they possess significant influence and can elect a majority of our board of directors and authorize or prevent proposed significant corporate transactions. Their ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer.

We face the risk of breaching covenants in the agreements governing our outstanding indebtedness and may not be able to comply with such covenants.

Our debt agreements contain financial covenants that could cause us to suffer an event of default. Our ability to meet the covenants can be affected by various risks, uncertainties and events beyond our control, and we cannot provide assurance that we will meet those tests. Failure to comply with any of the covenants in our debt agreements could result in a default under those agreements and under other agreements containing cross-default provisions.

Upon the occurrence of an event of default under our debt agreements, all amounts outstanding can be declared immediately due and payable. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations, including our ability to repay borrowings under our debt agreements.

Under agreements governing our outstanding indebtedness, we are not permitted to pay dividends on our common stock and we may not meet Delaware law requirements or have sufficient cash to pay dividends in the future.

We are not required to pay dividends to our stockholders and our stockholders do not have contractual or other rights to receive them. The agreements governing our outstanding indebtedness allow us to pay dividends only under limited circumstances, and pursuant to those agreements, we currently are not permitted to pay such dividends.

In addition, under Delaware law, our Board of Directors may not authorize a dividend unless it is paid out of our surplus (calculated in accordance with the Delaware General Corporation law), or, if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and the preceding fiscal year.

Our ability to pay dividends in the future will depend on numerous factors, including:

• our obligations under agreements governing our outstanding indebtedness;

• the state of our business, the environment in which we operate, and the various risks we face, including financing risks and other risks summarized in this report;

• the results of our operations, financial condition, liquidity needs and capital resources;

• our expected cash needs, including for interest and any future principal payments on indebtedness, capital expenditures and payment of fines and settlements related to antitrust and qui tam matters; and

• Potential sources of liquidity, including borrowing under our revolving credit facility or possible asset sales.

We depend on the federal government for a portion of our business, and we could be adversely affected by suspension or debarment by the federal government.

Some of our revenue is derived from contracts with agencies of the U.S. government, and as a U.S. government contractor, we are subject to federal regulations regarding the performance of our government

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contracts. In addition, we are required to certify our compliance with numerous federal laws, including environmental laws. Failure to comply with relevant federal laws may result in suspension or debarment. In March 2011, we pled guilty to a charge of violating federal antitrust laws in our Puerto Rico tradelane and in February 2012, we pled guilty to a charge relating to environmental record-keeping on one of our vessels. If the federal government suspends or debars us for violation of legal and regulatory requirements, it could have a material adverse effect on our business, results of operations or prospects.

Further economic decline and decrease in market demand for our services will adversely affect our operating results and financial condition.

During the second half of 2008, a crisis in the credit markets began to impact the capital markets and produced a global recession. Even with the worst of the crisis believed to have passed, economic conditions remain fragile, and a further slowdown in economic conditions of our markets may adversely affect our business. Demand for our shipping services depends on levels of shipping in our markets, as well as on economic and trade growth. Cyclical or other recessions in the continental U.S. or in these markets can negatively affect our operating results. Consumer purchases or discretionary items generally decline during periods where disposable income is adversely affected or there is economic uncertainty, and, as a result our customers may ship fewer containers or may ship containers only at reduced rates. Uncertainties experienced by our customers could cause them to reduce the volume of, or discontinue, shipments along certain routes and consequently the revenue stream that we derive from customer contracts. Furthermore, challenging economic times may affect our customers’ ability to gain timely access to sufficient credit, which could impair their ability to pay us in a timely manner. If that occurred, we may cease recognizing revenue from certain customers or increase our allowance for doubtful accounts, and our financial results would be harmed.

We cannot predict the timing, strength or duration of any economic slowdown or recovery. If the condition of the general economy or other relevant conditions in the Alaska, Hawaii or Puerto Rico markets worsen from present levels, our business could be harmed. In addition, even if the overall economy improves, we cannot assure you that the markets in which we operate will experience growth or that we will experience growth.

Our business is concentrated in three markets, including Puerto Rico, and we may continue to be adversely affected by Puerto Rico’s recessionary economic conditions.

We conduct most of our operations in three geographically concentrated areas, including Puerto Rico. As a result, our financial condition and results of operations are highly dependent on the economic conditions of Puerto Rico. The economy of Puerto Rico entered into a recession in the fourth quarter of the government’s fiscal year ended June 30, 2006. For fiscal years 2007, 2008, 2009, 2010, 2011 and 2012, Puerto Rico’s real gross national product decreased by 1.2%, 2.9%, 3.8%, 3.6%, 1.6% and increased by 0.1%, respectively. According to the latest information and projections issued by the Puerto Rico Planning Board, real gross national product for fiscal 2013 is projected to again decrease by 0.3%, and real gross national product for fiscal year 2014 is projected to decrease by 0.8%.

The long recession in Puerto Rico has resulted in, among other things, a reduction in demand for goods and cargo in the Puerto Rico trade. The steady reduction in demand for goods and cargo has resulted in pressure on price and utilization of vessel capacity. The continuation of the economic slowdown would cause those adverse effects to continue. If economic conditions in Puerto Rico do not improve, our financial condition and results of operations could be materially adversely affected.

Volatility in fuel prices may adversely affect our results of operations.

Fuel is a significant operating expense for our shipping operations. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing

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countries and regions, regional production patterns and environmental concerns. As a result, variability in the price of fuel may adversely affect profitability. There can be no assurance that our customers will agree to bear such fuel price increases via fuel surcharges without a reduction in their volumes of business with us, nor any assurance that our future fuel hedging efforts, if any, will be successful.

Repeal, substantial amendment, or waiver of the Jones Act or its application could have a material adverse effect on our business.

If the Jones Act was to be repealed, substantially amended, or waived and, as a consequence, competitors with lower operating costs by utilizing their ability to acquire and operate foreign-flag and foreign-built vessels were to enter any of our Jones Act markets, our business would be materially adversely affected. In addition, our advantage as a U.S.-citizen operator of Jones Act vessels could be eroded by periodic efforts and attempts by foreign and domestic interests to circumvent certain aspects of the Jones Act. If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, or if the restrictions contained in the Jones Act were otherwise altered, the shipping of maritime cargo between covered U.S. ports could be opened to foreign-flag or foreign-built vessels. In the past, interest groups have lobbied Congress to repeal the Jones Act to facilitate foreign flag competition for trades and cargoes currently reserved for U.S.-flag vessels under the Jones Act. We believe that interest groups may continue efforts to modify or repeal the Jones Act currently benefiting U.S.-flag vessels. If these efforts are successful, it could result in increased competition, which could adversely affect our business and operating results.

Due to our participation in multi-employer pension plans, we may have exposure under those plans that extends beyond what our obligations would be with respect to our employees.

We contribute to twelve multi-employer pension plans. In the event of a partial or complete withdrawal by us from any plan which is underfunded, we would be liable for a proportionate share of such plan’s unfunded vested benefits. Based on the limited information available from plan administrators, which we cannot independently validate, we believe that our portion of the contingent liability in the case of a full withdrawal or termination would be material to our financial position and results of operations. In the event that any other contributing employer withdraws from any plan which is underfunded, and such employer (or any member in its controlled group) cannot satisfy its obligations under the plan at the time of withdrawal, then we, along with the other remaining contributing employers, would be liable for our proportionate share of such plan’s unfunded vested benefits. Even if we do not take any actions that would subject us to withdrawal liabilities, another contributing employer could take such actions.

In addition, if a multi-employer plan fails to satisfy the minimum funding requirements, the Internal Revenue Service, pursuant to Section 4971 of the Internal Revenue Code of 1986, as amended, referred to herein as the Code, will impose an excise tax of five percent (5%) on the amount of the accumulated funding deficiency. Under Section 413(c)(5) of the Code, the liability of each contributing employer, including us, will be determined in part by each employer’s respective delinquency in meeting the required employer contributions under the plan. The Code also requires contributing employers to make additional contributions in order to reduce the deficiency to zero, which may, along with the payment of the excise tax, have a material adverse impact on our financial results.

Compliance with safety and environmental protection and other governmental requirements may adversely affect our operations.

The shipping industry in general and our business and the operation of our vessels and terminals in particular are affected by extensive and changing safety, environmental protection and other international, national, state and local governmental laws and regulations, including the following: laws pertaining to air emissions; wastewater discharges; the handling and disposal of solid and hazardous materials and oil and oil-related products, hazardous substances and wastes; the investigation and remediation of contamination; and

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health, safety and the protection of the environment and natural resources. For example, our vessels, as U.S.-flagged vessels, generally must be maintained “in class” and are subject to periodic inspections by ABS or similar classification societies, and must be periodically inspected by, or on behalf of, the Coast Guard. Federal environmental laws and certain state laws require us, as a vessel operator, to comply with numerous environmental regulations and to obtain certificates of financial responsibility and to adopt procedures for oil and hazardous substance spill prevention, response and clean up. In complying with these laws, we have incurred expenses and may incur future expenses for ship modifications and changes in operating procedures. Changes in enforcement policies for existing requirements and additional laws and regulations adopted in the future could limit our ability to do business or further increase the cost of our doing business.

Our vessels’ operating certificates and licenses are renewed periodically during the required annual surveys of the vessels. However, there can be no assurance that such certificates and licenses will be renewed. Also, in the future, we may have to alter existing equipment, add new equipment to, or change operating procedures for, our vessels to comply with changes in governmental regulations, safety or other equipment standards to meet our customers’ changing needs. If any such costs are material, they could adversely affect our financial condition.

We are subject to regulation and liability under environmental laws that could result in substantial fines and penalties that may have a material adverse effect on our results of operations.

The U.S. Act to Prevent Pollution from Ships, which implements MARPOL, provides for severe civil and criminal penalties related to ship-generated pollution for incidents in U.S. waters within three nautical miles and in some cases in the 200-mile exclusive economic zone. The U.S. Environmental Protection Agency (“EPA”) requires vessels to obtain coverage under a general permit and to comply with inspection, monitoring, discharge, recordkeeping and reporting requirements. Occasionally, our vessels may not operate in accordance with such permit or requirements or we may not adequately comply with recordkeeping and reporting requirements. Any such violations could result in substantial fines or penalties that could have a material adverse effect on our results of operations and our business.

Restrictions on foreign ownership of our vessels could limit our ability to sell off any portion of our business or result in the forfeiture of our vessels.

The Jones Act restricts the foreign ownership interests in the entities that directly or indirectly own the vessels which we operate in our Jones Act markets. If we were to seek to sell any portion of our business that owns any of these vessels, we would have fewer potential purchasers, since some potential purchasers might be unable or unwilling to satisfy the foreign ownership restrictions described above. As a result, the sales price for that portion of our business may not attain the amount that could be obtained in an unregulated market. Furthermore, at any point Horizon Lines, LLC, our indirect wholly-owned subsidiary and principal operating subsidiary, ceases to be controlled and 75% owned by U.S. citizens, we would become ineligible to operate in our current Jones Act markets and may become subject to penalties and risk forfeiture of our vessels.

Catastrophic losses and other liabilities could adversely affect our results of operations and such losses and liability may be beyond insurance coverage.

The operation of any oceangoing vessel carries with it an inherent risk of catastrophic maritime disaster, mechanical failure, collision, and loss of or damage to cargo. Also, in the course of the operation of our vessels, marine disasters, such as oil spills and other environmental mishaps, cargo loss or damage, and business interruption due to political or other developments, as well as maritime disasters not involving us, labor disputes, strikes and adverse weather conditions, could result in loss of revenue, liabilities or increased costs, personal injury, loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. Damage arising from such occurrences may result in lawsuits asserting large claims.

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Although we maintain insurance, including retentions and deductibles, at levels that we believe are consistent with industry norms against the risks described above, including loss of life, there can be no assurance that this insurance would be sufficient to cover the cost of damages suffered by us from the occurrence of all of the risks described above or the loss of income resulting from one or more of our vessels being removed from operation. We also cannot be assured that a claim will be paid or that we will be able to obtain insurance at commercially reasonable rates in the future. Further, if we are negligent or otherwise responsible in connection with any such event, our insurance may not cover our claim.

In the event that any of the claims arising from any of the foregoing possible events were assessed against us, all of our assets could be subject to attachment and other judicial process.

Interruption or failure of our information technology and communications systems could impair our ability to effectively provide our shipping and logistics services, especially HITS, which could damage our reputation and harm our operating results.

Our provision of our shipping and logistics services depends on the continuing operation of our information technology and communications systems, especially our Horizon Information Technology System (“HITS”). We have experienced brief system failures in the past and may experience brief or substantial failures in the future. Any failure of our systems could result in interruptions in our service reducing our revenue and profits and damaging our brand. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all eventualities. The occurrence of a natural disaster, or other unanticipated problems at our facilities at which we maintain and operate our systems could result in lengthy interruptions or delays in our shipping and integrated logistics services, especially HITS.

Our vessels could be arrested by maritime claimants, which could result in significant loss of earnings and cash flow.

Crew members, suppliers of goods and services to a vessel, shippers of cargo, lenders and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a claimant may enforce its lien by either arresting or attaching a vessel through foreclosure proceedings. Moreover, crew members may place liens for unpaid wages that can include significant statutory penalty wages if the unpaid wages remain overdue (e.g., double wages for every day during which the unpaid wages remain overdue). The arrest or attachment of one or more of our vessels could result in a significant loss of earnings and cash flow for the period during which the arrest or attachment is continuing.

We are susceptible to severe weather and natural disasters and global climate change may make adverse weather conditions more severe or frequent.

Our operations are vulnerable to disruption as a result of weather and natural disasters such as bad weather at sea, hurricanes, typhoons and earthquakes. Such events will interfere with our ability to provide the on-time scheduled service our customers demand resulting in increased expenses and potential loss of business associated with such events. In addition, severe weather and natural disasters can result in interference with our terminal operations, and may cause serious damage to our vessels, loss or damage to containers, cargo and other equipment and loss of life or physical injury to our employees. Terminals on the east coast of the continental U.S. and in the Caribbean are particularly susceptible to hurricanes and typhoons. In the past, our terminal in Puerto Rico was seriously damaged by a hurricane, resulting in damage to cranes and other equipment and closure of the facility. Earthquakes in Anchorage have also damaged our terminal facilities resulting in delay in terminal operations and increased expenses. Any such damage will not be fully covered by insurance.

The risk of adverse weather conditions is enhanced by the potential for global climate change which some scientists believe may increase severe weather patterns. The EPA has found in its recent greenhouse gas endangerment finding that global climate change would result in more severe and possibly more frequent adverse

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weather conditions. If this is the case, the above mentioned risks would be expected to increase in years ahead. For example, increased or more powerful weather events could result in damage to our shipping terminals and vessels or disrupt port operations.

We may face unexpected substantial dry-docking costs for our vessels.

Our vessels are dry-docked periodically to comply with regulatory requirements and to effect maintenance and repairs, if necessary. The cost of such repairs at each dry-docking are difficult to predict with certainty and can be substantial. Our established processes have enabled us to make on average four dry-dockings per year over the last five years with a minimal impact on schedule. There are some years when we have more than the average of four dry-dockings annually. In addition, our vessels may have to be dry-docked in the event of accidents or other unforeseen damage. Our insurance may not cover all of these costs. Large unpredictable repair and dry-docking expenses could significantly decrease our profits.

Our certificate of incorporation limits the ownership of common stock by individuals and entities that are not U.S. citizens. This may affect the liquidity of our common stock and may result in non-U.S. citizens being required to disgorge profits, sell their shares at a loss or relinquish their voting, dividend and distribution rights.

Under applicable U.S. maritime laws, at least 75% of the outstanding shares of each class or series of our capital stock must be owned and controlled by U.S. citizens within the meaning of such laws. Certain provisions of our certificate of incorporation are intended to facilitate compliance with this requirement and may have an adverse effect on holders of shares of the common stock.

Under the provisions of our certificate of incorporation, any transfer, or attempted transfer, of any shares of our capital stock will be void if the effect of such transfer, or attempted transfer, would be to cause one or more non-U.S. citizens in the aggregate to own (of record or beneficially) shares of any class or series of our capital stock in excess of 19.9% of the outstanding shares of such class or series. To the extent such restrictions voiding transfers are effective, the liquidity or market value of the shares of common stock may be adversely impacted.

In the event such restrictions voiding transfers would be ineffective for any reason, our certificate of incorporation provides that if any transfer would otherwise result in the number of shares of any class or series of our capital stock owned (of record or beneficially) by non-U.S. citizens being in excess of 19.9% of the outstanding shares of such class or series, such transfer will cause such excess shares to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries that are U.S. citizens. The proposed transferee will have no rights in the shares transferred to the trust, and the trustee, who is a U.S. citizen chosen by us and unaffiliated with us or the proposed transferee, will have all voting, dividend and distribution rights associated with the shares held in the trust. The trustee will sell such excess shares to a U.S. citizen within 20 days of receiving notice from us and distribute to the proposed transferee the lesser of the price that the proposed transferee paid for such shares and the amount received from the sale, and any gain from the sale will be paid to the charitable beneficiary of the trust.

These trust transfer provisions also apply to situations where ownership of a class or series of our capital stock by non-U.S. citizens in excess of 19.9% would be exceeded by a change in the status of a record or beneficial owner thereof from a U.S. citizen to a non-U.S. citizen, in which case such person will receive the lesser of the market price of the shares on the date of such status change and the amount received from the sale. In addition, under our certificate of incorporation, if the sale or other disposition of shares of common stock would result in non-U.S. citizens owning (of record or beneficially) in excess of 19.9% of the outstanding shares of common stock, the excess shares shall be automatically transferred to a trust for disposal by a trustee in accordance with the trust transfer provisions described above. As part of the foregoing trust transfer provisions, the trustee will be deemed to have offered the excess shares in the trust to us at a price per share equal to the lesser of (i) the market price on the date we accept the offer and (ii) the price per share in the purported transfer or original issuance of shares, as described in the preceding paragraph, or the market price per share on the date of the status change, that resulted in the transfer to the trust.

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As a result of the above trust transfer provisions, a proposed transferee that is a non-U.S. citizen or a record or beneficial owner whose citizenship status change results in excess shares may not receive any return on its investment in shares it purportedly purchases or owns, as the case may be, and it may sustain a loss.

To the extent that the above trust transfer provisions would be ineffective for any reason, our certificate of incorporation provides that, if the percentage of the shares of any class or series of our capital stock owned (of record or beneficially) by non-U.S. citizens is known to us to be in excess of 19.9% for such class or series, we, in our sole discretion, shall be entitled to redeem all or any portion of such shares most recently acquired (as determined by our board of directors in accordance with guidelines that are set forth in our certificate of incorporation), by non-U.S. citizens, or owned (of record or beneficially) by non-U.S. citizens as a result of a change in citizenship status, in excess of such maximum permitted percentage for such class or series at a redemption price based on a fair market value formula that is set forth in our certificate of incorporation. Such excess shares shall not be accorded any voting, dividend or distribution rights until they have ceased to be excess shares, provided that they have not been already redeemed by us. As a result of these provisions, a stockholder who is a non-U.S. citizen may be required to sell its shares of common stock at an undesirable time or price and may not receive any return on its investment in such shares. Further, we may have to incur additional indebtedness, or use available cash (if any), to fund all or a portion of such redemption, in which case our financial condition may be materially weakened.

So that we may ensure our compliance with the applicable maritime laws, our certificate of incorporation permits us to require that any record or beneficial owner of any shares of our capital stock provide us from time to time with certain documentation concerning such owner’s citizenship and comply with certain requirements. These provisions include a requirement that every person acquiring, directly or indirectly, five percent (5%) or more of the shares of any class or series of our capital stock must provide us with specified citizenship documentation. In the event that a person does not submit such requested or required documentation to us, our certificate of incorporation provides us with certain remedies, including the suspension of the voting rights of such person’s shares of our capital stock and the payment of dividends and distributions with respect to those shares into an escrow account. As a result of non-compliance with these provisions, a record or beneficial owner of the shares of our common stock may lose significant rights associated with those shares.

In addition to the risks described above, the foregoing foreign ownership restrictions could delay, defer or prevent a transaction or change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Certain provisions of our corporate governance documents and applicable U.S. maritime laws place restrictions on transfers and acquisitions or accumulation of our equity by third parties, and the failure of the protections afforded by such provisions may have a material detrimental impact on our Jones Act operations and/or impair our future ability to use a substantial amount of our existing net operating loss carryforwards.

Our certificate of incorporation contains provisions voiding transfers of shares of any class or series of our capital stock that would result in non-U.S. citizens, in the aggregate, owning in excess of 19.9% of the shares of such class or series. In the event that this transfer restriction would be ineffective, our certificate of incorporation provides for the automatic transfer of such excess shares to a trust specified therein. These trust provisions also apply to excess shares that would result from a change in the status of a record or beneficial owner of shares of our capital stock from a U.S. citizen to a non-U.S. citizen. In the event that these trust transfer provisions would also be ineffective, our certificate of incorporation permits us to redeem such excess shares. The per-share redemption price may be paid, as determined by our Board of Directors, by cash, redemption notes, or warrants. However, we may not be able to redeem such excess shares for cash because our operations may not have generated sufficient excess cash flow to fund such redemption.

If, for any reason, we are unable to effect such a redemption when such ownership of shares by non-U.S. citizens is in excess of 25.0% of such class or series, or otherwise prevent non-U.S. citizens in the aggregate from

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owning shares in excess of 25.0% of any such class or series, or fail to exercise our redemption right because we are unaware that such ownership exceeds such percentage, we will likely be unable to comply with applicable maritime laws. If all of the citizenship-related safeguards in our certificate of incorporation fail at a time when ownership of shares of any class or series of our stock is in excess of 25.0% of such class or series, we will likely be required to suspend our Jones Act operations. Any such actions by governmental authorities would have a severely detrimental impact on the results of our operations.

In addition to our corporate governance documents, on August 27, 2012, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”) designed to protect our significant net operating loss and tax credit carryforwards (“NOLs”). The Rights Plan will expire on August 27, 2015, or earlier upon the date that: (1) our Board of Directors determines that the plan is no longer needed to preserve the deferred tax assets or is no longer in the best interest of the Company and our stockholders, (2) our Board of Directors determines, at the beginning of a specified period, that no tax benefits may be carried forward, or (3) the rights are redeemed or exchanged by our Board of Directors pursuant to the Rights Plan. As of December 22, 2013, we had federal net operating loss carryforwards of $233.3 million. Under applicable tax rules, we may “carry forward” these NOLs in certain circumstances to offset any current and future taxable income and thus reduce our income tax liability, subject to certain requirements and restrictions. Therefore, we believe that these NOLs could be a substantial asset. However, if we experience an “ownership change,” as defined in Section 382 of the Code, our ability to use the NOLs could be substantially limited, which could significantly increase our future income tax liability.

Although the Rights Plan is intended to reduce the likelihood of an ownership change that could adversely affect us, we cannot assure that it would prevent all transfers that could result in such an ownership change. In particular, it would not protect against ownership changes resulting from sales by certain greater than five percent (5%) stockholders that may trigger limitations on our use of NOLs under Section 382 of the Code. Further, because the Rights Plan may restrict a stockholder’s ability to acquire our stock, the liquidity and market value of our stock might be adversely affected.

We are subject to statutory and regulatory directives in the United States addressing homeland security concerns that may increase our costs and adversely affect our operations.

Various government agencies within the Department of Homeland Security (“DHS”), including the Transportation Security Administration, the Coast Guard, and the U.S. Customs and Border Protection (“CBP”), have adopted, and may adopt in the future, rules, policies or regulations or changes in the interpretation or application of existing laws, rules, policies or regulations, compliance with which could increase our costs or result in loss of revenue.

The Coast Guard’s maritime security regulations, issued pursuant to the Maritime Transportation Security Act of 2002 (“MTSA”), require us to operate our vessels and facilities pursuant to both the maritime security regulations and approved security plans. Our vessels and facilities are subject to periodic security compliance verification examinations by the Coast Guard. A failure to operate in accordance with the maritime security regulations or the approved security plans may result in the imposition of a fine or control and compliance measures, including the suspension or revocation of the security plan, thereby making the vessel or facility ineligible to operate. We are also required to audit these security plans on an annual basis and, if necessary, submit amendments to the Coast Guard for its review and approval. Failure to timely submit the necessary amendments may lead to the imposition of the fines and control and compliance measures mentioned above. Failure to meet the requirements of the maritime security regulations could have a material adverse effect on our results of operations.

DHS may adopt additional security-related regulations, including new requirements for screening cargo and our reimbursement to the agency for the cost of security services. Any such new security-related regulations could have an adverse impact on our ability to efficiently process cargo or could increase our operating costs. In particular, our customers typically need quick shipment of their cargos and rely on our on-time shipping capabilities. If any new regulations disrupt or impede the timing of our shipments, we may fail to meet the needs of our customers, or may incur additional expenses to do so.

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Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.

Domestic container shipping is subject to various security, inspection, and related procedures, referred to herein as inspection procedures. Inspection procedures can result in the seizure of containers or their contents, delays in the loading, offloading, transshipment or delivery of containers and the levying of fines or other penalties.

We understand that, currently, only a small proportion of all containers delivered to the United States are physically inspected by U.S., state or local authorities prior to delivery to their destinations. The U.S. government, foreign governments, international organizations, and industry associations have been considering ways to improve and expand inspection procedures. There are numerous proposals to enhance the existing inspection procedures, which if implemented would likely affect shipping and integrated logistics companies such as us. Such changes could impose additional financial and legal obligations on us, including additional responsibility for physically inspecting and recording the contents of containers we are shipping. In addition, changes to inspection procedures could impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo by container uneconomical or impractical. Any such changes or developments may have a material adverse effect on our business, financial condition and results of operations.

No assurance can be given that our insurance costs will not escalate.

Our protection and indemnity insurance (“P&I”) is provided by a mutual P&I club which is a member of the International Group of P&I clubs. As a mutual club, it relies on member premiums, investment reserves and income, and reinsurance to manage liability risks on behalf of its members.

Our coverage under the Longshore Act for U.S. Longshore and Harbor Workers compensation is provided by Signal Mutual Indemnity Association Ltd. Signal Mutual is a non-profit organization whose members pool risks of a similar nature to achieve long-term and stable insurance protection at cost. Signal Mutual is now the largest provider of Longshore benefits in the country. This program provides for first-dollar coverage without a deductible.

Increased investment losses, underwriting losses, or reinsurance costs could cause international marine insurance clubs to increase the cost of premiums, resulting not only in higher premium costs, but also higher levels of deductibles and self-insurance retentions.

Environmental and Other Regulation

Our marine operations are subject to various federal, state and local environmental laws and regulations implemented principally by the Coast Guard, the EPA and the United States Department of Transportation (“DOT”), as well as related state regulatory agencies. These requirements generally govern the safe operations of our ships and pollution prevention in U.S. internal waters, the territorial sea, and the 200-mile exclusive economic zone of the United States.

The operation of our vessels is also subject to regulation under various international conventions adopted by the IMO that are implemented by the laws of domestic and foreign jurisdictions, and enforced by the Coast Guard and by port state authorities in our non-U.S. ports of call. In addition, our vessels are required to meet construction, maintenance and repair standards established by ABS, Det Norske Veritas (“DNV”), IMO and/or the Coast Guard, as well as to meet operational, environmental, security, and safety standards and regulations presently established by the Coast Guard, CBP, EPA and IMO. The Coast Guard also licenses our seagoing officers and certifies our seamen.

Our marine operations are further subject to regulation by various federal agencies, including the Surface Transportation Board (“STB”), Maritime Administration (“MARAD”), the Federal Maritime Commission, the

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EPA, CBP, and the Coast Guard. These regulatory authorities have broad powers over operational safety, tariff filings of freight rates, service contracts, transfer or sale of our vessels, certain mergers, contraband, pollution prevention, financial reporting, and homeland, port and vessel security.

Our common and contract motor carrier operations are regulated by the STB and various state agencies. Our drivers also must comply with the safety and fitness regulations promulgated by the DOT, including certain regulations for drug and alcohol testing and hours of service. The ship’s officers and unlicensed crew members employed aboard our vessels must also comply with numerous safety, fitness and training regulations promulgated by the Coast Guard, the DOT, and the IMO, including certain regulations for drug testing and work and rest hours.

The United States Oil Pollution Act of 1990 and the Comprehensive Environmental Response, Compensation and Liability Act

The Oil Pollution Act of 1990 (“OPA”) was enacted in 1990 and established a comprehensive regulatory and liability regime designed to increase pollution prevention, ensure better spill response capability, increase liability for oil spills, and facilitate prompt compensation for cleanup and damages. OPA is applicable to owners and operators whose vessels trade with the United States or its territories or possessions, or whose vessels operate in the navigable waters of the United States (generally three nautical miles from the coastline) and the 200 nautical mile exclusive economic zone of the United States. Under OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless it is subsequently determined by the Coast Guard or a court of competent jurisdiction that the spill results solely from the act or omission of a third party, an act of God or an act of war) for removal costs and damages arising from discharges or threatened discharges of oil from their vessels up to their limits of liability, unless the limits are broken as described below. “Damages” are defined broadly under OPA to include:

• natural resources damages and the costs of assessment thereof;

• damages for injury to, or economic losses resulting from the destruction of, real or personal property;

• the net loss of taxes, royalties, rents, fees and profits by the United States government, and any state or political subdivision thereof;

• lost profits or impairment of earning capacity due to property or natural resources damage;

• the net costs of providing increased or additional public services necessitated by a spill response, such as protection from fire, safety or other hazards; and

• the loss of subsistence use of natural resources.

Effective July 31, 2009, the OPA regulations were amended to increase the liability limits for responsible parties for non-tank vessels to $1,000 per gross ton or $854,400, whichever is greater. These limits of liability do not apply: (1) if an incident was proximately caused by violation of applicable federal safety, construction or operating regulations or by a responsible party’s gross negligence or willful misconduct, or (2) if the responsible party fails or refuses to report the incident, fails to provide reasonable cooperation and assistance requested by a responsible official in connection with oil removal activities, or without sufficient cause fails to comply with an order issued under OPA.

In 1980, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) was adopted and is applicable to the discharge of hazardous substances (other than oil) whether on land or at sea. CERCLA also imposes liability similar to OPA and provides compensation for cleanup, removal and natural resource damages. Liability per vessel under CERCLA is limited to the greater of $300 per gross ton or $5 million, unless the incident is caused by gross negligence, willful misconduct, or a violation of certain regulations, in which case liability is unlimited.

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OPA requires owners and operators of vessels to establish and maintain with the Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under OPA. Effective July 1, 2009, the Coast Guard regulations requiring evidence of financial responsibility were amended to conform the OPA financial responsibility requirements to the July 2009 increases in liability limits. Current Coast Guard regulations require evidence of financial responsibility for oil pollution in the amount of $1,000 per gross ton or $854,400, whichever is greater, for non-tank vessels, plus the CERCLA liability limit of $300 per gross ton for hazardous substance spills. As a result of the Delaware River Protection Act, which was enacted by Congress in 2006, the OPA limits of liability must be adjusted not less than every three years to reflect significant increases in the Consumer Price Index. Although future increases were scheduled for 2012 and every three years thereafter, the Coast Guard has not implemented new limits since 2009.

On September 30, 2013, the Coast Guard issued a Final Rule, which became effective October 30, 2013, requiring owners and operators of non-tank vessels to prepare and submit Nontank Vessel Response Plans (“NTVRPs”) by January 30, 2014. The requirements for non-tank vessels are generally similar to those for tank vessel requirements. We submitted all the necessary documentation to the USCG prior to the deadline and have received approval of our response plans.

Under the Coast Guard regulations, vessel owners and operators may evidence their financial responsibility through an insurance guaranty, surety bond, self-insurance, financial guaranty or other evidence of financial responsibility acceptable to the Coast Guard. Under OPA, an owner or operator of a fleet of vessels may demonstrate evidence of financial responsibility in an amount sufficient to cover the vessels in the fleet having the greatest maximum liability under OPA.

The Coast Guard’s regulations concerning Certificates of Financial Responsibility provide, in accordance with OPA, that claimants may bring suit directly against an insurer or guarantor that furnishes Certificates of Financial Responsibility. In the event that such insurer or guarantor is sued directly, it is prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. OPA allows individual states to impose their own liability regimes that are consistent but more stringent than OPA, with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills, as well as requirements for response and contingency planning and requirements for financial responsibility. We intend to comply with all applicable state regulations in the states where our vessels call.

We maintain Certificates of Financial Responsibility as required by the Coast Guard and various states for our vessels.

The Act to Prevent Pollution from Ships and MARPOL requirements for oil pollution prevention

MARPOL is the main international convention covering prevention of pollution of the marine environment by vessels from operational or accidental causes. It has been updated by amendments through the years and is implemented in the United States by the Act to Prevent Pollution from Ships. MARPOL has six specific annexes; and Annex I governs oil pollution, Annex V governs garbage pollution, and Annex VI governs air pollution.

Since the 1990s, the Department of Justice (“DOJ”) has been aggressively enforcing U.S. criminal laws against vessel owners, operators, managers, crewmembers, shoreside personnel, and corporate officers for actions related to violations of Annex I and Annex V, in particular. Prosecutions generally involve violations related to pollution prevention devices, such as the oily water separator, and include falsifying the Oil Record Book and the Garbage Record Book, obstruction of justice, false statements and conspiracy. Over the past 15 to 20 years, the DOJ has imposed significant criminal penalties in vessel pollution cases and the vast majority of such cases did not actually involve pollution in the United States, but rather efforts to conceal or cover up pollution that occurred in international waters. In certain cases, responsible shipboard officers and shoreside officials have been sentenced to prison. In addition, the DOJ has required defendants to implement a comprehensive environmental compliance plan (“ECP”) as part of any negotiated resolution.

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In the first quarter of 2012, we entered into a plea agreement with the government, and agreed to plead guilty to two false statements for maintaining an inaccurate Oil Record Book. This related to one of our containerships in the U.S. west coast-Hawaii service. As part of our probation obligation, we have developed, adopted, and implemented an ECP. Should we face DOJ criminal prosecutions in the future, we could face significant criminal penalties and defense costs as well as costs associated with the implementation of an ECP.

Under MARPOL Annex V, which governs the discharge of garbage from ships, the special area for the Wider Caribbean region including the Gulf of Mexico and the Caribbean Sea went into effect on May 1, 2011. Under MARPOL, these special areas require the adoption of special mandatory methods for the prevention of sea pollution, and are provided with a higher level of protection than other areas of the sea.

In addition, new regulations addressing garbage management went into effect on January 1, 2013. The new regulations impose stricter garbage management procedures and documentation requirements for all vessels and fixed and floating platforms by imposing a general prohibition on the discharge of all garbage unless the discharge is expressly provided for under the regulations. The new regulations allow the limited discharge of only four categories: food waste, cargo residues and certain operational wastes not harmful to the marine environment, and carcasses of animals carried as cargo. These regulations greatly reduce the amount of garbage that vessels will be able to dispose of at sea and will increase our costs of disposing garbage remaining on board vessels at their port calls. The Coast Guard published an interim rule on February 28, 2013 to implement these new requirements in the United States effective April 1, 2013.

The United States Clean Water Act

Enacted in 1972, the United States Clean Water Act (“CWA”) prohibits the discharge of “pollutants,” which includes oil or hazardous substances, into navigable waters of the United States and imposes civil and criminal penalties for unauthorized discharges. The CWA complements the remedies available under OPA and CERCLA discussed above.

The CWA established the National Pollutant Discharge Elimination System (“NPDES”) permitting program, which governs discharges of pollutants into navigable waters of the United States from point sources, such as vessels operating in the navigable waters. Pursuant to the NPDES program, the EPA issued a Vessel General Permit (“2008 VGP”), which was in effect from February 6, 2009 to December 19, 2013. On April 12, 2013, the EPA implemented the Phase II VGP Regime (“2013 VGP”) effective on December 19, 2013, covering 27 types of discharges. The 2013 VGP applies to U.S. and foreign-flag commercial vessels that are at least 79 feet in length, and therefore applies to our vessels.

The 2013 VGP requires vessel owners and operators to adhere to “best management practices” to manage the covered discharges, including ballast water, that occur normally in the operation of a vessel. In addition, the 2013 VGP requires vessel owners and operators to implement various training, inspection, monitoring, recordkeeping, and reporting requirements, as well as corrective actions upon identification of each deficiency. The purpose of these limitations is to reduce the number of living organisms discharged via ballast water into waters regulated by the 2013 VGP. The 2013 VGP also contains requirements for oil-to-sea interfaces, which seeks to improve environmental protection of U.S. waters, by requiring all vessels to use an Environmentally Acceptable Lubricant (EAL) in all oil-to-sea interfaces, unless not technically feasible.

We filed a Notice of Intent to be covered by the 2008 VGP for each of our ships and filed another Notice of Intent to be covered by the 2013 VGP, and we have implemented its requirements. Under the 2013 VGP, there is an annual reporting requirement. The 2013 VGP has resulted in increased requirements and may lead to increased enforcement by the EPA and the Coast Guard that could result in an increase in the Company’s operating costs.

On February 11, 2011, the EPA and the Coast Guard entered into a Memorandum of Understanding (“MOU”) outlining the steps the agencies will take to better coordinate efforts to implement and enforce the

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VGP. Under the MOU, the Coast Guard will identify and report to the EPA deficiencies detected as a result of its normal boarding protocols for U.S.-flag and foreign-flag vessels. However, the EPA retains responsibility and enforcement authority to address violations. Failure to comply with the 2013 VGP may result in civil or criminal penalties.

Section 401(d) of the CWA permits individual states to attach additional limitations and requirements to federal permits, including the 2013 VGP, that are necessary to assure that the permit will comply with any applicable CWA-based effluent limitations and other limitations, standards of performance, prohibitions, effluent standards, or pretreatment standards, and with any other appropriate requirements of that state. Pursuant to this authority, several states have specified significant, additional requirements that became a condition of the 2013 VGP. As a result, in addition to the 2013 VGP requirements, a permit may not be issued until the owners and operators of the vessel have met state specific state conditions in accordance with Section 401 of the CWA, if applicable.

The National Invasive Species Act

The United States National Invasive Species Act (“NISA”) was enacted in 1996 in response to growing reports of harmful organisms being released into United States waters through ballast water taken on by vessels in foreign ports. The Coast Guard adopted regulations under NISA in July 2004 that imposed mandatory ballast water management practices for all vessels equipped with ballast water tanks entering United States waters. These requirements could be met by performing mid-ocean ballast exchange, by retaining ballast water on board the vessel, or by using environmentally sound ballast water treatment methods approved by the Coast Guard. Mid-ocean ballast exchange was the primary method for compliance with the Coast Guard regulations. Vessels that are unable to conduct mid-ocean ballast exchange due to voyage or safety concerns may discharge minimum amounts of ballast water in U.S. waters, provided that they comply with recordkeeping requirements and document the reasons they could not follow the required ballast water management requirements.

In March 2012, the Coast Guard amended its regulations on ballast water management by establishing standards for the allowable concentration of living organisms in a vessel’s ballast water discharged in United States waters. The final rule sets limits to match those set internationally by IMO in the International Convention for the Control and Management of Ships Ballast Water and Sediments (the “Ballast Water Convention”). The Coast Guard deferred the phase-two discharge standard, which would have been more stringent and cannot be met using existing treatment technology. However, the Coast Guard intends to establish a more stringent phase-two discharge standard after completing additional research and analysis. The Coast Guard requirements will be phased in over a several-year period depending on a vessel’s ballast water capacity and dry-docking schedule.

In most cases vessels will be required to install and operate a ballast water management system (“BWMS”) that has been type-approved by the Coast Guard. A vessel’s compliance date varies based upon the date of construction and ballast water capacity. Our existing vessels with a ballast water capacity less than 1500 cubic meters or greater than 5000 cubic meters must comply by their first scheduled dry-docking after January 1, 2016. If a vessel intends to install a BWMS prior to the applicable compliance date and the Coast Guard has not yet type-approved systems appropriate for the vessel’s class or type, the vessel may install an Alternate Management System (“AMS”) that has been approved by a foreign-flag administration pursuant to the IMO’s I Ballast Water Convention if the Coast Guard determines that it is at least as effective as ballast water exchanges. If an AMS is installed prior to the applicable compliance date, it may be used until five years after the compliance date, which is intended to provide sufficient time for the manufacturer to obtain Coast Guard approval. At present, however, no Coast Guard type-approved BWMS is available.

One of our vessels could be required to have a ballast water treatment system on board by its first scheduled dry-docking that occurs after January 1, 2014, however, that vessel is not currently in service and the ballast water treatment system would only be required if we decide to use it and dry dock that vessel after January 1, 2014. All of our remaining vessels will be required to have an approved system on board by their first scheduled

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dry-docking survey after January 1, 2016. Systems are available that will meet the IMO standards, however US Coast Guard has been slow to establish criteria and approve Ballast Water Treatment Systems. We are carefully monitoring developments on ballast water treatment systems and may apply for a waiver, or install an AMS or USCG approved ballast treatment system in vessel dry dockings which occur after January 1, 2016.

In addition to the federal standards, states have enacted legislation or regulations to address invasive species through ballast water and hull cleaning management, and permitting requirements, which in many cases have also become part of the state’s VGP certification. For instance, California requires vessels to comply with its own ballast water discharge and hull fouling requirements. On October 1, 2013, the California legislature delayed implementation of California’s ballast water discharge performance standards, effective January 1, 2014, for a two-year period. Numerous other states have also added more stringent requirements to their certification of the 2013 VGP. State requirements could increase our costs of operating in those state waters.

The United States Clean Air Act and Air Emission Standards under MARPOL

In 1970, the United States Clean Air Act (as amended by the Clean Air Act Amendments of 1977 and 1990, the “CAA”) was enacted and required the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. The CAA also requires states to submit State Implementation Plans (“SIPs”), which are designed to attain national health-based air quality standards throughout the United States, including major metropolitan and/or industrial areas. Several SIPs regulate emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. The EPA and some states have each proposed more stringent regulations of air emissions from propulsion and auxiliary engines on oceangoing vessels. For example, the California Air Resources Board (“CARB”) has published regulations requiring oceangoing vessels visiting California ports to reduce air pollution through the use of marine distillate fuels once they sail within 24 nautical miles of the California coastline effective July 1, 2009. CARB began enforcing these requirements on December 1, 2011. CARB’s more stringent fuel oil requirements for marine gas oil and marine diesel oil went into effect on January 1, 2014, requiring oceangoing vessels to use fuel at or below 0.1% sulfur.

The state of California also began on January 1, 2010, implementing regulations on a phased in basis that require vessels to either shut down their auxiliary engines while in port in California and use electrical power supplied at the dock or implement alternative means to significantly reduce emissions from the vessel’s electric power generating equipment while it is in port. Generally, a vessel will run its auxiliary engines while in port in order to power lighting, ventilation, pumps, communication and other onboard equipment. The emissions from running auxiliary engines while in port may contribute to particulate matter in the ambient air. The purpose of the regulations is to reduce the emissions from a vessel while it is in port. The cost of reducing vessel emissions while in port may be substantial if we determine that we cannot use or the ports will not permit us to use electrical power supplied at the dock. Alternatively, the ports may pass the cost of supplying electrical power at the port to us, and we may incur additional costs in connection with modifying our vessels to use electrical power supplied at the dock. These requirements went into effect on January 1, 2014. Currently, we only operate steamships in California, and these vessels are exempt from this regulation until January 01, 2020.

Annex VI of MARPOL, which addresses air emissions from vessels, came into force in the United States on January 8, 2009 and requires the use of low sulfur fuels worldwide in both auxiliary and main propulsion diesel engines on vessels. By July 1, 2010, amendments to MARPOL required all diesel engines on vessels built between 1990 and 2000 to meet a Nitrous Oxide (“NOx”) standard of 17.0g-NOx/kW-hr. On January 1, 2011 the NOx standard was lowered to 14.4 g-NOx/kW-hr, and on January 1, 2016 it will be further lowered to 3.4 g-NOx/kW-hr, for vessels operating in a designated Emission Control Area (“ECA”).

In addition, the current global sulfur cap of 4.5% sulfur was reduced to 3.5% effective January 1, 2012 and will be further reduced to as low as 0.5% sulfur in 2020. The recommendations made in connection with a MARPOL fuel availability study scheduled for 2018 at IMO may cause this date to slip to 2025. The current 1.0% maximum sulfur emissions permitted in designated ECAs around the world will be reduced to 0.1% sulfur on January 1, 2015. These sulfur limitations will be applied to all subsequently approved ECAs.

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With respect to North America, the EPA received approval of the IMO, in coordination with Environment Canada, to designate all waters, with certain limited exceptions, within 200 nautical miles of Hawaii and the U.S. and Canadian coasts as ECAs. The North American ECA went into force on August 1, 2012, limiting the sulfur content in fuel that is burned as described above. Beginning in 2016, NOx after-treatment requirements become applicable in this ECA as well. Furthermore, on July 15, 2011, the IMO officially adopted amendments to MARPOL to designate certain waters around Puerto Rico and the U.S. Virgin Islands as the United States— Caribbean ECA, where stringent international emission standards will also apply to ships. For this area, the effective date of the first-phase fuel sulfur standard is January 2014, and the second phase begins in 2015. Stringent NOx engine standards begin in 2016.

With the adoption of the North American ECA, ships operating within 200 miles of the U.S. coast are required to burn 1% sulfur content fuel oil and will be required to burn 0.1% sulfur content fuel oil as of January 1, 2015. While the EPA has received approval at IMO to exempt and has exempted our 10 steamships from the 0.1% sulfur content fuel oil requirement until 2020, our three D-7 vessels utilized in our Alaska trade lanes are diesel-powered and will be subject to the 0.1% sulfur content requirement beginning in January, 2015. In order to comply with these environmental laws and regulations, we will most likely need to make material capital expenditures related to these D-7 vessels prior to 2015. Additionally, in order to address the expiration of the steamship exemption in 2020 and because our 10 steamships cannot currently safely burn 0.1% sulfur content fuel oil, we will most likely need to make material capital expenditures to install engines or systems on these vessels to address fuel efficiency and emissions or to replace such vessels altogether. It is not yet known whether any engine or system modifications will exist or be feasible to allow our fleet to be brought into compliance with these environmental laws and regulations.

The Resource Conservation and Recovery Act

Our operations occasionally generate and require the transportation, treatment and disposal of both hazardous and non-hazardous solid wastes that are subject to the requirements of the United States Resource Conservation and Recovery Act (“RCRA”) or comparable international, state or local requirements. From time to time we arrange for the disposal of hazardous waste or hazardous substances at offsite disposal facilities. With respect to our marine operations, the EPA has a longstanding policy that RCRA only applies after wastes are “purposely removed” from the vessel. As a general matter, with certain exceptions, vessel owners and operators are required to determine if their wastes are hazardous, obtain a generator identification number, comply with certain standards for the proper management of hazardous wastes, and use hazardous waste manifests for shipments to disposal facilities. The degree of RCRA regulation will depend on the amount of hazardous waste a generator generates in any given month. Moreover, vessel owners and operators may be subject to more stringent state hazardous waste requirements in those states where they land hazardous wastes. If such materials are improperly disposed of by third parties that we contract with, we may still be held liable for cleanup costs under applicable laws.

Endangered Species Regulation

The Endangered Species Act, federal conservation regulations and comparable state laws protect species threatened with possible extinction. Protection of endangered and threatened species may include restrictions on the speed of vessels in certain ocean waters and may require us to change the routes of our vessels during particular periods. For example, in an effort to prevent the collision of vessels with the North Atlantic right whale, federal regulations restrict the speed of vessels to ten knots or less in certain areas along the Atlantic Coast of the United States during certain times of the year. The reduced speed and special routing along the Atlantic Coast results in the use of additional fuel, which affects our results of operations.

Greenhouse Gas Regulation

In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (the “Kyoto Protocol”) entered into force. Pursuant to the Kyoto Protocol, countries that are parties to the Convention

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are required to implement national programs to reduce emissions of certain gases, generally referred to as greenhouse gases, which are suspected of contributing to global warming. On January 1, 2009, the EPA began to require large emitters of greenhouse gases to collect and report data with respect to their greenhouse gas emissions. On December 1, 2009, the EPA issued an “endangerment finding” regarding greenhouse gases under the CAA.

Any future adoption of climate control treaties, legislation or other regulatory measures by the United Nations, IMO, EU, United States or other countries where the Company operates that restrict emissions of greenhouse gases could result in financial and operational impacts on our business (including potential capital expenditures to reduce such emissions) that the Company cannot predict with certainty at this time.

Vessel Security Regulations

Following the terrorist attacks on September 11, 2001, there have been a variety of initiatives intended to enhance vessel security within the United States and internationally. On November 25, 2002, MTSA was signed into law. To implement certain portions of MTSA, in July 2003, the Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, the IMO adopted amendments to the International Convention for the Safety of Life at Sea (“SOLAS”), known as the International Ship and Port Facilities Security Code (the “ISPS Code”), creating a new chapter dealing specifically with maritime security. The new chapter came into effect in July 2004 and imposes various detailed security obligations on vessels and port authorities. Among the various requirements under MTSA and/or the ISPS Code are:

• on-board installation of automatic information systems to enhance vessel-to-vessel and vessel-to-shore communications;

• on-board installation of ship security alert systems;

• the development of vessel and facility security plans;

• the implementation of a Transportation Worker Identification Credential program; and

• compliance with flag state security certification requirements.

The Coast Guard regulations, intended to align with international maritime security standards, generally deem foreign-flag vessels to be in compliance with MTSA’s vessel security measures provided such vessels have on board a valid International Ship Security Certificate that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. U.S.-flag vessels, however, must comply with all of the security measures required by MTSA, as well as SOLAS and the ISPS Code, if engaged in international trade. We believe that we have implemented the various security measures required by the MTSA, SOLAS and the ISPS Code.

Item 1B. Unresolved Staff Comments

None.

27

Item 2. Properties

We lease all of our facilities, including our terminal and office facilities located at each of the ports upon which our vessels call, as well as our central sales and administrative offices and regional sales offices. The following table sets forth the locations, descriptions, and square footage of our significant facilities as of the date hereof:

Location	Description of Facility	Square Footage(1)
Anchorage, Alaska	Stevedoring building and various terminal and related property		1,633,385
Charleston, South Carolina	Regional sales office		2,138
Charlotte, North Carolina	Corporate headquarters		25,592
Compton, California	Terminal supervision office and warehouse		176,676
Dominican Republic	Operations office		1,184
Dutch Harbor, Alaska	Office and various terminal and related property		760,337
Elizabeth, New Jersey	Vessel operations and administration office		1,844
Honolulu, Hawaii	Terminal property and office		29,108	(2)
Irving, Texas	Operations center		51,989
Jacksonville, Florida	Terminal supervision, sales office & warehousing		15,943
Kodiak, Alaska	Office and various terminal and related property		265,232
Oakland, California	Office and various terminal and related property		247,732
Renton, Washington	Regional sales office		5,162
San Juan, Puerto Rico	Office and various terminal and related property		3,253,743
Sparks, Nevada	Warehousing		20,000
Tacoma, Washington	Office and various terminal and related property		797,348

(1) Square footage for marine terminal facilities excludes common use areas used by other terminal customers and us.

(2) Excludes 1,647,952 square feet of terminal property, which we have the option to use and pay for on an as-needed basis.

Item 3. Legal Proceedings

In May 2013, the DOJ declined to intervene in a qui tam complaint filed in the U.S. District Court for the Central District of California by Mario Rizzo under the Federal False Claims Act. The case was unsealed in May 2013, and we were served with a complaint in June 2013. The case is entitled United States of America, ex rel. Mario Rizzo v. Horizon Lines, LLC et al. The qui tam complaint alleges, among other things, that we and another defendant submitted false claims by claiming fuel surcharges in excess of what was agreed by the Department of Defense. The complaint seeks significant damages, penalties and other relief. We have filed responsive pleadings and intend to vigorously defend against the allegations set forth in the complaint.

On March 5, 2014, we entered into a settlement agreement which resolved pending inquiries of the United States Department of Justice on behalf of the United States Postal Service, the United States Department of Agriculture and the United States Department of Defense (collectively, the “United States”). The settlement agreement relates to a federal qui tam complaint filed by the relator, William B. Stallings, in the United States District Court for the Middle District of Florida, entitled United States of America, ex rel. Stallings v. Sea Star Line, LLC et al., pursuant to the qui tam provisions of the False Claims Act. The claims underlying the qui tam civil complaint were the alleged price fixing of certain ocean transportation contracts between the continental United States and Puerto Rico during the period from April 2002 through April 2008 that involved the United States as a customer. This qui tam action was unsealed on March 6, 2014. The settlement agreement provides that we will pay to the United States the total sum of $1.5 million in six different installment payments through April 2015. During the fourth quarter of 2013, we recorded a charge of $1.4 million related to this legal settlement, which represents the present value of the expected future payments.

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In the ordinary course of business, from time to time, we become involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo, employees’ personal injury claims, and claims for loss or damage to the person or property of third parties. We generally maintain insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. We also, from time to time, become involved in routine employment-related disputes and disputes with parties with which we have contractual relations. Our policy is to disclose contingent liabilities associated with both asserted and unasserted claims after all available facts and circumstances have been reviewed and we determine that a loss is reasonably possible. Our policy is to record contingent liabilities associated with both asserted and unasserted claims when it is probable that the liability has been incurred and the amount of the loss is reasonably estimable.

Item 4. Mine Safety Disclosures

Not applicable.

29

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

On October 20, 2011, our common stock began trading on the over-the-counter (“OTC”) market under a new stock symbol, HRZL. Our common stock was removed from listing on the NYSE and a Form 25 was filed on March 1, 2012.

As of March 3, 2014, there were approximately 21 holders of record of the Common Stock. The following table sets forth the intraday high and low sales price of the Company’s common stock for the fiscal periods presented.

2014	High		Low
First Quarter (through March 3, 2014)	$	1.05	$	0.52

2013	High		Low
First Quarter	$	1.56	$	1.18
Second Quarter	$	1.49	$	1.16
Third Quarter	$	1.45	$	1.20
Fourth Quarter	$	1.50	$	0.78

2012	High		Low
First Quarter	$	8.50	$	2.05
Second Quarter	$	6.50	$	1.53
Third Quarter	$	2.00	$	1.40
Fourth Quarter	$	1.55	$	1.12

During the fourth quarter of 2013, there were no purchases of shares of the Company’s common stock, by or on behalf of the Company or any “affiliated purchaser” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934.

Equity Compensation Plan Information

The information required by this item will be included in the Company’s proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2014, and is incorporated herein by reference.

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Total Return Comparison Graph

The below graph compares the cumulative total shareholder return of the public common stock of Horizon Lines, Inc. to the cumulative total returns of the Dow Jones U.S. Industrial Transportation Index and the S&P 500 Index. Cumulative total returns assume reinvestment of dividends.

Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate other filings with the Securities and Exchange Commission, including this annual report on Form 10-K, in whole or in part, the Total Return Comparison Graph shall not be deemed incorporated by reference into any such filings.

* Comparison graph is based upon $100 invested in the given average or index at the close of trading on December 21, 2008 and $100 invested in the Company’s stock by the opening bell on December 22, 2008, as well as the reinvestment of dividends.

	12/21/2008		12/20/2009		12/26/2010		12/25/2011		12/23/2012		12/22/2013
Horizon Lines, Inc.		100.00		161.43		139.39		22.81		19.34		18.73
Dow Jones U.S. Industrial Transportation Index		100.00		121.80		149.84		149.09		157.57		214.85
S&P 500 Index		100.00		124.17		141.55		142.51		161.07		204.79

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Item 6. Selected Financial Data

The five-year selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this Form 10-K, and our consolidated financial statements and the related notes appearing in Item 15 of this Form 10-K.

We have a 52- or 53-week fiscal year (every sixth or seventh year) that ends on the Sunday before the last Friday in December. Fiscal year 2010 consisted of 53 weeks and each of the other years presented below consisted of 52 weeks.

Selected Financial Data is as follows (in thousands, except per share data):

	Fiscal Years Ended
	Dec. 22, 2013			Dec. 23, 2012			Dec. 25, 2011			Dec. 26, 2010			Dec. 20, 2009
Statement of Operations Data:
Operating revenue	$	1,033,310		$	1,073,722		$	1,026,164		$	1,000,055		$	979,352
Impairment of assets(1)		3,295			386			2,997			2,655			1,867
Restructuring costs(2)		6,324			4,340			—			1,843			747
Legal settlements(3)		1,387			—			(5,483	)		32,270			20,000
Goodwill impairment(4)		—			—			115,356			—			—
Operating income (loss)		31,377			4,252			(97,856	)		4,894			24,426
Interest expense, net		66,916			62,888			55,677			40,117			38,036
(Gain) loss on modification/early extinguishment of debt(5)		(5	)		36,615			(16,017	)		—			50
Gain on change in value of debt conversion features(6)		(271	)		(19,405	)		(84,480	)		—			—
Income tax (benefit) expense(7)		(1,925	)		(1,482	)		126			324			10,573
Net loss from continuing operations		(33,354	)		(74,403	)		(53,194	)		(35,574	)		(24,251	)
Net income (loss) from discontinued operations(8)		1,421			(20,295	)		(176,223	)		(22,395	)		(7,021	)
Net loss	$	(31,933	)	$	(94,698	)	$	(229,417	)	$	(57,969	)	$	(31,272	)
Basic net (loss) income per share:
Continuing operations	$	(0.91	)	$	(3.26	)	$	(36.33	)	$	(29.01	)	$	(20.06	)
Discontinued operations		0.04			(0.89	)		(120.37	)		(18.27	)		(5.81	)
Basic net loss per share	$	(0.87	)	$	(4.15	)	$	(156.70	)	$	(47.28	)	$	(25.87	)
Diluted net (loss) income per share:
Continuing operations	$	(0.91	)	$	(3.26	)	$	(36.33	)	$	(29.01	)	$	(20.06	)
Discontinued operations		0.04			(0.89	)		(120.37	)		(18.27	)		(5.81	)
Diluted net loss per share	$	(0.87	)	$	(4.15	)	$	(156.70	)	$	(47.28	)	$	(25.87	)
Number of shares used in calculations(9):
Basic		36,498			22,794			1,464			1,226			1,209
Diluted		36,498			22,794			1,464			1,226			1,209
Cash dividends declared	$	—		$	—		$	—		$	6,281		$	13,397
Cash dividends declared per common share(9)	$	—		$	—		$	—		$	5.00		$	11.00
Balance Sheet Data:
Cash	$	5,236		$	27,839		$	21,147		$	2,751		$	6,419
Total assets		624,607			601,234			639,809			785,776			818,510
Total debt, including capital lease obligations		516,318			437,830			515,848			516,323			514,855
Long term debt, including capital lease obligations, net of current portion(10)		504,845			434,222			509,741			7,530			496,105
Stockholders’ (deficiency) equity(9)		(43,792	)		(16,742	)		(165,986	)		39,792			101,278
Other Financial Data:
EBITDA(11)	$	83,188		$	39,681		$	60,868		$	63,444		$	81,546
Capital expenditures		113,846			14,823			15,111			15,991			9,750
Vessel dry-docking payments		17,123			18,802			12,547			19,110			14,696
Cash flows provided by (used in):
Operating activities		31,843			8,323			(11,452	)		53,441			62,991
Investing activities		(98,107	)		(11,416	)		(12,837	)		(14,437	)		(8,535	)
Financing activities		41,855			29,496			93,978			(25,119	)		(44,753	)

32

(1) We made progress payments for three new cranes, which are still in the construction phase, that were initially purchased for use in our Anchorage, Alaska terminal. These cranes were expected to be installed and become fully operational in December 2010. However, the Port of Anchorage Intermodal Expansion Project encountered delays that are expected to continue beyond 2014. During 2011, we were marketing these cranes for sale and expected to complete the sale within one year. As a result of the reclassification to assets held for sale during 2011, we recorded an impairment charge of $2.8 million to write down the carrying value of the cranes to their estimated fair value less costs to sell. During the third quarter of 2013, we sold two of the three cranes. During the third quarter of 2013, we recorded an additional impairment charge of $2.6 million to write down the carrying value of the cranes to their estimated proceeds less costs to sell. We are currently exploring alternatives for the remaining crane and expect to install it in our terminal in Kodiak, Alaska. Impairment of assets of $2.7 million during the year ended December 26, 2010 related to certain owned and leased equipment. Impairment of assets of $1.9 million during the year ended December 20, 2009 related to a write-down of the carrying value of our spare vessels.

(2) During 2013, we moved our northeast terminal operations to Philadelphia, Pennsylvania from Elizabeth, New Jersey. In association with the relocation of the terminal operations, we recorded a restructuring charge of $6.3 million primarily resulting from the liability for withdrawal from the Port of Elizabeth’s multiemployer pension plan, as well as other costs to move to Philadelphia. In 2012, we discontinued our sailing that departs Jacksonville, Florida each Tuesday. In association with the service change, we recorded a pre-tax restructuring charge of $3.1 million during the fourth quarter of 2012. The $3.1 million charge was comprised of an equipment-related impairment expense of $2.2 million and union and non-union severance and employee related expense of $0.9 million. We also initiated a plan during the fourth quarter of 2012 to further reduce our non-union workforce beyond the reductions associated with the Puerto Rico service change and incurred approximately $1.2 million of expenses for severance and other employee related costs.

(3) On March 5, 2014, we entered into a settlement agreement which resolved pending inquiries of the United States Department of Justice on behalf of the United States Postal Service, the United States Department of Agriculture and the United States Department of Defense (collectively, the “United States”). The settlement agreement relates to a federal qui tam complaint filed by the relator, William B. Stallings pursuant to the qui tam provisions of the False Claims Act. The settlement agreement provides that we will pay to the United States the total sum of $1.5 million in six installment payments through April 2015. During the fourth quarter of 2013, we recorded a charge of $1.4 million related to this legal settlement, which represents the present value of the expected future payments.

We entered into a plea agreement, dated February 23, 2011, with the United States of America, under which we agreed to pay a fine of $45.0 million over five years without interest. We recorded a charge during the year ended December 26, 2010, of $30.0 million, which represented the present value of the expected $45.0 million of installment payments. On April 28, 2011, the U.S. District Court for the District of Puerto Rico amended the fine imposed on us by reducing the amount from $45.0 million to $15.0 million. During the second quarter of 2011, we reversed $19.2 million of the $30.0 million charge recorded during the year ended December 26, 2010, related to the reduction in this legal settlement.

In November 2011, we entered into a settlement agreement with all of the remaining significant shippers who opted out of the Puerto Rico direct purchaser antitrust class action settlement. We recorded a charge of $12.7 million during the fourth quarter of 2011, which represents the present value of the $13.8 million in installment payments. The year ended December 20, 2009, includes a $20.0 million charge for the settlement of the antitrust class action lawsuit in Puerto Rico.

The year ended December 26, 2010, includes a charge of $1.8 million for settlement of the investigation by the Puerto Rico office of Monopolistic Affairs and the lawsuit filed by the Commonwealth of Puerto Rico and the class action lawsuit in the indirect purchasers’ case.

In January 2012, we entered into an agreement with the U.S. Department of Justice and pled guilty to two counts of providing federal authorities with false vessel oil record-keeping entries. Pursuant to the agreement and judgment entered by the United States District Court for the Northern District of California, we agreed to pay a fine of $1.0 million and donate an additional $0.5 million to the National Fish & Wildlife Foundation for environmental community service programs. Based on our best estimate at the time, we recorded a charge of $0.5 million related to this investigation during the year ended December 26, 2010. We recorded an additional $1.0 million during the year ended December 25, 2011.

(4) During the third quarter of 2011, due to qualitative and quantitative indicators including the expected shutdown of the FSX service and a deterioration in earnings, we reviewed goodwill for impairment. A discounted cash flow model was used to derive the fair value of the reporting unit. The step one analysis indicating that the carrying value of the reporting unit exceeds the fair value of the reporting unit resulted in the need to perform step two. Our step two analysis indicated that the fair value of long term assets, including property, plant, and equipment, and customer contracts, exceeded book value. Thus, the goodwill impairment was due to both the deterioration in earnings as well as the fair value of certain of our underlying assets being in excess of their book value. As such, we recorded a $115.4 million goodwill impairment charge during the year ended December 25, 2011.

(5) During the year ended December 23, 2012 we recorded a net loss on conversion of debt of $36.6 million. This is comprised of an $11.3 million gain on conversion of $49.7 million of Series B notes into equity on January 11, 2012, a loss of $48.3 million on the conversion of $224.8 million of Series A and Series B Notes into equity on May 3, 2012, a $0.2 million gain on the conversion of $1.0 million Series A Notes into equity on July 20, 2012, and a $0.2 million gain on the conversion of $0.7 million of Series A Notes into equity on October 23, 2012.

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(6) During the years ended December 23, 2012 and December 25, 2011, we recorded a net gain in change of value of debt conversion features of $19.4 million and $84.5 million, respectively. We are required to mark-to-market the embedded conversion features of the Series A and Series B Notes on a quarterly basis. The net gain is a result of the change in fair value of these embedded derivatives during the year.

(7) During the second quarter of 2009, we determined that it was unclear as to the timing of when we will generate sufficient taxable income to realize our deferred tax assets. Accordingly, we recorded a full valuation allowance against our deferred tax assets. During 2012, we completed the unwind of our former interest rate swap. The interest rate swap and its tax effects were initially recorded in other comprehensive income and any changes in market value of the interest rate swap along with their tax effects were recorded directly to other comprehensive income. However, at the time that we established a valuation allowance against our net deferred tax assets, the impact was recorded entirely against continuing operations, thereby establishing disproportionate tax effects within other comprehensive income for the interest rate swap. During 2012, to eliminate the disproportionate tax effects from other comprehensive income, we recorded a charge to other comprehensive income in the amount of $1.6 million and an income tax benefit of $1.6 million. As a result of the loss from continuing operations and income from discontinued operations and other comprehensive income during 2013, we are required to record a tax benefit from continuing operations with an offsetting tax expense from discontinued operations and other comprehensive income. During 2013, we recorded a tax benefit in continuing operations. As such, the tax benefit recorded in continuing operations will approximate the income from discontinued operations and other comprehensive income multiplied by the statutory tax rate during 2013.

(8) During the third quarter of 2011, we began a review of strategic alternatives for our FSX service. As a result of several factors, including: 1) the projected continuation of volatile trans-Pacific freight rates, 2) high fuel prices, and 3) operating losses, we decided to discontinue the FSX service. As a result, the FSX service has been classified as discontinued operations in all periods presented. During the 4th quarter of 2010, we decided to discontinue our third-party logistics operations and determined that as a result of several factors, including: 1) the historical operating losses within the logistics operations, 2) the projected continuation of operating losses and 3) focus on the recently commenced international shipping activities, we would begin exploring the sale of our logistics operations. We reclassified our logistics operations as discontinued operations in all periods presented, and the logistics operations were transferred during the second quarter of 2011. During 2012, we entered into a Global Termination Agreement with SFL which enabled the Company to terminate early the bareboat charters of the five foreign-built, U.S.-flag vessels that formerly operated in the FSX service. In connection with the Global Termination Agreement, we recorded an additional restructuring charge of $14.1 million related to our vessel lease obligations originally recorded during 2011. During 2013, the Company incurred legal and professional fees associated with an arbitration proceeding. The Company was seeking reimbursement of certain costs and expenditures related to previously co-owned assets that were utilized as part of the Company’s FSX service. During the third quarter of 2013, an arbitration panel awarded the Company $3.0 million plus reimbursement of $0.8 million of legal fees and expenses.

(9) On December 7, 2011, we filed our restated certificate of incorporation to, among other things, effect a 1-for-25 reverse stock split. All prior periods presented have been adjusted to reflect the impact of this reverse stock split, including the impact on basic and diluted weighted-average shares and dividends declared per share.

(10) On March 28, 2011, we expected that we would experience a covenant default under the indenture related to our Notes and would have had until May 21, 2011, to obtain a waiver from the holders of the old notes. Due to cross default provisions, we classified our obligations under the old notes and senior credit facility as current liabilities in the accompanying Consolidated Balance Sheet as of December 26, 2010. Noncompliance with these financial covenants constituted an event of default, which could have resulted in acceleration of maturity. None of the indebtedness under the Senior Credit Facility or Notes was accelerated prior to completion of a comprehensive refinancing on October 5, 2011.

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(11) EBITDA is defined as net income plus net interest expense, income taxes, depreciation and amortization. We believe that in addition to GAAP based financial information, EBITDA and Adjusted EBITDA are meaningful disclosures for the following reasons: (i) EBITDA and Adjusted EBITDA are components of the measure used by our board of directors and management team to evaluate our operating performance, (ii) EBITDA and Adjusted EBITDA are components of the measure used by our management to facilitate internal comparisons to competitors’ results and the marine container shipping and logistics industry in general and (iii) the payment of discretionary bonuses to certain members of our management is contingent upon, among other things, the satisfaction by Horizon Lines of certain targets, which contain EBITDA and Adjusted EBITDA as components. We acknowledge that there are limitations when using EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA and Adjusted EBITDA are not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as tax payments and debt service requirements. Because all companies do not use identical calculations, this presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. The EBITDA amounts presented below contain certain charges that our management team excludes when evaluating our operating performance, for making day-to-day operating decisions and that have historically been excluded from EBITDA to arrive at Adjusted EBITDA when determining the payment of discretionary bonuses. A reconciliation of net loss to EBITDA and Adjusted EBITDA is included below (in thousands):

	Year Ended Dec. 22, 2013			Year Ended Dec. 23, 2012			Year Ended Dec. 25, 2011			Year Ended Dec. 26, 2010			Year Ended Dec. 20, 2009
Net loss	$	(31,933	)	$	(94,698	)	$	(229,417	)	$	(57,969	)	$	(31,272	)
Net income (loss) from discontinued operations		1,421			(20,295	)		(176,223	)		(22,395	)		(7,021	)
Net loss from continuing operations		(33,354	)		(74,403	)		(53,194	)		(35,574	)		(24,251	)
Interest expense, net		66,916			62,888			55,677			40,117			38,036
Income tax (benefit) expense		(1,925	)		(1,482	)		126			324			10,573
Depreciation and amortization		51,551			52,678			58,259			58,577			57,188
EBITDA		83,188			39,681			60,868			63,444			81,546
Restructuring costs		6,324			4,340			—			1,843			747
Impairment of assets		3,295			386			2,997			2,655			1,867
Legal settlements and contingencies.		1,387			—			(5,483	)		32,270			20,000
Antitrust and false claims legal expenses		921			1,567			4,480			5,243			12,192
Other severance charges		327			1,812			3,470			542			306
Gain on change in value of debt conversion features		(271	)		(19,405	)		(84,480	)		—			—
(Gain) loss on modification/ extinguishment of debt and other refinancing costs		(5	)		37,587			(15,112	)		—			50
Goodwill impairment		—			—			115,356			—			—
Adjusted EBITDA	$	95,166		$	65,968		$	82,096		$	105,997		$	116,708

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with Selected Consolidated and Combined Financial Data and our annual audited consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. The following discussion includes forward-looking statements that involve certain risks and uncertainties. For additional information regarding forward looking statements, see the Safe Harbor Statement on page (i) of this Form 10-K.

Executive Overview

	Year Ended December 22, 2013			Year Ended December 23, 2012			Year Ended December 25, 2011
	(In thousands)
Operating revenue	$	1,033,310		$	1,073,722		$	1,026,164
Operating expense		1,001,933			1,069,470			1,124,020
Operating income (loss)	$	31,377		$	4,252		$	(97,856	)
Operating ratio		97.0	%		99.6	%		109.5	%
Revenue containers (units)		223,169			234,969			234,311

As a result of the slow economic recoveries in the markets we serve, as well as the still uncertain macroeconomic environment, we are continuing our efforts to reduce expenses and preserve liquidity. During the fourth quarter of 2012, we announced that we would discontinue our sailing that departed Jacksonville, Florida each Tuesday and arrived in San Juan, Puerto Rico the following Friday. Operating revenue during 2013 declined as a result of this modification to our Puerto Rico service. In addition, the startup of a new competitor in our Puerto Rico market and the reduction of fuel surcharges both further negatively impacted operating revenue during 2013.

Operating income increased $26.6 million during 2013 as compared to 2012. The improvement was primarily due to a reduction in vessel lease expense, lower dry-dock transit and crew-related expenses, higher non-transportation revenue, reduced overhead, and gains on the sale of assets, partially offset by higher vessel operating expenses and certain contractual and inflationary increases in operating expenses more than offsetting a modest improvement in rates, net of fuel.

As compared to 2011, operating revenue during 2012 increased primarily as a result of higher fuel surcharges and rate increases to mitigate higher variable expenses, including port security, wharfage fees and other rate increases from our vendors and union partners. Operating expenses during 2012 included $18.2 million of incremental transit and crew costs associated with China dry-dockings of our three Puerto Rico vessels. Operating expense during 2011 included a $115.4 million non-cash goodwill impairment charge.

General

We believe that we are one of the nation’s leading Jones Act container shipping and integrated logistics companies. In addition, we are the only ocean carrier serving all three noncontiguous domestic markets of Alaska, Hawaii, and Puerto Rico from the continental United States. Under 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 predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens.

We own 13 vessels, all of which are fully qualified Jones Act vessels, and own or lease approximately 23,900 cargo containers. We provide comprehensive shipping and integrated 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 as well as contracting for terminal services in the seven ports in the continental U.S.

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History

Our long operating history dates back to 1956, when Sea-Land Service, Inc. pioneered the marine container shipping industry and established our business. In 1958, we introduced container shipping to the Puerto Rico market, and in 1964 we pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing container shipping services between the U.S. west coast and Hawaii and Guam through our acquisition from an existing carrier of all of its vessels and certain other assets that were already serving that market. Today, as the only Jones Act vessel operator with an integrated organization serving Alaska, Hawaii, and Puerto Rico, we are uniquely positioned to serve our customers that require shipping and logistics services in more than one of these markets.

Basis of Presentation

The accompanying consolidated financial statements include the consolidated accounts of the Company as of December 22, 2013, December 23, 2012 and December 25, 2011 and for the fiscal years ended December 22, 2013, December 23, 2012 and December 25, 2011. Certain prior period balances have been reclassified to conform to current period presentation.

At a special meeting of the Company’s stockholders held on December 2, 2011, our stockholders approved an amendment to our certificate of incorporation effecting a reverse stock split. On December 7, 2011, we filed our restated certificate of incorporation to, among other things, effect the 1-for-25 reverse stock split. In connection with the reverse stock split, stockholders received one share of common stock for every 25 shares of common stock held at the effective time. The reverse stock split reduced the number of shares of outstanding common stock from 56.7 million to 2.3 million. Unless otherwise noted, all share-related amounts herein reflect the reverse stock split.

During 2011, we discontinued our FSX service and our third-party logistics operations. There will not be any significant future cash flows related to these operations. In addition, we do not have any significant continuing involvement in the divested operations. As a result, the FSX service and logistics operations have been classified as discontinued operations in all periods presented.

Fiscal Year

We have a 52- or 53-week (every sixth or seventh year) fiscal year that ends on the Sunday before the last Friday in December. The fiscal years ended December 22, 2013, December 23, 2012, and December 25, 2011 each consisted of 52 weeks.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of our financial statements 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 on future events which cannot be determined with certainty, the actual results could differ from these estimates.

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

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We believe the following accounting principles are critical because they involve significant judgments, assumptions, and estimates used in the preparation of our financial statements.

Revenue Recognition

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. We recognize revenue and related costs of sales for our terminal and other services upon completion of services.

Allowance for Doubtful Accounts and Revenue Adjustments

We maintain an allowance for doubtful accounts based upon the expected collectability of accounts receivable reflective of our historical collection experience. In circumstances in which we are aware of a specific customer’s inability to meet its financial obligation (for example, bankruptcy filings, accounts turned over for collection or litigation), we record a specific reserve for the bad debts against amounts due. For all other customers, we recognize reserves for these bad debts based on the length of time the receivables are past due and other customer specific factors including, type of service provided, geographic location and industry. We monitor our collection risk on an ongoing basis through the use of credit reporting agencies. Accounts are written off after all means of collection, including legal action, have been exhausted. We do not require collateral from our trade customers.

Casualty and Property Insurance Reserves

We purchase insurance coverage for our exposures related to employee injuries or illness (state workers compensation, Longshore and Harbor workers compensation, protection and indemnity liability coverage for our crewmembers), vessel collisions and allisions, property loss and damage, third party liability, and cargo loss and damage. Most insurance policies include a deductible applicable to each incident or vessel voyage and deductibles can change from year to year as policies are renewed or replaced. Our current insurance program includes deductibles ranging from $0 to approximately $1.4 million. In most cases, our claims personnel work directly with our insurers’ claims professionals or our third-party claim administrators to continually update the anticipated residual exposure for each claim. In this process, we evaluate and monitor each claim individually, and use resources such as historical experience, known trends, and third-party estimates to determine the appropriate reserves for potential liability. Changes in the perceived severity of previously reported claims, significant changes in medical costs, and legislative changes affecting the administration of our plans could significantly impact the determination of appropriate reserves.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other intangible assets with indefinite useful lives are not amortized but are subject to annual impairment tests as of the first day of the fourth quarter. At least annually, or on an interim basis if there is an indicator of impairment, the fair value of the reporting unit is calculated. If the calculated fair value is less than the carrying amount, an impairment loss might be recognized. In these instances, a discounted cash flow model is used to determine the current estimated fair value of the reporting unit. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including market growth and market share, sales volumes and prices, costs of service, discount rate and estimated capital needs. Management considers historical experience and all available information at the time the fair value of a reporting unit is estimated. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. Changes in assumptions and estimates may affect the carrying value of goodwill and could result in additional impairment charges in future periods.

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We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. We identified our reporting unit by first determining our operating segment, and then assessed whether any components of the operating segment constituted a business for which discrete financial information is available and where segment management regularly reviews the operating results of the component. We concluded we currently have one operating segment and one reporting unit consisting of our container shipping business.

We apply the steps prescribed by ASC 350, Intangibles-Goodwill and Other, to determine goodwill impairment. We assess qualitative factors in our reporting unit to determine whether it is necessary to perform the first step of the two-step quantitative goodwill impairment test. The quantitative impairment test is required only if we conclude it is more likely than not our reporting unit’s fair value is less than its carrying amount. If the carrying amount of our reporting unit exceeds its fair value (step one), we measure the possible goodwill impairment based on a hypothetical allocation of the estimated fair value of the reporting unit to all of the underlying assets and liabilities, including previously unrecognized intangible assets (step two). The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent the reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.

The customer contracts and trademarks on the balance sheet as of December 22, 2013 were valued on July 7, 2004, as part of the Acquisition-Related Transactions, using the income appraisal methodology. The income appraisal methodology includes a determination of the present value of future monetary benefits to be derived from the anticipated income, or ownership, of the subject asset. The value of our customer contracts includes the value expected to be realized from existing contracts as well as from expected renewals of such contracts and was calculated using unweighted and weighted total undiscounted cash flows as part of the income appraisal methodology. The value of our trademarks and service marks was based on various factors including the strength of the trade or service name in terms of recognition and generation of pricing premiums and enhanced margins. We amortize customer contracts and trademarks and service marks on a straight-line method over the estimated useful life of four to 15 years. Long-lived intangible assets are reviewed annually, or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of our asset based on our estimate of its undiscounted future cash flows. If these estimated future cash flows are less than the carrying value of the asset, an impairment charge would be recognized for the difference between the asset’s estimated fair value and its carrying value.

We base fair value of our identifiable intangible assets on projected future cash flows discounted at a rate determined by management to be commensurate with the business risk. The estimation of fair value utilizing discounted forecasted cash flows includes numerous uncertainties which require our significant judgment when making assumptions of revenues, operating costs, marketing, selling and administrative expenses, as well as assumptions regarding the overall shipping and logistics industries, competition, and general economic and business conditions, among other factors.

Vessel Dry-docking

Under U.S. Coast Guard Rules, administered through ABS’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 dry-docking, to maintain the required operating certificates. These dry-dockings generally occur every two and a half years, or twice every five years. The costs of these scheduled dry-dockings are customarily deferred and amortized over a 30-month period beginning with the accounting period following the vessel’s release from dry-dock because dry-dockings enable the vessel to continue operating in compliance with U.S. Coast Guard requirements.

We also take advantage of vessel dry-dockings to perform normal repair and maintenance procedures on our vessels. These routine vessel maintenance and repair procedures are expensed as incurred, as well as the

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incremental crew and fuel costs to transit to and from the dry-dock location. In addition, we will occasionally, during a vessel dry-docking, replace vessel machinery or equipment and perform procedures that materially enhance capabilities of a vessel. In these circumstances, the expenditures are capitalized and depreciated over the estimated useful lives.

Income Taxes

Deferred tax assets represent expenses recognized for financial reporting purposes that may result in tax deductions in the future, and deferred tax liabilities represent expense recognized for tax purposes that may result in financial reporting expenses 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. In conjunction with our election to opt out of the tonnage tax regime, we revalued our deferred taxes to accurately reflect the rates at which we expect such items to reverse in future periods.

The application of income tax law is inherently complex. As such, we are required to make many assumptions and judgments regarding our income tax positions and the likelihood whether such tax positions would be sustained if challenged. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our assumptions and judgments can materially affect amounts recognized in the consolidated financial statements.

Property and Equipment

We capitalize property and equipment as permitted or required by applicable accounting standards, including replacements and improvements when costs incurred for those purposes extend the useful life of the asset. We charge maintenance and repairs to expense as incurred. Depreciation on capital assets is computed using the straight-line method and ranges from three to 40 years. Our management makes assumptions regarding future conditions in determining estimated useful lives and potential salvage values. These assumptions impact the amount of depreciation expense recognized in the period and any gain or loss once the asset is disposed.

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present or if other circumstances indicate that an impairment may exist, we must then determine whether an impairment loss should be recognized. An impairment loss can be recognized for a long-lived asset (or asset group) that is held and used only if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value. Estimates of future cash flows used to test a long-lived asset (or asset group) for recoverability shall include only the future cash flows (cash inflows and associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the long-lived asset (or asset group). Estimates of future cash flows should be based on an entity’s own assumptions about its use of a long-lived asset (or asset group). The cash flow estimation period should be based on the long-lived asset’s (or asset group’s) remaining useful life to the entity. When long-lived assets are grouped for purposes of performing the recoverability test, the remaining useful life of the asset group should be based on the useful life of the primary asset. The primary asset of the asset group is the principal long-lived tangible asset being depreciated that is the most significant component asset from which the group derives its cash-flow-generating capacity. Estimates of future cash flows used to test the recoverability of a long-lived asset (or asset group) that is in use shall be based on the existing service potential of the asset (or asset group) at the date tested. Existing service potential encompasses the long-lived asset’s estimated useful life, cash flow generating capacity, and the physical output capacity. The estimated cash flows should include cash flows associated with future expenditures necessary to maintain the existing service potential, including those that replace the service potential of component parts, but they should not include cash flows associated with future capital expenditures that would

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increase the service potential. When undiscounted future cash flows will not be sufficient to recover the carrying amount of an asset, the asset is written down to its fair value.

Recent Accounting Pronouncements

Accounting pronouncements effective after December 22, 2013, are not expected to have a material effect on the Company’s consolidated financial position or results of operations.

Shipping Rates

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

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, improved margins, and increased earnings and cash flows.

Results of Operations

Operating Revenue Overview

We derive our revenue primarily from providing comprehensive shipping and integrated logistics services to and from the continental U.S. and Alaska, Puerto Rico, and Hawaii. We charge our customers on a per load basis and price our services based primarily 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. There is occasionally 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 variances in our fuel recovery.

During 2013, over 90% of our revenue was generated from our shipping and integrated logistics services in markets where the marine trade is subject to the Jones Act. The balance of our revenue was 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) warehousing services for third-parties, and (iv) other non-transportation services.

As used in this Form 10-K, the term “revenue containers” refers to containers that are transported for a charge, as opposed to empty containers.

Cost of Services Overview

Our cost of services consist primarily of vessel operating costs, marine operating costs, inland transportation costs, land costs and rolling stock rent. Our vessel operating costs consist primarily of vessel fuel costs, crew payroll costs and benefits, vessel maintenance costs, space charter costs, vessel insurance costs and vessel rent. We view our vessel fuel costs as subject to potential fluctuation as a result of changes in unit prices in the fuel market. Our marine operating costs consist of stevedoring, port charges, wharfage and various other costs to secure vessels at the port and to load and unload containers to and from vessels. Our inland transportation costs consist primarily of the costs to move containers to and from the port via rail, truck or barge. Our land costs

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consist primarily of maintenance, yard and gate operations, warehousing operations and terminal overhead in the terminals in which we operate. Rolling stock rent consists primarily of rent for street tractors, yard equipment, chassis, gensets and various dry and refrigerated containers.

Year Ended December 22, 2013 Compared to Year Ended December 23, 2012

	Year Ended December 22, 2013			Year Ended December 23, 2012			% Change
	(In thousands)
Operating revenue	$	1,033,310		$	1,073,722			(3.8	)%
Operating expense:
Vessel		293,213			347,937			(15.7	)%
Marine		206,988			208,794			(0.9	)%
Inland		183,445			186,437			(1.6	)%
Land		143,747			147,936			(2.8	)%
Rolling stock rent		38,727			41,474			(6.6	)%
Cost of services		866,120			932,578			(7.1	)%
Depreciation and amortization		36,850			38,774			(5.0	)%
Amortization of vessel dry-docking		14,701			13,904			5.7	%
Selling, general and administrative		76,709			79,710			(3.8	)%
Restructuring costs		6,324			4,340			45.7	%
Impairment of assets		3,295			386			753.6	%
Legal settlements		1,387			—			100.0	%
Miscellaneous income, net		(3,453	)		(222	)		1,455.4	%
Total operating expense		1,001,933			1,069,470			(6.3	)%
Operating income	$	31,377		$	4,252			637.9	%
Operating ratio		97.0	%		99.6	%		(2.6	)%
Revenue containers (units)		223,169			234,969			(5.0	)%

Operating Revenue. Operating revenue decreased $40.4 million, or 3.8% during the year ended December 22, 2013. This revenue decrease can be attributed to the following factors (in thousands):

Revenue container volume decrease	$	(38,128	)
Bunker and intermodal fuel surcharges decrease		(22,470	)
Other non-transportation services revenue increase		10,284
Revenue container rate increase		9,902
Total operating revenue decrease	$	(40,412	)

The decrease in revenue container volume was primarily due to the reduced number of sailings between Jacksonville, Florida and San Juan, Puerto Rico, as well as the startup of a new competitor in our Puerto Rico market. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 21.4% of total revenue in the year ended December 22, 2013 and approximately 22.6% of total revenue in the year ended December 23, 2012. We adjust our bunker and intermodal fuel surcharges as a result of changes in the cost of bunker fuel for our vessels, in addition to diesel fuel fluctuations passed on to us by our truck, rail, and barge service providers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into our base transportation rates that we charge. The improvement in revenue container rate was primarily due to rate increases to mitigate increased variable expenses. The increase in non-transportation revenue was primarily due to higher third-party terminal stevedoring services and improvements related to certain transportation services agreements.

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Cost of Services. The $66.5 million decrease in cost of services is primarily due to the reduced number of sailings between Jacksonville and San Juan, a decline in labor and other vessel operating expenses as a result of dry-docking certain of our vessels in China during 2012, a reduction in vessel lease expense due to the purchase of three vessels previously under charter, and reduced overhead, partially offset by contractual rate increases.

Vessel expense, which is not primarily driven by revenue container volume, decreased $54.7 million for the year ended December 22, 2013. This decrease was a result of the following factors (in thousands):

Vessel fuel costs decrease	$	(30,123	)
Vessel lease expense decrease		(13,623	)
Labor and other vessel operating decrease		(8,175	)
Vessel space charter expense decrease		(2,803	)
Total vessel expense decrease	$	(54,724	)

The $30.1 million decline in fuel costs is comprised of a $19.6 million decrease due to lower consumption as a result of fewer operating days in 2013 due to the service adjustment in our Puerto Rico tradelane and dry-docking transits that occurred during 2012, as well as a $10.5 million reduction as a result of lower fuel prices. The decrease in labor and other vessel operating expense is primarily due to the service adjustment in our Puerto Rico tradelane and dry-docking certain of our vessels in China that occurred throughout 2012, partially offset by certain labor wage increases in 2013. The decrease in vessel lease expense is due to the purchase of three vessels previously under charter.

Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and associated benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. The $1.8 million decline in marine expense during the year ended December 22, 2013 was largely due to due to the service adjustment in our Puerto Rico tradelane, partially offset by contractual increases.

Inland expense decreased to $183.4 million for the year ended December 22, 2013 compared to $186.4 million during the year ended December 23, 2012. The $3.0 million decrease in inland expense is primarily due to lower container volumes and a decline in fuel costs, partially offset by contractual rate increases.

Land expense is comprised of the costs included within the terminal for the handling, maintenance and storage of containers, including yard operations, gate operations, maintenance, warehouse and terminal overhead.

	Year Ended December 22, 2013		Year Ended December 23, 2012		% Change
	(In thousands)
Land expense:
Maintenance	$	53,061	$	56,175		(5.5	)%
Terminal overhead		52,235		53,885		(3.1	)%
Yard and gate		30,620		30,837		(0.7	)%
Warehouse		7,831		7,039		11.2	%
Total land expense	$	143,747	$	147,936		(2.8	)%

The reduction in non-vessel related maintenance expenses was primarily due to lower volumes during 2013 as well as our process improvements and cost savings initiatives. Terminal overhead expenses were lower due to severance expense associated with certain union employees that elected early retirement during 2012 and a

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decrease in utilities expenses. Yard and gate expenses were reduced as a result of decreased container volumes, partially offset by contractual increases. Warehouse expense increased primarily due to an increase in warehousing services for third parties, as well as increases in overall automobile volume.

Rolling stock expense decreased $2.7 million or 6.6% during the year ended December 22, 2013 versus the year ended December 22, 2013. This decline is primarily related to the return of excess equipment as a result of the modification of our Puerto Rico service.

Depreciation and Amortization. Depreciation and amortization was $36.9 million during the year ended December 22, 2013 compared to $38.8 million for the year ended December 23, 2012. The increase in depreciation-owned vessels is due to the acquisition of the three Alaska vessels that were previously chartered. The decrease in amortization of intangible assets was due to certain customer relationship assets becoming fully amortized.

	Year Ended December 22, 2013		Year Ended December 23, 2012		% Change
	(In thousands)
Depreciation and amortization:
Depreciation — owned vessels	$	13,427	$	9,657		39.0	%
Depreciation and amortization — other		11,354		11,638		(2.4	)%
Amortization of intangible assets		12,069		17,479		(31.0	)%
Total depreciation and amortization	$	36,850	$	38,774		(5.0	)%
Amortization of vessel dry-docking	$	14,701	$	13,904		5.7	%

Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $14.7 million during the year ended December 22, 2013 compared to $13.9 million for the year ended December 22, 2013. Amortization of vessel dry-docking fluctuates based on the timing of dry-dockings, the number of dry-dockings that occur during a given period, and the amount of expenditures incurred during the dry-dockings. Dry-dockings generally occur every two and a half years and historically we have dry-docked approximately four vessels per year.

Selling, General and Administrative. Selling, general and administrative costs decreased to $76.7 million for the year ended December 22, 2013 compared to $79.7 million for the year ended December 23, 2012, a decrease of $3.0 million or 3.8%. This decrease is primarily due to a $3.3 million reduction in legal fees, including $1.2 million of legal and professional fees expenses specifically associated with the antitrust investigation and related legal proceedings, consulting fees decline of $0.7 million, $0.5 million resulting from technology upgrades, and $0.5 million associated with our reduction in force, partially offset by $3.0 million of higher stock-based and incentive-based compensation expenses.

Restructuring Charge. During April 2013, we moved our northeast terminal operations to Philadelphia, Pennsylvania from Elizabeth, New Jersey. In association with the relocation of the terminal operations, we recorded a restructuring charge of $4.9 million during 2013 resulting from the estimated liability for withdrawal from the Port of Elizabeth’s multiemployer pension plan. The remaining $1.4 million restructuring charge was associated with the return of excess equipment and additional severance charges related to the service adjustment in Puerto Rico.

Impairment Charge. We made progress payments for three new cranes, which are still in the construction phase, that were initially purchased for use in our Anchorage, Alaska terminal. These cranes were expected to be installed and become fully operational in December 2010. However, the Port of Anchorage Intermodal Expansion Project is encountering delays that are expected to continue beyond 2014. During 2013, we sold two of these cranes and recorded an impairment charge of $2.6 million to write down the carrying value of the cranes to their net proceeds. We are currently exploring alternatives for the remaining crane and expect to install it in our terminal facility in Kodiak, Alaska.

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Legal Settlements. As discussed in Legal Proceedings, on March 5, 2014, we entered into a settlement agreement which resolved pending inquiries of the United States Department of Justice on behalf of the United States Postal Service, the United States Department of Agriculture and the United States Department of Defense (collectively, the “United States”). The settlement agreement relates to a federal qui tam complaint filed by the relator, William B. Stallings pursuant to the qui tam provisions of the False Claims Act. The settlement agreement provides that we will pay to the United States the total sum of $1.5 million in six installment payments through April 2015. During the fourth quarter of 2013, we recorded a charge of $1.4 million related to this legal settlement, which represents the present value of the expected future payments.

Miscellaneous Income, Net. Miscellaneous income, net increased $3.2 million during 2013 primarily as a result of higher gains on the sale of assets, including spare vessels, and a decrease in bad debt expense.

Interest Expense, Net. Interest expense, net increased to $66.9 million for the year ended December 22, 2013 compared to $62.9 million for the year ended December 23, 2012, a rise of $4.0 million or 6.4%. This increase was primarily due to interest expense related to the debt issued during the first quarter of 2013 to acquire our Alaska vessels off of charter and the SFL Notes issued during the second quarter of 2012, partially offset by the conversion into equity of our 6.00% Convertible Notes during the second quarter of 2012 and a reduction in the non-cash interest accretion related to our legal settlements.

Income Tax Expense. The effective tax rate for the years ended December 22, 2013 and December 23, 2012 was 5.5% and 1.9%, respectively.

We continue to believe it is unclear as to the timing of when we will generate sufficient taxable income to realize our deferred tax assets. Accordingly, we maintain a valuation allowance against our deferred tax assets. Although we have recorded a valuation allowance against our deferred tax assets, it does not affect our ability to utilize our deferred tax assets to offset future taxable income. Until such time that we determine it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets, income tax benefits associated with future period losses will be fully reserved except for intraperiod allocations of income tax expense. As a result, we do not expect to record a current or deferred federal tax benefit or expense and only minimal state tax provisions during those periods.

During 2012, we completed the unwind of our former interest rate swap. The interest rate swap and its tax effects were initially recorded in other comprehensive income and any changes in market value of the interest rate swap along with their tax effects were recorded directly to other comprehensive income. However, at the time that we established a valuation allowance against our net deferred tax assets, the impact was recorded entirely against continuing operations, thereby establishing disproportionate tax effects within other comprehensive income for the interest rate swap. During the year ended December 23, 2012, to eliminate the disproportionate tax effects from other comprehensive income, we recorded a charge to other comprehensive income in the amount of $1.6 million and an income tax benefit of $1.6 million.

We also recorded the impact of state income tax refunds of $0.5 million during the year ended December 23, 2012.

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Year Ended December 23, 2012 Compared to Year Ended December 25, 2011

	Year Ended December 23, 2012			Year Ended December 25, 2011			% Change
	(In thousands)
Operating revenue	$	1,073,722		$	1,026,164			4.6	%
Operating expense:
Vessel		347,937			311,645			11.6	%
Marine		208,794			194,002			7.6	%
Inland		186,437			179,583			3.8	%
Land		147,936			144,072			2.7	%
Rolling stock rent		41,474			40,727			1.8	%
Cost of services		932,578			870,029			7.2	%
Depreciation and amortization		38,774			42,883			(9.6	)%
Amortization of vessel dry-docking		13,904			15,376			(9.6	)%
Selling, general and administrative		79,710			82,125			(2.9	)%
Restructuring costs		4,340			—			100.0	%
Impairment of assets		386			2,997			(87.1	)%
Goodwill impairment		—			115,356			(100.0	)%
Legal settlements		—			(5,483	)		(100.0	)%
Miscellaneous (income) expense, net		(222	)		737			(130.3	)%
Total operating expense		1,069,470			1,124,020			(4.9	)%
Operating income (loss)	$	4,252		$	(97,856	)		104.3	%
Operating ratio		99.6	%		109.5	%		(9.9	)%
Revenue containers (units)		234,969			234,311			0.3	%

Operating Revenue. Operating revenue increased $47.6 million, or 4.6% during the year ended December 23, 2012. This revenue increase can be attributed to the following factors (in thousands):

Bunker and intermodal fuel surcharges increase	$	29,895
Revenue container rate increase		15,108
Revenue container volume increase		2,083
Other non-transportation services revenue increase		472
Total operating revenue increase	$	47,558

Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 22.6% of total revenue in the year ended December 23, 2012 and approximately 20.7% of total revenue in the year ended December 25, 2011. We adjust our bunker and intermodal fuel surcharges as a result of changes in the cost of bunker fuel for our vessels, in addition to diesel fuel fluctuations passed on to us by our truck, rail, and barge service providers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into our base transportation rates that we charge. The increase in revenue container rate was primarily due to increases to mitigate higher variable expenses, including port security, wharfage fees and other rate increases from our vendors and union partners. The increase in revenue container volume was due to modestly improving economic conditions and improving consumer sentiment in certain of the company’s markets and higher automobile shipments. The increase in non-transportation revenue was primarily due to higher revenue from certain transportation services agreements, partially offset by a reduction in third-party terminal stevedoring services.

Cost of Services. The $62.5 million increase in cost of services is primarily due to both higher vessel costs, as a result of a rise in fuel prices and additional duplicate fuel and vessel operating expenses associated with vessel dry-dockings, and an increase in marine expense.

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Vessel expense, which is not primarily driven by revenue container volume, increased $36.3 million for the year ended December 23, 2012. This increase can be attributed to the following factors (in thousands):

Vessel fuel costs increase	$	22,463
Labor and other vessel operating increase		13,380
Vessel space charter expense increase		423
Vessel lease expense increase		26
Total vessel expense increase	$	36,292

The $22.5 million rise in fuel costs is comprised of a $17.5 million increase in fuel prices and $5.0 million in higher consumption as a result of additional vessel operating days. The increase in labor and other vessel operating expense during 2012 is primarily due to dry-docking three of our Puerto Rico vessels in China, vessel-related service interruptions, and contractual increases in labor rates. The increase in purchases under certain transportation services contracts is primarily due to the timing of the seafood season in Alaska and certain vessel-related service interruptions.

Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and associated benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. The $14.8 million rise in marine expense during the year ended December 23, 2012 was largely due to contractual rate increases, the cargo scanning fee in Puerto Rico enacted during the fourth quarter of 2011, and cargo claims as a result of certain vessel-related service interruptions.

Inland expense increased to $186.4 million for the year ended December 23, 2012 compared to $179.6 million during the year ended December 25, 2011. The $6.8 million growth in inland expense is mainly due to higher fuel costs, contractual increases, and more empty container repositioning costs as a result of the shutdown of our FSX service.

Land expense is comprised of the costs included within the terminal for the handling, maintenance and storage of containers, including yard operations, gate operations, maintenance, warehouse and terminal overhead.

	Year Ended December 23, 2012		Year Ended December 25, 2011		% Change
	(In thousands)
Land expense:
Maintenance	$	56,175	$	56,019		0.3	%
Terminal overhead		53,885		52,982		1.7	%
Yard and gate		30,837		28,497		8.2	%
Warehouse		7,039		6,574		7.1	%
Total land expense	$	147,936	$	144,072		1.2	%

Terminal overhead increased primarily due to higher utilities expense and severance for certain union employees that elected early retirement. Yard and gate expenses were higher as a result of contractual rate increases related to reefer monitoring, increased container volumes, and certain terminal maintenance activities.

Rolling stock expense increased $0.7 million or 1.8% during the year ended December 23, 2012 versus the year ended December 25, 2011. This increase is primarily related to contractual rates increases.

Depreciation and Amortization. Depreciation and amortization was $38.8 million during the year ended December 23, 2012 compared to $42.9 million for the year ended December 25, 2011. The decrease in

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depreciation-owned vessels was due to certain vessel assets becoming fully depreciated and no longer subject to depreciation expense. The decrease in amortization of intangible assets was due to certain customer relationship assets becoming fully amortized and no longer subject to amortization expense.

	Year Ended December 23, 2012		Year Ended December 25, 2011		% Change
	(In thousands)
Depreciation and amortization:
Depreciation — owned vessels	$	9,657	$	9,160		5.4	%
Depreciation and amortization — other		11,638		13,406		(13.2	)%
Amortization of intangible assets		17,479		20,317		(14.0	)%
Total depreciation and amortization	$	38,774	$	42,883		(9.6	)%
Amortization of vessel dry-docking	$	13,904	$	15,376		(9.6	)%

Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $13.9 million during the year ended December 23, 2012 compared to $15.4 million for the year ended December 25, 2011. Amortization of vessel dry-docking fluctuates based on the timing of dry-dockings, the number of dry-dockings that occur during a given period, and the amount of expenditures incurred during the dry-dockings. Dry-dockings generally occur every two and a half years and historically we have dry-docked approximately four vessels per year.

Selling, General and Administrative. Selling, general and administrative costs decreased to $79.7 million for the year ended December 23, 2012 compared to $82.1 million for the year ended December 25, 2011, a decrease of $2.4 million or 2.9%. This decrease is primarily comprised of a $1.7 million reduction in severance charges and a $2.9 million decline in legal and professional fees expenses associated with the antitrust investigation and related legal proceedings, partially offset by $1.4 million of higher stock based compensation expense, professional fees of $0.3 million incurred related to the search for a permanent CEO, and legal and tax consulting fees of $0.9 million associated with our refinancing efforts.

Restructuring Charge. Of the $4.3 million restructuring charge recorded during the year ended December 23, 2012, $3.1 million was comprised of an equipment-related impairment expense of $2.2 million and union and non-union severance and employee related expense of $0.9 million. We also initiated a plan during the fourth quarter of 2012 to further reduce our non-union workforce which resulted in an additional $1.2 million of expenses for severance and other and employee related costs.

Impairment Charge. During the year ended December 23, 2012, we incurred a charge of $0.4 million related to certain leased equipment that was not deployed. During the third quarter of 2012, we purchased the equipment from the lessor and subsequently sold it to a third party, which resulted in a net cash outflow of $0.8 million.

Goodwill Impairment. During the third quarter of 2011, due to qualitative and quantitative indicators including the expected shutdown of the FSX service and a deterioration in earnings, we reviewed goodwill for impairment. A discounted cash flow model was used to derive the fair value of the reporting unit. The step one analysis indicating that the carrying value of the reporting unit exceeds the fair value of the reporting unit resulted in the need to perform step two. Our step two analysis indicated that the fair value of long term assets, including property, plant, and equipment, and customer contracts, exceeded book value. Thus, the goodwill impairment was due to both the deterioration in earnings as well as the fair value of certain of our underlying assets being in excess of their book value. As such, we recorded a $115.4 million goodwill impairment charge during the year ended December 25, 2011.

Legal Settlements. On March 22, 2011, the Court entered a judgment against us whereby we were required to pay a fine of $45.0 million to resolve the investigation by the DOJ. On April 28, 2011, the Court reduced the fine from $45.0 million to $15.0 million payable over five years without interest. During the second quarter of 2011, we reversed $19.2 million of the $30.0 million charge recorded on a discounted basis during the year ended December 26, 2010 related to this legal settlement.

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In November 2011, we entered into a settlement agreement with all of the remaining significant shippers who opted out of the Puerto Rico direct purchaser antitrust class action settlement. Under the terms of the settlement agreement, we made payments of $5.8 million, $4.0 million and $4.0 million during December 2011, June 2012 and December 2012, respectively. We recorded a charge of $12.7 million during the fourth quarter of 2011, which represents the present value of the $13.8 million in installment payments.

In January 2012, we entered into an agreement with the U.S. Department of Justice and pled guilty to two counts of providing federal authorities with false vessel oil record-keeping entries. Pursuant to the agreement and judgment entered by the United States District Court for the Northern District of California, we agreed to pay a fine of $1.0 million and donate an additional $0.5 million to the National Fish & Wildlife Foundation for environmental community service programs. Based on our best estimate at the time, we recorded a charge of $0.5 million related to this investigation during the year ended December 26, 2010. We recorded an additional $1.0 million during the year ended December 25, 2011.

Miscellaneous (Income) Expense, Net. Miscellaneous (income) expense, net increased during 2012 as a result of higher gain on the sale of assets.

Interest Expense, Net. Interest expense, net increased to $62.9 million for the year ended December 23, 2012 compared to $55.7 million for the year ended December 25, 2011, an increase of $7.2 million or 13.0%. This increase was primarily due to a rise in interest rates associated with the comprehensive refinancing and the accretion of non-cash interest related to our long-term debt and legal settlements.

Income Tax (Benefit) Expense. The effective tax rate for the years ended December 23, 2012 and December 25, 2011 was 1.9% and (0.2)%, respectively. During 2009, we determined that it was unclear as to the timing of when we will generate sufficient taxable income to realize our deferred tax assets. Accordingly, we recorded a valuation allowance against our deferred tax assets. Although we have recorded a valuation allowance against our deferred tax assets, it does not affect our ability to utilize our deferred tax assets to offset future taxable income. Until such time that we determine it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets, income tax benefits associated with future period losses will be fully reserved. As a result, we do not expect to record a current or deferred federal tax benefit or expense and only minimal state tax provisions during those periods.

During 2012, we completed the unwind of our former interest rate swap. The interest rate swap and its tax effects were initially recorded in other comprehensive income and any changes in market value of the interest rate swap along with their tax effects were recorded directly to other comprehensive income. However, at the time that we established a valuation allowance against our net deferred tax assets, the impact was recorded entirely against continuing operations, thereby establishing disproportionate tax effects within other comprehensive income for the interest rate swap. During the year ended December 23, 2012, to eliminate the disproportionate tax effects from other comprehensive income, we recorded a charge to other comprehensive income in the amount of $1.6 million and an income tax benefit of $1.6 million.

We also recorded the impact of state income tax refunds of $0.5 million during the year ended December 23, 2012.

Liquidity and Capital Resources

Our principal sources of funds have been (i) earnings before non-cash charges, (ii) borrowings under debt arrangements, and (iii) the sale of excess assets. Our principal uses of funds have been (i) capital expenditures on our container fleet and terminal operating equipment, purchase of vessels, and improvements to our vessel fleet and our information technology systems, (ii) vessel dry-docking expenditures, (iii) working capital consumption, (iv) the shutdown of our FSX service, and (v) principal and interest payments on our existing indebtedness. Cash totaled $5.2 million at December 22, 2013. As of December 22, 2013, there were no borrowings outstanding under the ABL facility and total borrowing availability was $63.4 million.

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Operating Activities

Net cash provided by operating activities from continuing operations was $31.8 million for the year ended December 22, 2013 compared to $8.3 million for the year ended December 23, 2012. The $23.5 million increase in cash provided by operating activities is primarily due to the following (in thousands):

Increase in earnings adjusted for non-cash charges	$	29,809
Decrease in payments related to vessel leases		12,446
Decrease in materials and supplies		7,373
Decrease in accounts payable		(11,586	)
Increase in accounts receivable		(6,975	)
Decrease in accrued liabilities		(6,477	)
Increase in legal settlement payments		(1,000	)
Other decrease in working capital, net		(70	)
Total increase	$	23,520

Net cash provided by operating activities from continuing operations was $8.3 million for the year ended December 23, 2012 compared to cash used in operating activities of $11.5 million for the year ended December 25, 2011. The $19.8 million increase in cash provided by operating activities is primarily due to the following (in thousands):

Increase in accounts payable	$	22,726
Decrease in accounts receivable		17,617
Increase in accrued liabilities		3,554
Decrease in materials and supplies		2,576
Decrease in earnings adjusted for non-cash charges		(3,748	)
Increase in payments related to dry-dockings		(6,255	)
Increase in vessel rent payments in excess of accrual		(18,705	)
Other decrease in working capital, net		2,010
Total increase	$	19,775

Investing Activities

Net cash used in investing activities was $98.1 million for the year ended December 22, 2013 compared to $11.4 million for the year ended December 23, 2012. The $86.7 million increase in net cash consumed is primarily due to the acquisition of the three Alaska vessels that were previously chartered, partially offset by an increase in proceeds from the sale of equipment.

Net cash used in investing activities from continuing operations was $11.4 million for the year ended December 23, 2012 compared to $12.8 million for the year ended December 25, 2011. The decrease is primarily related to a $1.1 million increase in proceeds from the sale of assets and $0.3 million decline in capital spending.

Financing Activities

Net cash provided by financing activities during the year ended December 22, 2013 was $41.9 million compared to $29.5 million for the year ended December 23, 2012. The net cash provided by financing activities during 2013 included the issuance of $95.0 million of new debt in connection with the purchase of three vessels that were previously chartered, as well as a net $42.5 million repayment under the ABL Facility as compared to $42.5 million borrowed under debt agreements during 2012. In addition, during the year ended December 22, 2013, we paid $5.7 million in financing costs related to fees associated with the new debt issued. We paid $6.4 million during the year ended December 23, 2012 in financing costs related to our overall refinancing efforts and the conversion of debt to equity.

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Net cash provided by financing activities during the year ended December 23, 2012 was $29.5 million compared to $94.0 million for the year ended December 25, 2011. The net cash provided by financing activities during 2012 included $42.5 borrowed under the ABL Facility, partially offset by principal payments of $4.5 million. During 2012, we paid $6.4 million of financing costs related to fees associated with debt to equity conversions and $2.1 million related to capital leases. The net cash provided by financing activities during the year ended December 25, 2011 included the issuance of the First and Second Lien Notes and the repayment of the Senior Credit Facility. In addition, during the year ended December 25, 2011, we paid $35.6 million in financing costs related to fees associated with our comprehensive refinancing and $1.6 million related to a capital lease.

Capital Requirements and Liquidity

Based upon our current level of operations, we believe cash flow from operations and available cash, together with borrowings available under the ABL Facility, will be adequate to meet our liquidity needs throughout 2014.

During 2014, we expect to spend approximately $23.0 million and $13.0 million on capital expenditures and dry-docking expenditures, respectively. Capital expenditures will include vessel modifications, rolling stock, and terminal infrastructure and equipment. We also expect to spend approximately $4.6 million during 2014 for legal settlements and legal expenses associated with the DOJ antitrust settlement, an environmental settlement and the qui tam actions.

In addition to the dry-docking and capital expenditures, legal settlements and antitrust and qui tam related legal fees, we expect to utilize cash flows to make principal and interest payments. Due to the seasonality within our business and the above mentioned payments and expenses, we will utilize borrowings under the ABL Facility throughout 2014, but plan to repay such borrowings prior to the end of 2014.

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations as of December 22, 2013 are as follows (in thousands):

	Total Obligations		2014		2015-2016		2017-2018		Thereafter
Principal and operating lease obligations:
First lien notes	$	220,500	$	2,250	$	218,250	$	—	$	—
Second lien notes		183,872		—		183,872		—		—
$75 million term loan		75,750		5,625		70,125		—		—
$20 million term loan		20,000		—		20,000		—		—
6.00% convertible senior notes		1,991		—		—		1,991		—
Operating leases		136,983		49,702		61,591		15,981		9,709
Capital leases		12,415		3,517		7,254		1,644		—
Subtotal		651,511		61,094		561,092		19,616		9,709
Interest obligations:
First lien notes		71,837		24,193		47,644		—		—
Second lien notes(1)		99,898		—		99,898		—		—
$75 million term loan		20,651		7,620		13,031		—		—
$20 million term loan		4,800		1,600		3,200		—		—
6.00% convertible senior notes		418		119		239		60		—
Capital leases		2,439		1,213		1,143		83		—
Subtotal		200,043		34,745		165,155		143		—
Legal settlements		13,000		4,375		8,625		—		—
Other commitments(2)		2,948		1,374		1,574		—		—
Total obligations	$	867,502	$	101,588	$	736,446	$	19,759	$	9,709
Standby letters of credit	$	12,888	$	3,273	$	5,630	$	3,985	$	—

(1) The second lien notes bear interest at a rate of either: (i) 13% per annum, payable semiannually in cash in arrears; (ii) 14% per annum, 50% of which is payable semiannually in cash in arrears and 50% payable in kind; or (iii) 15% per annum payable in kind, payable semiannually. The table above reflects interest obligations under the second lien notes at 15% per annum payable in kind.

(2) Other commitments includes the purchase commitment related to a crane we expect to install in our Kodiak, Alaska terminal and restructuring liabilities.

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Long-Term Debt

On October 5, 2011, we issued the 6.00% Convertible Notes. On October 5, 2011, Horizon Lines issued the First Lien Notes, the Second Lien Notes, and entered into the ABL Facility, and on January 31, 2013, entered into the $20.0 Million Agreement. On January 31, 2013, Horizon Lines Alaska Vessels, LLC (“Horizon Alaska”), our newly formed special purpose subsidiary, entered into the $75.0 Million Agreement. The 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, the ABL Facility, the $20.0 Million Agreement and the $75.0 Million Agreement are defined and described below.

Road Raiders Inland, Inc. and each of its downstream subsidiaries were formed in 2013, and as of December 22, 2013, due to the immaterial level of operations, were “Immaterial Subsidiaries” under the ABL Facility, the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million

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Agreement (collectively, the “Horizon Lines Debt Agreements”) and in accordance with the Horizon Lines Debt Agreements did not guarantee any of the Horizon Lines Debt Agreements. Subsequent to December 22, 2013, each of such Immaterial Subsidiaries entered into agreements to fully and unconditionally guarantee the Horizon Lines Debt Agreements. Per the terms of the Horizon Lines Debt Agreements, the Alaska SPEs (as defined below) are not required to be a party thereto, are considered “Unrestricted Subsidiaries” under the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement, and do not guarantee any of the Horizon Lines Debt Agreements.

As of the date hereof, the 6.00% Convertible Notes are fully and unconditionally guaranteed by the Company’s subsidiaries other than the Unrestricted Subsidiaries identified above.

As of the date hereof, the ABL Facility, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement are fully and unconditionally guaranteed by the Company and each of its subsidiaries other than Horizon Lines and the Unrestricted Subsidiaries identified above.

The ABL Facility is secured on a first-priority basis by liens on the accounts receivable, deposit accounts, securities accounts, investment property (other than equity interests of the subsidiaries and joint ventures of the Company) and cash, in each case with certain exceptions, of the Company and the Company’s subsidiaries other than the Unrestricted Subsidiaries identified above (collectively, the “ABL Priority Collateral”). Substantially all other assets of the Company and the Company’s subsidiaries, other than the assets of the Unrestricted Subsidiaries identified above, also serve as collateral for the Horizon Lines Debt Agreements (collectively, such other assets are the “Secured Notes Priority Collateral”).

The following table summarizes the guarantors and non-guarantors of each of the Horizon Lines Debt Agreements as of the date hereof:

	ABL Facility	$20 Million Agreement	First Lien Notes	Second Lien Notes	6% Convertible Notes	$75 Million Agreement
Horizon Lines, Inc.	Guarantor	Guarantor	Guarantor	Guarantor	Issuer	Non-Guarantor
Horizon Lines, LLC	Issuer	Issuer	Issuer	Issuer	Guarantor	Non-Guarantor
Horizon Alaska	Non-Guarantor	Unrestricted	Unrestricted	Unrestricted	Unrestricted	Issuer
Horizon Vessels	Non-Guarantor	Unrestricted	Unrestricted	Unrestricted	Unrestricted	Guarantor
Alaska Terminals	Non-Guarantor	Unrestricted	Unrestricted	Unrestricted	Unrestricted	Guarantor
Road Raiders Inland, Inc. and subsidiaries	Guarantor	Guarantor	Guarantor	Guarantor	Guarantor	Non-Guarantor
Other subsidiaries of the Company not specifically listed above	Guarantor	Guarantor	Guarantor	Guarantor	Guarantor	Non-Guarantor

The following table lists the order of lien priority for each of the Horizon Lines Debt Agreements on the Secured Notes Priority Collateral and the ABL Priority Collateral, as applicable:

	Secured Notes Priority Collateral	ABL Priority Collateral
$20 Million Agreement	First	Second
First Lien Notes	Second	Third
Second Lien Notes	Third	Fourth
6.0% Convertible Notes	Fourth	Fifth
ABL Facility	Fifth	First

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First Lien Notes

The 11.00% First Lien Senior Secured Notes (the “First Lien Notes”) were issued pursuant to an indenture on October 5, 2011. The First Lien Notes bear interest at a rate of 11.0% per annum, payable semiannually beginning on April 15, 2012, and mature on October 15, 2016. The First Lien Notes are callable at par plus accrued and unpaid interest. Horizon Lines is obligated to make mandatory prepayments of 1%, on an annual basis, of the original principal amount. These prepayments are payable on a semiannual basis and commenced on April 15, 2012.

The First Lien Notes contain affirmative and negative covenants which are typical for senior secured high-yield notes with no financial maintenance covenants. The First Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of December 22, 2013.

On October 5, 2011, the fair value of the First Lien Notes was $228.4 million, which reflected Horizon Lines’ ability to call the First Lien Notes at 101.5% during the first year and at par thereafter. The original issue premium of $3.4 million is being amortized through interest expense through the maturity of the First Lien Notes.

Second Lien Notes

The 13.00%-15.00% Second Lien Senior Secured Notes (the “Second Lien Notes”) were issued pursuant to an indenture on October 5, 2011.

The Second Lien Notes bear interest at a rate of either: (i) 13% per annum, payable semiannually in cash in arrears; (ii) 14% per annum, 50% of which is payable semiannually in cash in arrears and 50% is payable in kind; or (iii) 15% per annum payable in kind, payable semiannually beginning on April 15, 2012, and maturing on October 15, 2016. The Second Lien Notes were non-callable for two years from the date of their issuance, and thereafter the Second Lien Notes are callable by Horizon Lines at (i) 106% of their aggregate principal amount, plus accrued and unpaid interest thereon in the third year, (ii) 103% of their aggregate principal amount, plus accrued and unpaid interest thereon in the fourth year, and (iii) at par plus accrued and unpaid interest thereafter.

On April 15, 2012, October 15, 2012, April 15, 2013 and October 15, 2013, Horizon Lines issued an additional $7.9 million, $8.1 million, $8.7 million and $9.4 million, respectively, of Second Lien Notes to satisfy the payment-in-kind interest obligation under the Second Lien Notes. In addition, Horizon Lines elected to satisfy its interest obligation under the Second Lien Notes due April 15, 2014 by issuing additional Second Lien Notes. As such, as of December 22, 2013, Horizon Lines has recorded $3.7 million of accrued interest as an increase to long-term debt.

The Second Lien Notes contain affirmative and negative covenants that are typical for senior secured high-yield notes with no financial maintenance covenants. The Second Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of December 22, 2013.

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On October 5, 2011, the fair value of the Second Lien Notes was $96.6 million. The original issue discount of $3.4 million is being amortized through interest expense through the maturity of the Second Lien Notes.

During 2012, we entered into a Global Termination Agreement with Ship Finance International Limited (“SFL”) whereby Horizon Lines issued $40.0 million aggregate principal amount of its Second Lien Notes and warrants to purchase 9,250,000 shares of our common stock at a price of $0.01 per share to satisfy its obligations for certain vessel leases. The Second Lien Notes issued to SFL (the “SFL Notes”) have the same terms as the Second Lien Notes issued on October 5, 2011 (the “Initial Notes”), except that they are subordinated to the Initial Notes in the case of a bankruptcy, and holders of the SFL Notes, so long as then held by SFL, have the option to purchase the Initial Notes in the event of a bankruptcy. On April 9, 2012, the fair value of the SFL Notes outstanding on such date approximated face value. On October 15, 2012, April 15, 2013 and October 15, 2013, Horizon Lines issued an additional $3.1 million, $3.2 million and $3.5 million, respectively, of SFL Notes to satisfy the payment-in-kind interest obligation under the SFL Notes. In addition, Horizon Lines elected to satisfy its interest obligation under the SFL Notes due April 15, 2014 by issuing additional SFL Notes. As such, as of December 22, 2013, Horizon Lines has recorded $1.4 million of accrued interest as an increase to long-term debt.

ABL Facility

On October 5, 2011, Horizon Lines entered into a $100.0 million asset-based revolving credit facility (the “ABL Facility”) with Wells Fargo Capital Finance, LLC (“Wells Fargo”). Use of the ABL Facility is subject to compliance with a customary borrowing base limitation. The ABL Facility includes an up to $30.0 million letter of credit sub-facility and a swingline sub-facility up to $15.0 million, with Wells Fargo serving as administrative agent and collateral agent. Horizon Lines has the option to request increases in the maximum commitment under the ABL Facility by up to $25.0 million in the aggregate; however, such incremental facility increases have not been committed to in advance. The ABL Facility is available to be used by Horizon Lines for working capital and other general corporate purposes.

The ABL Facility was amended on January 31, 2013 in conjunction with the $75.0 Million Agreement and the $20.0 Million Agreement. In addition to allowing for the incurrence of the additional long-term debt under those agreements, amendments to the ABL Facility included, among other changes, (i) permission to make certain investments in the Alaska SPEs, including the proceeds of the $20.0 Million Agreement and the arrangements related to the charters and the sublease of the terminal facility licenses for the Vessels (as defined below), (ii) excluding the Alaska SPEs from the guarantee and collateral requirements of the ABL Facility and from the restrictions of the negative covenants and certain other provisions, (iii) weekly borrowing base reporting in the event availability under the facility falls below a threshold of (a) $14.0 million or (b) 14.0% of the maximum commitment under the ABL Facility, (iv) the exclusion of certain historical charges and expenses relating to discontinued operations and severance from the calculation of bank-defined Adjusted EBITDA, (v) the exclusion of the historical charter hire expense deriving from the Vessels from the calculation of bank-defined Adjusted EBITDA, and (vi) the inclusion of pro forma interest expense on the $75.0 Million Agreement and the $20.0 Million Agreement in the calculation of fixed charges.

The ABL Facility matures October 5, 2016 (but 90 days earlier if the First Lien Notes and the Second Lien Notes are not repaid or refinanced as of such date). The interest rate on the ABL Facility is LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. A fee ranging from 0.375% to 0.50% per annum will accrue on unutilized commitments under the ABL Facility. As of December 22, 2013, there were no borrowings outstanding under the ABL facility and total borrowing availability was $63.4 million. Horizon Lines had $12.9 million of letters of credit outstanding as of December 22, 2013.

The ABL Facility requires compliance with a minimum fixed charge coverage ratio test if excess availability is less than the greater of (i) $12.5 million or (ii) 12.5% of the maximum commitment under the ABL Facility. In addition, the ABL Facility includes certain customary negative covenants that, subject to certain

55

materiality thresholds, baskets and other agreed upon exceptions and qualifications, will limit, among other things, indebtedness, liens, asset sales and other dispositions, mergers, liquidations, dissolutions and other fundamental changes, investments and acquisitions, dividends, distributions on equity or redemptions and repurchases of capital stock, transactions with affiliates, repayments of certain debt, conduct of business and change of control. The ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, as well as provisions requiring compliance with applicable citizenship requirements of the Jones Act. Horizon Lines was in compliance with all such applicable covenants as of December 22, 2013.

$75.0 Million Term Loan Agreement

Three of Horizon Lines’ Jones Act-qualified vessels: the Horizon Anchorage, Horizon Tacoma, and Horizon Kodiak (collectively, the “Vessels”) were previously chartered. The charter for the Vessels was due to expire in January 2015. For each chartered Vessel, Horizon Lines generally had the following options in connection with the expiration of the charter: (i) purchase the vessel for its fixed price or fair market value, (ii) extend the charter for an agreed upon period of time at a fixed price or fair market value charter rate or, (iii) return the vessel to its owner. On January 31, 2013, we, through our newly formed subsidiary Horizon Alaska, acquired off of charter the Vessels for a purchase price of approximately $91.8 million.

On January 31, 2013, Horizon Alaska, together with two newly formed subsidiaries of Horizon Lines, Horizon Lines Alaska Terminals, LLC (“Alaska Terminals”) and Horizon Lines Merchant Vessels, LLC (“Horizon Vessels”), entered into an approximately $75.8 million term loan agreement with certain lenders and U.S. Bank National Association (“U.S. Bank”), as the administrative agent, collateral agent and ship mortgage trustee (the “$75.0 Million Agreement”). The obligations under the $75.0 Million Agreement are secured by a first priority lien on substantially all of the assets of Horizon Alaska, Horizon Vessels and Alaska Terminals (collectively, the “Alaska SPEs”), which primarily includes the Vessels. The operations of the Alaska SPEs are limited to a bareboat charter of the Vessels between Horizon Alaska and Horizon Lines and a sublease of a terminal facility in Anchorage, Alaska between Alaska Terminals and Horizon Lines of Alaska, LLC.

The loan under the $75.0 Million Agreement accrues interest at 10.25% per annum, payable quarterly commencing March 31, 2013. Amortization of loan principal is payable in equal quarterly installments, commencing on March 31, 2014, and each amortization installment will equal 2.5% of the total initial loan amount (which may increase to 3.75% upon specified events). The full remaining outstanding amount of the loan under the $75.0 Million Agreement is payable on September 30, 2016. The proceeds of the loan under the $75.0 Million Agreement were utilized by Horizon Alaska to acquire the Vessels. In connection with the borrowing under the $75.0 Million Agreement, the Alaska SPEs paid financing costs of $2.5 million during 2013, which included loan commitment fees of $1.5 million. The financing costs have been recorded as a reduction to the carrying amount of the $75.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $75.0 Million Agreement. In addition to the commitment fees of $1.5 million paid in cash at closing, the Alaska SPEs will also pay, at maturity of the $75.0 Million Agreement, an additional $0.8 million of closing fees by increasing the original $75.0 million principal amount. We are recording non-cash interest accretion through maturity of the $75.0 Million Agreement related to the additional closing fees.

The $75.0 Million Agreement contains certain covenants, including a minimum EBITDA threshold and limitations on the incurrence of indebtedness, liens, asset sales, investments and dividends (all as defined in the agreement). The Alaska SPEs were in compliance with all such covenants as of December 22, 2013. The agent and the lenders under the $75.0 Million Agreement do not have any recourse to our stock or assets (other than the Alaska SPEs or equity interests therein). Defaults under the $75.0 Million Agreement do not give rise to any remedies under the Horizon Lines Debt Agreements.

On January 31, 2013, the fair value of the $75.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $75.0 Million Agreement, we utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap

56

analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $75.0 Million Agreement. We determined the estimated benchmark yield approximated the stated interest rate.

$20.0 Million Term Loan Agreement

On January 31, 2013, we and those of our subsidiaries that are parties (collectively, the “Loan Parties”) to the existing First Lien Notes, the Second Lien Notes, and the 6.00% Convertible Notes (collectively, the “Notes”) entered into a $20.0 million term loan agreement with certain lenders and U.S. Bank, as administrative agent, collateral agent, and ship mortgage trustee (the “$20.0 Million Agreement”). The loan under the $20.0 Million Agreement matures on September 30, 2016 and accrues interest at 8.00% per annum, payable quarterly commencing March 31, 2013 with interest calculated assuming accrual beginning January 8, 2013. The $20.0 Million Agreement does not provide for any amortization of principal, and the full outstanding amount of the loan is payable on September 30, 2016. We are not permitted to optionally prepay the $20.0 Million Agreement except for prepayment in full (together with a prepayment premium equal to 5.0% of the principal amount prepaid) following repayment in full of the First Lien Notes and the $75.0 Million Agreement.

In connection with the issuance of the $20.0 Million Agreement, Horizon Lines paid financing costs of $0.6 million during 2013. The financing costs have been recorded as a reduction to the carrying amount of the $20.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $20.0 Million Agreement.

The covenants in the $20.0 Million Agreement are substantially similar to the negative covenants contained in the indentures governing the Notes, which indentures permit the incurrence of the term loan borrowed under the $20.0 Million Agreement and the contribution of such amounts to Horizon Alaska. The proceeds of the loan borrowed under the $20.0 Million Agreement were contributed to Horizon Alaska to enable it to acquire the Vessels.

On January 31, 2013, the fair value of the $20.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $20.0 Million Agreement, we utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $20.0 Million Agreement. We determined the estimated benchmark yield approximated the stated interest rate.

6.00% Convertible Notes

On October 5, 2011, we issued $178.8 million in aggregate principal amount of new 6.00% Series A Convertible Senior Secured Notes due 2017 (the “Series A Notes”) and $99.3 million in aggregate principal amount of new 6.00% Series B Mandatorily Convertible Senior Secured Notes (the “Series B Notes” and, together with the Series A Notes, collectively the “6.00% Convertible Notes”). The 6.00% Convertible Notes were issued pursuant to an indenture, which we and the Loan Parties entered into with U.S. Bank, as trustee and collateral agent, on October 5, 2011 (the “6.00% Convertible Notes Indenture”).

During 2012, we completed various debt-to-equity conversions of the 6.00% Convertible Notes. On October 5, 2012, all outstanding Series B Notes not previously converted into shares of our common stock were mandatorily converted into Series A Notes as required by the terms of the 6.00% Convertible Notes Indenture.

Warrants

Certain warrants, not including the warrants issued to SFL, were issued pursuant to a warrant agreement, which we entered into with The Bank of New York Mellon Trust Company, N.A, as warrant agent, on October 5, 2011, as amended by Amendment No. 1, dated December 7, 2011 (the “Warrant Agreement”). Pursuant to the Warrant Agreement, each warrant entitles the holder to purchase common stock at a price of $0.01 per share, subject to adjustment in certain circumstances. In connection with a reverse stock split in December 2011, warrant holders will receive 1/25th of a share of our common stock upon conversion. As of December 22, 2013 there were

57

1.1 billion warrants outstanding for the purchase of up to 53.0 million shares of our common stock. Upon issuance, in lieu of payment of the exercise price, a warrant holder will have the right (but not the obligation) to require us to convert our warrants, in whole or in part, into shares of our common stock without any required payment or request that we withhold, from the shares of common stock that would otherwise be delivered to such warrant holder, shares issuable upon exercise of the Warrants equal in value to the aggregate exercise price.

Warrant holders will not be permitted to exercise or convert their warrants if and to the extent the shares of common stock issuable upon exercise or conversion would constitute “excess shares” (as defined in our certificate of incorporation) if they were issued in order to abide by the foreign ownership limitations imposed by our certificate of incorporation. In addition, a warrant holder who cannot establish to our reasonable satisfaction that it (or, if not the holder, the person that the holder has designated to receive the common stock upon exercise or conversion) is a United States citizen will not be permitted to exercise or convert its warrants to the extent the receipt of the common stock upon exercise or conversion would cause such person or any person whose ownership position would be aggregated with that of such person to exceed 4.9% of our outstanding common stock.

The warrants contain no provisions allowing us to force redemption, and we have no conditional obligation to redeem or convert the warrants. Each warrant is convertible into shares of our common stock at an exercise price of $0.01 per share, which we have the option to waive. In addition, we have sufficient authorized and unissued shares available to settle the warrants during the maximum period the warrants could remain outstanding. As a result, the warrants do not meet the definition of an asset or liability and were classified as equity on the date of issuance, on December 23, 2012, and on December 22, 2013. The warrants will be evaluated on a continuous basis to determine if equity classification continues to be appropriate.

Goodwill

We review our goodwill, intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, and also review goodwill annually. As of December 22, 2013, the carrying value of goodwill was $198.8 million. Earnings estimated to be generated are expected to support the carrying value of goodwill. However, should our operating results differ from what is expected or other triggering events occur, it could imply that our goodwill may not be recoverable and may result in the recognition of a non-cash write down of goodwill.

Interest Rate Risk

Our primary interest rate exposure relates to the ABL Facility. The interest rate on the ABL Facility is based on LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. As of December 22, 2013, we had no borrowings outstanding under the ABL Facility.

Performance Metrics

In addition to EBITDA and Adjusted EBITDA, we use various other non-GAAP measures such as adjusted net income (loss), and adjusted net income (loss) per share. We believe that in addition to GAAP based financial information, the non-GAAP amounts presented below are meaningful disclosures for the following reasons: (i) each are components of the measure used by our board of directors and management team to evaluate our operating performance, (ii) each are components of the measures used by our management to facilitate internal comparisons to competitors’ results and the marine container shipping and logistics industry in general, and (iii) results excluding certain costs and expenses provide useful information for the understanding of the ongoing operations with the impact of significant special items. We acknowledge that there are limitations when using non-GAAP measures. The measures below are not recognized terms under GAAP and do not purport to be alternatives to net income (loss) and net income (loss) per share as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Similar to the amounts presented for EBITDA and Adjusted EBITDA, because all companies do not use identical calculations, the amounts below may not be comparable to other similarly titled measures of other companies.

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The tables below present a reconciliation of net loss to adjusted net loss and net loss per share to adjusted net loss per share (in thousands, except per share amounts):

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
Net loss	$	(31,933	)	$	(94,698	)	$	(229,417	)
Net income (loss) from discontinued operations		1,421			(20,295	)		(176,223	)
Net loss from continuing operations		(33,354	)		(74,403	)		(53,194	)
Adjustments:
Goodwill impairment		—			—			115,356
Antitrust and false claims legal expenses		921			1,567			4,480
Union/other severance charge		327			1,812			3,470
Impairment charge		3,295			386			2,997
Accretion of legal settlement		984			1,971			810
Accretion of multi-employer pension plan withdrawal liability		378			—			—
Legal settlements and contingencies		1,387			—			(5,483	)
Restructuring charge		6,324			4,340			—
(Gain) loss on extinguishment /modification of debt and other refinancing costs		(5	)		37,587			(15,112	)
Gain on change in value of debt conversion features		(271	)		(19,405	)		(84,480	)
Tax impact of adjustments		(912	)		—			(717	)
Total adjustments		12,428			28,258			21,321
Adjusted net loss	$	(20,926	)	$	(46,145	)	$	(31,873	)

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
Net loss per share	$	(0.87	)	$	(4.15	)	$	(156.70	)
Net income (loss) per share from discontinued operations		0.04			(0.89	)		(120.37	)
Net loss per share from continuing operations		(0.91	)		(3.26	)		(36.33	)
Adjustments:
Goodwill impairment		—			—			78.80
Antitrust and false claims legal expenses		0.03			0.07			3.06
Union/other severance charge		0.01			0.08			2.37
Impairment charge		0.09			0.02			2.05
Accretion of legal settlement		0.03			0.08			0.55
Accretion of multi-employer pension plan withdrawal liability		0.01
Legal settlements and contingencies		0.04			—			(3.75	)
Restructuring charge		0.17			0.19			—
(Gain) loss on extinguishment /modification of debt and other refinancing costs		—			1.65			(10.32	)
Gain on change in value of debt conversion features		(0.01	)		(0.85	)		(57.70	)
Tax impact of adjustments		(0.03	)		—			(0.49	)
Total adjustments:		0.34			1.24			14.57
Adjusted net loss per share	$	(0.57	)	$	(2.02	)	$	(21.76	)

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Outlook

We expect 2014 revenue container loads to be above 2013 levels due to anticipated modest volume growth in all three markets we serve. This projected volume growth takes into consideration the estimated impacts of a new competitor that entered the Puerto Rico Gulf service during 2013 for a full year in 2014, as well as a second vessel being added by a competitor in our Hawaii service during 2014, partially offset by the full-year impact of adding a bi-weekly Jacksonville sailing to our southbound service between Houston, Texas and San Juan, Puerto Rico.

Overall, revenue container rates are expected to range from flat to a marginal improvement in 2014. We expect the new vessel capacity added in Puerto Rico during 2013 and being added in Hawaii in 2014, as well as a challenging economic environment in Puerto Rico, to impact rates in 2014.

We will experience increases in expenses associated with our revenue container volumes, including our vessel payroll costs and benefits, stevedoring, port charges, wharfage, inland transportation costs, and rolling stock costs, among others. Although the number of vessels being dry-docked in 2014 is less than 2013, the costs associated with repositioning vessels and expenses related to spare vessels will slightly exceed 2013 levels.

We expect 2014 financial results to approximate 2013 results, with 2014 adjusted EBITDA projected between $82.0 million and $97.0 million, compared with $95.2 million in fiscal 2013.

Based on our current level of operations, we believe cash flow from operations and borrowings available under the ABL Facility will be adequate to support our business plans. We expect total liquidity during 2014 to reach a low of approximately $30.0 million following payment in April of our semiannual cash interest and principal obligations under the First Lien Notes, then build over the balance of the year and end 2014 at approximately $70.0 million.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary interest rate exposure relates to the ABL Facility. The interest rate on the ABL Facility is based on LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. As of December 22, 2013, we had no borrowings outstanding under the ABL Facility.

We maintain a policy for managing risk related to exposure to variability in interest rates, fuel prices and other relevant market rates and prices which includes potentially entering into derivative instruments in order to mitigate our risks. We do not have any current derivative instruments outstanding.

Our exposure to market risk for changes in interest rates is limited to our ABL Facility and one of our operating leases. The interest rate for our ABL Facility is currently indexed to LIBOR of one, two, three, or six months as selected by us, or the Alternate Base Rate as defined in the ABL Facility. One of our operating leases is currently indexed to LIBOR of one month.

In addition, at times we have utilized derivative instruments tied to various indexes to hedge a portion of our quarterly exposure to bunker fuel price increases. These instruments consist of fixed price swap agreements. We do not use derivative instruments for trading purposes. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit standards for its counterparties. We currently do not have any bunker fuel price hedges in place.

Changes in fair value of derivative financial instruments are recorded as adjustments to the assets or liabilities being hedged in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the effectiveness of the hedge.

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Item 8. Financial Statements and Supplementary Data

See index in Item 15 of this annual report on Form 10-K. Quarterly information (unaudited) is presented in a Note to the consolidated financial statements.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act as of December 22, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 22, 2013.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our internal control over financial reporting as of December 22, 2013 based on the control criteria established in a report entitled Internal Control — Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such evaluation management has concluded that our internal control over financial reporting is effective as of December 22, 2013.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our fiscal quarter ending December 22, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

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Part III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item as to the Company’s executive officers, directors, director nominees, audit committee financial expert, audit committee, and procedures for stockholders to recommend director nominees will be included in the Company’s proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2014, and is incorporated by reference herein. The information required by this item as to compliance by the Company’s directors, executive officers and certain beneficial owners of the Company’s Common Stock with Section 16(a) of the Securities Exchange Act of 1934 also will be included in said proxy statement and also is incorporated herein by reference.

The Company has adopted a Code of Business Conduct and Ethics that governs the actions of all Company employees, including officers and directors. The Code of Business Conduct and Ethics is posted within the Investor Relations section of the Company’s internet website at www.horizonlines.com. The Company will provide a copy of the Code of Business Conduct and Ethics to any stockholder upon request. Any amendments to and/or any waiver from a provision of any of the Code of Business Conduct and Ethics granted to any director, executive officer or any senior financial officer, must be approved by the Board of Directors and will be disclosed on the Company’s internet website as soon as reasonably practical following the amendment or waiver. The information contained on or connected to the Company’s internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that the Company files with or furnishes to the Securities and Exchange Commission.

Item 11. Executive Compensation

The information required by this item will be included in the Company’s proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2014, and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be included in the Company’s proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2014, and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required by this item will be included in the Company’s proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2014, and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this item will be included in the Company’s proxy statement to be filed for the Annual Meeting of Stockholders to be held on June 5, 2014, and is incorporated herein by reference.

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Part IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements:

Horizon Lines, Inc.

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Financial Statements for the fiscal year ended December 22, 2013:
Consolidated Balance Sheets		F-2
Consolidated Statements of Operations		F-3
Consolidated Statements of Comprehensive Loss		F-4
Consolidated Statements of Cash Flows		F-5
Consolidated Statements of Changes In Stockholders’ Equity (Deficiency)		F-6
Notes to Consolidated Financial Statements		F-7
Schedule II — Valuation and Qualifying Accounts		F-44

(a)(2) Exhibits:

		Incorporated by Reference
Exhibit Number				Date of First Filing	Exhibit Number	Filed Herewith
	Description	Form	File No.
3.1	Restated Certificate of Incorporation	8-K	001-32627	6/21/13	3.1
4.1	Third Supplemental Indenture governing the 6.00% Series A Convertible Senior Secured Notes due 2017 and 6.00% Series B Mandatorily Convertible Senior Secured Notes, dated January 29, 2013	10-Q	001-32627	11/5/13	4.2
4.2	Third Supplemental Indenture governing the 13.00% — 15.00% Second-Lien Senior Secured Notes due 2016, dated January 29, 2013	10-Q	001-32627	11/5/13	4.2
4.3	Second Supplemental Indenture governing the 11.00% First Lien Senior Secured Notes due 2016, dated January 29, 2013	10-Q	001-32627	11/5/13	4.1
10.1	Second Amendment to Credit Agreement between Horizon Lines, Inc., as parent, Horizon Lines, LLC, as borrower, and Wells Fargo Capital Finance, LLC, as administrative agent, dated January 31, 2013	10-Q	001-32627	5/1/13	10.3
10.2	Amended and Restated Intercreditor Agreement dated January 31, 2013	10-Q	001-32627	5/1/13	10.4
10.3	Separation Agreement between the Registrant and Brian Taylor, dated November 8, 2012	10-K	001-32627	3/12/13	10.41
*10.4	Form of Restricted Stock Unit Agreement between the Registrant and Michael F. Zendan II, dated December 26, 2012	8-K	001-32627	12/28/12	10.1

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		Incorporated by Reference
Exhibit Number				Date of First Filing	Exhibit Number	Filed Herewith
	Description	Form	File No.
10.5	Form of Restricted Stock Unit Agreement between the Registrant and William A. Hamlin, dated June 1, 2013	8-K	001-32627	6/5/13
10.6	$75 Million Term Loan Agreement dated January 31, 2013	10-Q	001-32627	5/1/2013	10.1
10.7	$20 Million Term Loan Agreement dated January 31, 2013	10-Q	001-32627	5/1/2013	10.2
12	Ratio of Earnings to Fixed Charges.					X
14	Code of Ethics.	10-K	001-32627	2/5/09
21	List of Subsidiaries of Horizon Lines, Inc.					X
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.					X
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.					X
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.					X
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.					X
(101.INS)	XBRL Instance Document					X
(101.SCH)	XBRL Taxonomy Extension Schema Document					X
(101.CAL)	XBRL Taxonomy Extension Calculation Linkbase Document					X
(101.DEF)	XBRL Taxonomy Extension Definition Linkbase Document					X
(101.LAB)	XBRL Taxonomy Extension Label Linkbase Document					X
(101.PRE)	XBRL Taxonomy Extension Presentation Linkbase Document					X

* Exhibit represents a management contract or compensatory plan.

† Portions of this document were omitted and filed separately pursuant to a request for confidential treatment in accordance with Rule 406 of the Securities Act.

†† Portions of this document were omitted and filed separately pursuant to a request for confidential treatment in accordance with Rule 24b-2 of the Exchange Act.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 21st day of March 2014.

HORIZON LINES, INC.
By:	/s/ SAMUEL A. WOODWARD
	Samuel A. Woodward
	President and Chief Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the 28th day of February 2014.

Signature	Title
/s/ SAMUEL A. WOODWARD	President, Chief Executive Officer and Director
Samuel A. Woodward	(Principal Executive Officer)
/s/ MICHAEL T. AVARA	Executive Vice President and Chief Financial
Michael T. Avara	Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ JEFFREY A. BRODSKY	Chairman of the Board and Director
Jeffrey A. Brodsky
/s/ KURT M. CELLAR	Director
Kurt M. Cellar
/s/ JAMES LACHANCE	Director
James LaChance
/s/ STEVEN L. RUBIN	Director
Steven L. Rubin
/s/ MARTIN TUCHMAN	Director
Martin Tuchman
/s/ DAVID N. WEINSTEIN	Director
David N. Weinstein

65

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Horizon Lines, Inc.

We have audited the accompanying consolidated balance sheets of Horizon Lines, Inc. as of December 22, 2013 and December 23, 2012, and the related consolidated statements of operations, comprehensive loss, cash flows, and changes in stockholders’ equity (deficiency) for each of the three years in the period ended December 22, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Horizon Lines, Inc. at December 22, 2013 and December 23, 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 22, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Charlotte, North Carolina

March 21, 2014

F-1

Horizon Lines, Inc.

Consolidated Balance Sheets

	December 22, 2013			December 23, 2012
	(In thousands, except per share data)
ASSETS
Current assets:
Cash	$	5,236		$	27,839
Accounts receivable, net of allowance		100,460			99,685
Materials and supplies		23,369			29,521
Deferred tax asset		1,140			4,626
Other current assets		8,915			8,563
Total current assets		139,120			170,234
Property and equipment, net		226,838			160,050
Goodwill		198,793			198,793
Intangible assets, net		35,154			48,573
Other long-term assets		24,702			23,584
Total assets	$	624,607		$	601,234
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable	$	49,897		$	46,584
Current portion of long-term debt, including capital lease		11,473			3,608
Accrued vessel rent		—			4,902
Other accrued liabilities		77,406			87,358
Total current liabilities		138,776			142,452
Long-term debt, including capital lease, net of current portion		504,845			434,222
Deferred rent		—			9,081
Deferred tax liability		1,391			4,662
Other long-term liabilities		23,387			27,559
Total liabilities		668,399			617,976
Commitments and contingencies
Stockholders’ deficiency:
Preferred stock, $.01 par value, 30,500 authorized; no shares issued or outstanding		—			—
Common stock, $.01 par value, 150,000 shares authorized, 38,885 shares issued and outstanding at December 22, 2013 and 100,000 shares authorized, 34,434 shares issued and outstanding as of December 23, 2012		999			954
Additional paid in capital		384,073			381,445
Accumulated deficit		(429,891	)		(397,958	)
Accumulated other comprehensive income (loss)		1,027			(1,183	)
Total stockholders’ deficiency		(43,792	)		(16,742	)
Total liabilities and stockholders’ deficiency	$	624,607		$	601,234

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

F-2

Horizon Lines, Inc.

Consolidated Statements of Operations

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
	(In thousands, except per share amounts)
Operating revenue	$	1,033,310		$	1,073,722		$	1,026,164
Operating expense:
Cost of services (excluding depreciation expense)		866,120			932,578			870,029
Depreciation and amortization		36,850			38,774			42,883
Amortization of vessel dry-docking		14,701			13,904			15,376
Selling, general and administrative		76,709			79,710			82,125
Restructuring charge		6,324			4,340			—
Impairment charge		3,295			386			2,997
Goodwill impairment		—			—			115,356
Legal settlements		1,387			—			(5,483	)
Miscellaneous (income) expense		(3,453	)		(222	)		737
Total operating expense		1,001,933			1,069,470			1,124,020
Operating income (loss)		31,377			4,252			(97,856	)
Other expense (income):
Interest expense, net		66,916			62,888			55,677
(Gain) loss on modification/conversion of debt		(5	)		36,615			(16,017	)
Gain on change in value of debt conversion features		(271	)		(19,405	)		(84,480	)
Other expense, net		16			39			32
Loss from continuing operations before income taxes		(35,279	)		(75,885	)		(53,068	)
Income tax (benefit) expense		(1,925	)		(1,482	)		126
Net loss from continuing operations		(33,354	)		(74,403	)		(53,194	)
Net income (loss) from discontinued operations		1,421			(20,295	)		(176,223	)
Net loss	$	(31,933	)	$	(94,698	)	$	(229,417	)
Basic and diluted net (loss) income per share:
Continuing operations	$	(0.91	)	$	(3.26	)	$	(36.33	)
Discontinued operations		0.04			(0.89	)		(120.37	)
Basic and diluted net loss per share	$	(0.87	)	$	(4.15	)	$	(156.70	)
Number of weighted average shares used in calculations:
Basic		36,498			22,794			1,464
Diluted		36,498			22,794			1,464

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

F-3

Horizon Lines, Inc.

Consolidated Statements of Comprehensive Loss

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
	(In thousands)
Net loss	$	(31,933	)	$	(94,698	)	$	(229,417	)
Other comprehensive income (loss)
Unrecognized actuarial (losses) gains, net of tax		1,831			(3,043	)		1,241
Unwind of interest rate swap		—			(726	)		339
Amortization of pension and post-retirement benefit transition obligation, net of tax		379			514			472
Change in fair value of interest rate swap, net of tax		—			—			1,458
Other comprehensive income (loss)		2,210			(3,255	)		3,510
Comprehensive loss	$	(29,723	)	$	(97,953	)	$	(225,907	)

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

F-4

Horizon Lines, Inc.

Consolidated Statements of Cash Flows

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
	(In thousands)
Cash flows from operating activities:
Net loss from continuing operations	$	(33,354	)	$	(74,403	)	$	(53,194	)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation		24,781			21,295			22,566
Amortization of intangibles		12,069			17,479			20,317
Amortization of vessel dry-docking		14,701			13,904			15,376
Goodwill impairment		—			—			115,356
Impairment charge		3,295			386			2,997
Restructuring charge		6,324			4,340			—
Legal settlements		1,387			—			(5,483	)
Gain on change in value of conversion features		(271	)		(19,405	)		(84,480	)
Amortization of deferred financing costs		3,259			2,615			3,955
Deferred income taxes		(1,922	)		(112	)		162
Gain on equipment disposals		(3,604	)		(832	)		(935	)
(Gain) loss on modification/conversion of debt		(5	)		36,615			(16,017	)
Payment-in-kind interest expense		25,587			20,493			—
Accretion of interest on debt		1,032			3,996			11,972
Accretion of interest on legal settlements		996			1,971			810
Other non-cash interest accretion		378			—			—
Stock-based compensation		2,895			2,169			758
Changes in operating assets and liabilities:
Accounts receivable, net		(775	)		6,200			(11,417	)
Materials and supplies		5,865			(1,508	)		(4,084	)
Other current assets		(493	)		(1,233	)		3,148
Accounts payable		3,314			14,900			(7,826	)
Accrued liabilities		(9,277	)		(2,800	)		(6,355	)
Vessel rent		(777	)		(13,223	)		5,482
Vessel dry-docking payments		(17,123	)		(18,802	)		(12,547	)
Legal settlement payments		(6,500	)		(5,500	)		(8,518	)
Other assets/liabilities		61			(222	)		(3,495	)
Net cash provided by (used in) operating activities from continuing operations		31,843			8,323			(11,452	)
Net cash provided by (used in) operating activities from discontinued operations		1,806			(25,711	)		(50,588	)
Cash flows from investing activities:
Purchases of equipment		(113,846	)		(14,823	)		(15,111	)
Proceeds from sale of equipment		15,739			3,407			2,274
Net cash used in investing activities from continuing operations		(98,107	)		(11,416	)		(12,837	)
Net cash provided by (used in) investing activities from discontinued operations		—			6,000			(705	)
Cash flows from financing activities:
Issuance of debt		95,000			—			—
Borrowing under revolving credit facility		34,300			42,500			104,500
Payments on revolving credit facility		(76,800	)		—			(204,500	)
Payments of long-term debt		(2,250	)		(4,484	)		(93,750	)
Payment of financing costs		(5,711	)		(6,406	)		(35,644	)
Payments on capital lease obligations		(2,684	)		(2,114	)		(1,628	)
Proceeds from issuance of First Lien Notes		—			—			225,000
Proceeds from issuance of Second Lien Notes		—			—			100,000
Net cash provided by financing activities		41,855			29,496			93,978
Net change in cash from continuing operations		(24,409	)		26,403			69,689
Net change in cash from discontinued operations		1,806			(19,711	)		(51,293	)
Net change in cash		(22,603	)		6,692			18,396
Cash at beginning of year		27,839			21,147			2,751
Cash at end of year	$	5,236		$	27,839		$	21,147

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

F-5

Horizon Lines, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)

	Common Shares		Common Stock		Treasury Stock			Additional Paid in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Stockholders’ Equity (Deficiency)
	(In thousands)
Stockholders’ equity at December 26, 2010		1,230	$	345	$	(78,538	)	$	193,266		$	(73,843	)	$	(1,438	)	$	39,792
Vesting of restricted stock		1		—		—			(26	)		—			—			(26	)
Stock-based compensation		—		—		—			677			—			—			677
Stock issued under Employee Stock Purchase Plan		6		1		—			181			—			—			182
Stock issued as part of recapitalization plan		1,003		252		—			19,044			—			—			19,296
Conversion of warrants to stock		29		7		—			(7	)		—			—			—
Net loss		—		—		—			—			(229,417	)		—			(229,417	)
Unrecognized actuarial gains, net of tax		—		—		—			—			—			1,241			1,241
Fair value of interest rate swap, net of tax		—		—		—			—			—			1,458			1,458
Unwind of interest rate swap		—		—		—			—			—			339			339
Amortization of pension and post-retirement benefit transition obligation, net of tax		—		—		—			—			—			472			472
Stockholders’ deficiency at December 25, 2011		2,269	$	605	$	(78,538	)	$	213,135		$	(303,260	)	$	2,072		$	(165,986	)
Vesting of restricted stock		10		—		—			51			—			—			51
Stock-based compensation		—		—		—			1,918			—			—			1,918
Stock issued as part of conversion of debt		30,065		328		—			75,774			—			—			76,102
Warrants issued as part of conversion of debt		—		—		—			125,188			—			—			125,188
Warrants issued to SFL		—		—		—			43,938			—			—			43,938
Conversion of warrants to stock		2,090		21		—			(21	)		—			—			—
Retirement of treasury shares		—		—		78,538			(78,538	)		—			—			—
Net loss		—		—		—			—			(94,698	)		—			(94,698	)
Unrecognized actuarial loss, net of tax		—		—		—			—			—			(3,043	)		(3,043	)
Unwind of interest rate swap		—		—		—			—			—			(726	)		(726	)
Amortization of pension and post-retirement benefit transition obligation, net of tax		—		—		—			—			—			514			514
Stockholders’ deficiency at December 23, 2012		34,434	$	954	$	—		$	381,445		$	(397,958	)	$	(1,183	)	$	(16,742	)
Stock-based compensation		—		—		—			2,660			—			—			2,660
Vesting of restricted stock		4		—		—			—			—			—			—
Stock issued as part of conversion of debt		8		—		—			13			—			—			13
Conversion of warrants to stock		4,439		45		—			(45	)		—			—			—
Net loss		—		—		—			—			(31,933	)		—			(31,933	)
Unrecognized actuarial gain, net of tax		—		—		—			—			—			1,831			1,831
Amortization of pension and post-retirement benefit transition obligation, net of tax		—		—		—			—			—			379			379
Stockholders’ deficiency at December 22, 2013		38,885	$	999	$	—		$	384,073		$	(429,891	)	$	1,027		$	(43,792	)

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

F-6

Horizon Lines, Inc.

Notes to Consolidated Financial Statements

1. Basis of Presentation and Operations

Horizon Lines, Inc. (the “Company”) operates as a holding company for Horizon Lines, LLC (“Horizon Lines”), a Delaware limited liability company and wholly-owned subsidiary, Horizon Lines of Alaska, LLC (“Horizon Lines of Alaska”), a Delaware limited liability company and wholly-owned subsidiary, Horizon Logistics, LLC (“Horizon Logistics”), a Delaware limited liability company and wholly-owned subsidiary, Horizon Lines of Puerto Rico, Inc. (“HLPR”), a Delaware corporation and wholly-owned subsidiary, Hawaii Stevedores, Inc. (“HSI”), a Hawaii corporation and wholly-owned subsidiary, as well as Road Raiders Transportation, Inc. and Road Raiders Logistics, Inc. (collectively, “Road Raiders”), Delaware corporations and wholly-owned subsidiaries. Horizon Lines operates as a Jones Act container shipping business with primary service to ports within the continental United States, Alaska, Hawaii, and Puerto Rico. Under the Jones Act, all vessels transporting cargo between covered locations must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. Horizon Lines also offers terminal services. HLPR operates as an agent for Horizon Lines in Puerto Rico and also provides terminal services in Puerto Rico. The Company also provides certain third-party logistics services via its recently formed Road Raiders subsidiaries.

The accompanying consolidated financial statements include the consolidated accounts of the Company and its majority owned subsidiaries and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficiency) and cash flows. All significant intercompany accounts and transactions have been eliminated. Certain prior period balances have been reclassified to conform to current period presentation.

At a special meeting of the Company’s stockholders held on December 2, 2011, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation effecting a reverse stock split. On December 7, 2011, the Company filed its restated certificate of incorporation to, among other things, effect the 1-for-25 reverse stock split. In connection with the reverse stock split, stockholders received one share of common stock for every 25 shares of common stock held at the effective time. The reverse stock split reduced the number of shares of outstanding common stock from 56.7 million to 2.3 million. Unless otherwise noted, all share-related amounts herein reflect the reverse stock split. In addition, proportional adjustments were made to the number of shares issuable upon the vesting of restricted shares and the exercise of outstanding options to purchase shares of common stock and the per share exercise price of those options.

During 2011, the Company discontinued its FSX trans-Pacific container shipping service. There will not be any significant future cash flows related to the ceased operations of the FSX service. Also during 2011, the entire component comprising the third-party logistics operations was discontinued. There will not be any significant future cash flows related to these divested logistics operations. In addition, the Company does not have any significant continuing involvement in either of the divested operations. As a result, the FSX service and the former logistics operations have been classified as discontinued operations in all periods presented. See Note 6 for additional details of activities related to discontinued operations.

2. Significant Accounting Policies

Cash

Cash of the Company consists principally of cash held in banks and temporary investments having a maturity of three months or less at the date of acquisition.

F-7

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based upon the expected collectability of accounts receivable reflective of its historical collection experience. In circumstances in which management is aware of a specific customer’s inability to meet its financial obligation to the Company (for example, bankruptcy filings, accounts turned over for collection or litigation), the Company records a specific reserve for the bad debts against amounts due. For all other customers, the Company recognizes reserves for these bad debts based on the length of time the receivables are past due and other customer specific factors including, type of service provided, geographic location and industry. The Company monitors its collection risk on an ongoing basis through the use of credit reporting agencies. Accounts are written off after all means of collection, including legal action, have been exhausted. The Company does not require collateral from its trade customers.

The allowance for doubtful accounts approximated $3.8 million and $3.3 million at December 22, 2013 and December 23, 2012, respectively.

Materials and Supplies

Materials and supplies consist primarily of fuel inventory aboard vessels and inventory for maintenance of property and equipment. Fuel is carried at cost on the first in, first out (FIFO) basis, while all other materials and supplies are carried at average cost.

Property and Equipment

Property and equipment are stated at cost. Certain costs incurred in the development of internal-use software are capitalized. Routine maintenance, repairs, and removals other than vessel dry-dockings are charged to expense. Expenditures that materially increase values, change capacities or extend useful lives of the assets are capitalized. Depreciation and amortization is computed by the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the Company’s assets are as follows:

Buildings, chassis and cranes	25 years
Containers	15 years
Vessels	20-40 years
Software	3 years
Other	3-10 years

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present or if other circumstances indicate that an impairment may exist, the Company must then determine whether an impairment loss should be recognized. An impairment loss should be recognized for a long-lived asset (or asset group) that is held and used only if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value. Estimates of future cash flows used to test a long-lived asset (or asset group) for recoverability shall include only the future cash flows (cash inflows and associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the long-lived asset (or asset group). Estimates of future cash flows should be based on an entity’s own assumptions about its use of a long-lived asset (or asset group). The cash flow estimation period should be based on the long-lived asset’s (or asset group’s) remaining useful life to the entity. When long-lived assets are grouped for purposes of performing the recoverability test, the remaining useful life of the asset group should be based on the useful life of the primary asset. The primary asset of the asset group is the principal long-lived tangible asset being depreciated that is the most significant component asset from which the group derives its cash-flow-generating capacity. Estimates of future cash flows used to test the recoverability of a long-lived asset (or asset group) that is in use shall be based on the existing service potential of the asset (or asset group) at the date tested. Existing service potential encompasses the long-lived asset’s estimated useful life, cash flow

F-8

generating capacity, and, the physical output capacity. The estimated cash flows should include cash flows associated with future expenditures necessary to maintain the existing service potential, including those that replace the service potential of component parts, but they should not include cash flows associated with future capital expenditures that would increase the service potential. When undiscounted future cash flows will not be sufficient to recover the carrying amount of an asset, the asset is written down to its fair value.

Vessel Dry-docking

Vessels must undergo regular inspection, monitoring and maintenance, referred to as dry-docking, to maintain the required operating certificates. United States Coast Guard regulations generally require that vessels be dry-docked twice every five years. The costs of these scheduled dry-dockings are customarily capitalized and are then amortized over a 30-month period beginning with the accounting period following the vessel’s release from dry-dock, because dry-dockings enable the vessel to continue operating in compliance with U.S. Coast Guard requirements,.

The Company takes advantage of vessel dry-dockings to also perform normal repair and maintenance procedures on the vessels. These routine vessel maintenance and repair procedures are charged to expense as incurred. In addition, the Company will occasionally during a vessel dry-docking, replace vessel machinery or equipment and perform procedures that materially enhance capabilities of a vessel. In these circumstances, the expenditures are capitalized and depreciated over the estimated useful lives.

Leases

The Company leases certain vessels, facilities, equipment and vehicles under capital and operating leases. The commencement date of all leases is the earlier of the date the Company becomes legally obligated to make rent payments or the date the Company may exercise control over the use of the property. Rent expense is recorded as incurred. Certain of the Company’s leases contain fluctuating or escalating payments and rent holiday periods. The related rent expense is recorded on a straight-line basis over the lease term. Leasehold improvements associated with assets utilized under capital or operating leases are amortized over the shorter of the asset’s useful life or the lease term.

Intangible Assets

Intangible assets consist of goodwill, customer contracts/relationships, trademarks, and deferred financing costs. The Company amortizes customer contracts/relationships using the straight line method over the expected useful lives of 4 to 10 years. The Company also amortizes trademarks using the straight line method over the expected life of the related trademarks of 15 years. The Company amortizes debt issue cost using the effective interest method over the term of the related debt.

Goodwill and other intangible assets with indefinite useful lives are not amortized but are subject to annual impairment tests as of the first day of the fourth quarter. At least annually, or on an interim basis if there is an indicator of impairment, the fair value of the reporting unit is calculated. If the calculated fair value is less than the carrying amount, an impairment loss might be recognized. In these instances, a discounted cash flow model is used to determine the current estimated fair value of the reporting unit. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including market growth and market share, sales volumes and prices, costs of service, discount rate and estimated capital needs. Management considers historical experience and all available information at the time the fair value of a reporting unit is estimated. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. Changes in assumptions and estimates may affect the carrying value of goodwill and could result in additional impairment charges in future periods.

The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. The Company identified its

F-9

reporting unit by first determining its operating segment, and then assessed whether any components of the operating segment constituted a business for which discrete financial information is available and where segment management regularly reviews the operating results of the component. The Company concluded it had one operating segment and one reporting unit consisting of the container shipping business.

The Company uses the two-step method prescribed by ASC 350, Intangibles-Goodwill and Other, to determine goodwill impairment. If the carrying amount of the Company’s single reporting unit exceeds its fair value (step one), the Company measures the possible goodwill impairment based on a hypothetical allocation of the estimated fair value of the reporting unit to all of the underlying assets and liabilities, including previously unrecognized intangible assets (step two). The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent the reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.

Revenue Recognition

The Company records transportation revenue and an accrual for the corresponding costs to complete delivery when the cargo first sails from its point of origin. The Company believes 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. The Company recognizes revenue and related costs of sales for terminal and other services upon completion of services.

Insurance Reserves

The Company maintains insurance for casualty, property and health claims. Most of the Company’s insurance arrangements include a level of self-insurance. Reserves are established based on the nature of the claim or the value of cargo damaged and the use of current trends and historical data for other claims. These estimates are based on historical information along with certain assumptions about future events and also include reserves for claims incurred but not reported, where applicable.

Income Taxes

The Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effects on deferred tax assets and liabilities of subsequent changes in the tax laws and rates are recognized in income during the year the changes are enacted. Deferred tax assets are reduced by a valuation allowance when, in the judgment of management, it is more likely than not that some portion or all of the deferred tax assets will not be realizable.

Pension and Post-retirement Benefits

The Company has noncontributory pension plans and post-retirement benefit plans covering certain union employees. Costs of these plans are charged to current operations and consist of several components that are based on various actuarial assumptions regarding future experience of the plans. In addition, certain other union employees are covered by plans provided by their respective union organizations. The Company expenses amounts as paid in accordance with union agreements.

Amounts recorded for the pension plan and the post-retirement benefit plan reflect estimates related to future interest rates, investment returns, and employee turnover. The Company reviews all assumptions and estimates on an ongoing basis.

The Company is required to recognize the overfunded or underfunded status of its defined benefit and post-retirement benefit plans as an asset or liability, with changes in the funded status recognized as an adjustment to the ending balance of accumulated other comprehensive income (loss) in the year they occur. The pension plan and the post-retirement benefit plans are in an underfunded status.

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Computation of Net (Loss) Income per Share

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted daily average number of shares of common stock outstanding during the period. Certain of the Company’s unvested stock-based awards contain non-forfeitable rights to dividends. In periods when the Company generates net income from continuing operations, shares are included in the denominator for basic net income per share for these participating securities. However, in periods when the Company generates a net loss from continuing operations, shares are excluded from the denominator for these participating securities as the impact would be anti-dilutive. Diluted net income per share is computed using the weighted daily average number of shares of common stock outstanding for the period plus dilutive potential common shares, including stock options and warrants using the treasury-stock method and from convertible preferred stock using the “if converted” method.

Fiscal Period

The fiscal period of the Company typically ends on the Sunday before the last Friday in December. For fiscal year 2013, the fiscal period began on December 24, 2012 and ended on December 22, 2013. For fiscal year 2012, the fiscal period began on December 26, 2011 and ended on December 23, 2012. For fiscal year 2011, the fiscal period began on December 27, 2010 and ended on December 25, 2011. Each of the fiscal years ended December 22, 2013, December 23, 2012 and December 25, 2011 consisted of 52 weeks.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates include the assessment of the realization of accounts receivable, deferred tax assets and long-lived assets and the useful lives of intangible assets and property and equipment, as well as the estimate and recognition of liabilities.

Recent Accounting Pronouncements

Accounting pronouncements effective after December 22, 2013, are not expected to have a material effect on the Company’s consolidated financial position or results of operations

Supplemental Cash Flow Information

Non-cash financing activities were as follows (in thousands):

	Fiscal Years Ended
	December 22, 2013		December 23, 2012		December 25, 2011
Notes issued as payment in kind	$	24,762	$	26,924	$	—
Conversion of debt to equity		20		283,935		—
Second lien notes issued to SFL		—		40,000		—

Cash payments for interest and income tax refunds were as follows (in thousands):

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
Interest	$	33,919		$	29,257		$	34,609
Income taxes		(18	)		(234	)		(102	)

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3. Long-Term Debt

Long-term debt, net of original issue discount or premium, consists of the following (in thousands):

	December 22, 2013			December 23, 2012
First lien notes	$	222,381		$	225,305
Second lien notes		187,129			160,871
$75.0 million term loan agreement		73,282			—
$20.0 million term loan agreement		19,572			—
Capital lease obligations		12,415			7,443
ABL facility		—			42,500
6.00% convertible notes		1,539			1,711
Total long-term debt		516,318			437,830
Current portion		(11,473	)		(3,608	)
Long-term debt, net of current portion	$	504,845		$	434,222

On October 5, 2011, the Company issued the 6.00% Convertible Notes. On October 5, 2011, Horizon Lines issued the First Lien Notes, the Second Lien Notes, and entered into the ABL Facility, and on January 31, 2013, entered into the $20.0 Million Agreement. On January 31, 2013, Horizon Lines Alaska Vessels, LLC (“Horizon Alaska”), the Company’s newly formed special purpose subsidiary, entered into the $75.0 Million Agreement. The 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, the ABL Facility, the $20.0 Million Agreement, and the $75.0 Million Agreement are defined and described below.

Road Raiders Inland, Inc. and each of its downstream subsidiaries were formed in 2013, and as of December 22, 2013, due to the immaterial levels of operations, were “Immaterial Subsidiaries” under the ABL Facility, the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement (collectively, the “Horizon Lines Debt Agreements”) and in accordance with the Horizon Lines Debt Agreements did not guarantee any of the Horizon Lines Debt Agreements. Per the terms of the Horizon Lines Debt Agreements, the Alaska SPEs (as defined below) are not required to be a party thereto, are considered “Unrestricted Subsidiaries” under the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement, and do not guarantee any of the Horizon Lines Debt Agreements.

As of December 22, 2013, the 6.00% Convertible Notes are fully and unconditionally guaranteed by the Company’s subsidiaries other than the Immaterial Subsidiaries and Unrestricted Subsidiaries identified above.

As of December 22, 2013, the ABL Facility, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement are fully and unconditionally guaranteed by the Company and each of its subsidiaries other than Horizon Lines, the Immaterial Subsidiaries, and the Unrestricted Subsidiaries.

The ABL Facility is secured on a first-priority basis by liens on the accounts receivable, deposit accounts, securities accounts, investment property (other than equity interests of the subsidiaries and joint ventures of the Company) and cash, in each case with certain exceptions, of the Company and the Company’s subsidiaries other than the Immaterial Subsidiaries and Unrestricted Subsidiaries identified above (collectively, the “ABL Priority Collateral”). Substantially all other assets of the Company and the Company’s subsidiaries, other than the assets of the Immaterial Subsidiaries and Unrestricted Subsidiaries identified above, also serve as collateral for the Horizon Lines Debt Agreements (collectively, such other assets are the “Secured Notes Priority Collateral”).

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The following table summarizes the guarantors and non-guarantors of each of the Horizon Lines Debt Agreements as of December 22, 2013:

	ABL Facility	$20 Million Agreement	First Lien Notes	Second Lien Notes	6% Convertible Notes	$75 Million Agreement
The Company	Guarantor	Guarantor	Guarantor	Guarantor	Issuer	Non-Guarantor
Horizon Lines, LLC	Issuer	Issuer	Issuer	Issuer	Guarantor	Non-Guarantor
Horizon Alaska	Non-Guarantor	Unrestricted	Unrestricted	Unrestricted	Unrestricted	Issuer
Horizon Vessels	Non-Guarantor	Unrestricted	Unrestricted	Unrestricted	Unrestricted	Guarantor
Alaska Terminals	Non-Guarantor	Unrestricted	Unrestricted	Unrestricted	Unrestricted	Guarantor
Road Raiders Inland, Inc. and subsidiaries(1)	Immaterial	Immaterial	Immaterial	Immaterial	Immaterial	Non-Guarantor
Other subsidiaries of the Company not specifically listed above	Guarantor	Guarantor	Guarantor	Guarantor	Guarantor	Non-Guarantor

(1) Subsequent to December 22, 2013, Road Raiders Inland, Inc. and each of its downstream subsidiaries entered into agreements to fully and unconditionally guarantee the Horizon Lines Debt Agreements.

The following table lists the order of lien priority for each of the Horizon Lines Debt Agreements on the Secured Notes Priority Collateral and the ABL Priority Collateral, as applicable:

	Secured Notes Priority Collateral	ABL Priority Collateral
$20 Million Agreement	First	Second
First Lien Notes	Second	Third
Second Lien Notes	Third	Fourth
6.0% Convertible Notes	Fourth	Fifth
ABL Facility	Fifth	First

First Lien Notes

The 11.00% First Lien Senior Secured Notes (the “First Lien Notes”) were issued pursuant to an indenture on October 5, 2011. The First Lien Notes bear interest at a rate of 11.0% per annum, payable semiannually beginning on April 15, 2012, and mature on October 15, 2016. The First Lien Notes are callable at par plus accrued and unpaid interest. Horizon Lines is obligated to make mandatory prepayments of 1%, on an annual basis, of the original principal amount. These prepayments are payable on a semiannual basis and commenced on April 15, 2012.

The First Lien Notes contain affirmative and negative covenants which are typical for senior secured high-yield notes with no financial maintenance covenants. The First Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of December 22, 2013.

On October 5, 2011, the fair value of the First Lien Notes was $228.4 million, which reflected Horizon Lines’ ability to call the First Lien Notes at 101.5% during the first year and at par thereafter. The original issue premium of $3.4 million is being amortized through interest expense through the maturity of the First Lien Notes.

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Second Lien Notes

The 13.00%-15.00% Second Lien Senior Secured Notes (the “Second Lien Notes”) were issued pursuant to an indenture on October 5, 2011.

The Second Lien Notes bear interest at a rate of either: (i) 13% per annum, payable semiannually in cash in arrears; (ii) 14% per annum, 50% of which is payable semiannually in cash in arrears and 50% is payable in kind; or (iii) 15% per annum payable in kind, payable semiannually beginning on April 15, 2012, and maturing on October 15, 2016. The Second Lien Notes were non-callable for two years from the date of their issuance, and thereafter the Second Lien Notes are callable by Horizon Lines at (i) 106% of their aggregate principal amount, plus accrued and unpaid interest thereon in the third year, (ii) 103% of their aggregate principal amount, plus accrued and unpaid interest thereon in the fourth year, and (iii) at par plus accrued and unpaid interest thereafter.

On April 15, 2012, October 15, 2012, April 15, 2013 and October 15, 2013, Horizon Lines issued an additional $7.9 million, $8.1 million, $8.7 million and $9.4 million, respectively, of Second Lien Notes to satisfy the payment-in-kind interest obligation under the Second Lien Notes. In addition, Horizon Lines elected to satisfy its interest obligation under the Second Lien Notes due April 15, 2014 by issuing additional Second Lien Notes. As such, as of December 22, 2013, Horizon Lines has recorded $3.7 million of accrued interest as an increase to long-term debt.

The Second Lien Notes contain affirmative and negative covenants that are typical for senior secured high-yield notes with no financial maintenance covenants. The Second Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of December 22, 2013.

On October 5, 2011, the fair value of the Second Lien Notes was $96.6 million. The original issue discount of $3.4 million is being amortized through interest expense through the maturity of the Second Lien Notes.

During 2012, the Company and Horizon Lines entered into a Global Termination Agreement with Ship Finance International Limited (“SFL”) whereby Horizon Lines issued $40.0 million aggregate principal amount of its Second Lien Notes and warrants to purchase 9,250,000 shares of the Company’s common stock at a price of $0.01 per share to satisfy its obligations for certain vessel leases. The Second Lien Notes issued to SFL (the “SFL Notes”) have the same terms as the Second Lien Notes issued on October 5, 2011 (the “Initial Notes”), except that they are subordinated to the Initial Notes in the case of a bankruptcy, and holders of the SFL Notes, so long as then held by SFL, have the option to purchase the Initial Notes in the event of a bankruptcy. On April 9, 2012, the fair value of the SFL Notes outstanding on such date approximated face value. On October 15, 2012, April 15, 2013 and October 15, 2013, Horizon Lines issued an additional $3.1 million, $3.2 million and $3.5 million, respectively, of SFL Notes to satisfy the payment-in-kind interest obligation under the SFL Notes. In addition, Horizon Lines elected to satisfy its interest obligation under the SFL Notes due April 15, 2014 by issuing additional SFL Notes. As such, as of December 22, 2013, Horizon Lines has recorded $1.4 million of accrued interest as an increase to long-term debt.

ABL Facility

On October 5, 2011, Horizon Lines entered into a $100.0 million asset-based revolving credit facility (the “ABL Facility”) with Wells Fargo Capital Finance, LLC (“Wells Fargo”). Use of the ABL Facility is subject to compliance with a customary borrowing base limitation. The ABL Facility includes an up to $30.0 million letter

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of credit sub-facility and a swingline sub-facility up to $15.0 million, with Wells Fargo serving as administrative agent and collateral agent. Horizon Lines has the option to request increases in the maximum commitment under the ABL Facility by up to $25.0 million in the aggregate; however, such incremental facility increases have not been committed to in advance. The ABL Facility is available to be used by Horizon Lines for working capital and other general corporate purposes.

The ABL Facility was amended on January 31, 2013 in conjunction with the $75.0 Million Agreement and $20.0 Million Agreement. In addition to allowing for the incurrence of the additional long-term debt under those agreements, amendments to the ABL Facility included, among other changes, (i) permission to make certain investments in the Alaska SPEs, including the proceeds of the $20.0 Million Agreement and the arrangements related to the charters and the sublease of the terminal facility licenses for the Vessels (as defined below), (ii) excluding the Alaska SPEs from the guarantee and collateral requirements of the ABL Facility and from the restrictions of the negative covenants and certain other provisions, (iii) weekly borrowing base reporting in the event availability under the facility falls below a threshold of (a) $14.0 million or (b) 14.0% of the maximum commitment under the ABL Facility, (iv) the exclusion of certain historical charges and expenses relating to discontinued operations and severance from the calculation of bank-defined Adjusted EBITDA, (v) the exclusion of the historical charter hire expense deriving from the Vessels from the calculation of bank-defined Adjusted EBITDA, and (vi) the inclusion of pro forma interest expense on the $75.0 Million Agreement and the $20.0 Million Agreement in the calculation of fixed charges.

The ABL Facility matures October 5, 2016 (but 90 days earlier if the First Lien Notes and the Second Lien Notes are not repaid or refinanced as of such date). The interest rate on the ABL Facility is LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. A fee ranging from 0.375% to 0.50% per annum will accrue on unutilized commitments under the ABL Facility. As of December 22, 2013, there were no borrowings outstanding under the ABL facility and total borrowing availability was $63.4 million. Horizon Lines had $12.9 million of letters of credit outstanding as of December 22, 2013.

The ABL Facility requires compliance with a minimum fixed charge coverage ratio test if excess availability is less than the greater of (i) $12.5 million or (ii) 12.5% of the maximum commitment under the ABL Facility. In addition, the ABL Facility includes certain customary negative covenants that, subject to certain materiality thresholds, baskets and other agreed upon exceptions and qualifications, will limit, among other things, indebtedness, liens, asset sales and other dispositions, mergers, liquidations, dissolutions and other fundamental changes, investments and acquisitions, dividends, distributions on equity or redemptions and repurchases of capital stock, transactions with affiliates, repayments of certain debt, conduct of business and change of control. The ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, as well as provisions requiring compliance with applicable citizenship requirements of the Jones Act. Horizon Lines was in compliance with all such applicable covenants as of December 22, 2013.

$75.0 Million Term Loan Agreement

Three of Horizon Lines’ Jones Act-qualified vessels: the Horizon Anchorage, Horizon Tacoma, and Horizon Kodiak (collectively, the “Vessels”) were previously chartered. The charter for the Vessels was due to expire in January 2015. For each chartered Vessel, the Company generally had the following options in connection with the expiration of the charter: (i) purchase the vessel for its fixed price or fair market value, (ii) extend the charter for an agreed upon period of time at a fixed price or fair market value charter rate or, (iii) return the vessel to its owner. On January 31, 2013, the Company, through its newly formed subsidiary Horizon Alaska, acquired off of charter the Vessels for a purchase price of approximately $91.8 million.

On January 31, 2013, Horizon Alaska, together with two newly formed subsidiaries of Horizon Lines, Horizon Lines Alaska Terminals, LLC (“Alaska Terminals”) and Horizon Lines Merchant Vessels, LLC (“Horizon Vessels”), entered into an approximately $75.8 million term loan agreement with certain lenders and

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U.S. Bank National Association (“U.S. Bank”), as the administrative agent, collateral agent and ship mortgage trustee (the “$75.0 Million Agreement”). The obligations under the $75.0 Million Agreement are secured by a first-priority lien on substantially all of the assets of Horizon Alaska, Horizon Vessels, and Alaska Terminals (collectively, the “Alaska SPEs”), which primarily includes the Vessels. The operations of the Alaska SPEs are limited to a bareboat charter of the Vessels between Horizon Alaska and Horizon Lines and a sublease of a terminal facility in Anchorage, Alaska between Alaska Terminals and Horizon Lines of Alaska.

The loan under the $75.0 Million Agreement accrues interest at 10.25% per annum, payable quarterly commencing March 31, 2013. Amortization of loan principal is payable in equal quarterly installments, commencing on March 31, 2014, and each amortization installment will equal 2.5% of the total initial loan amount (which may increase to 3.75% upon specified events). The full remaining outstanding amount of the loan under the $75.0 Million Agreement is payable on September 30, 2016. The proceeds of the loan under the $75.0 Million Agreement were utilized by Horizon Alaska to acquire the Vessels. In connection with the borrowing under the $75.0 Million Agreement, the Alaska SPEs paid financing costs of $2.5 million during 2013, which included loan commitment fees of $1.5 million. The financing costs have been recorded as a reduction to the carrying amount of the $75.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $75.0 Million Agreement. In addition to the commitment fees of $1.5 million paid in cash at closing, the Alaska SPEs will also pay, at maturity of the $75.0 Million Agreement, an additional $0.8 million of closing fees by increasing the original $75.0 million principal amount. The Company is recording non-cash interest accretion through maturity of the $75.0 Million Agreement related to the additional closing fees.

The $75.0 Million Agreement contains certain covenants, including a minimum EBITDA threshold and limitations on the incurrence of indebtedness, liens, asset sales, investments and dividends (all as defined in the agreement). The Alaska SPEs were in compliance with all such covenants as of December 22, 2013. The agent and the lenders under the $75.0 Million Agreement do not have any recourse to the stock or assets of the Company or any of its subsidiaries (other than the Alaska SPEs or equity interests therein). Defaults under the $75.0 Million Agreement do not give rise to any remedies under the Horizon Lines Debt Agreements.

On January 31, 2013, the fair value of the $75.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $75.0 Million Agreement, the Company utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $75.0 Million Agreement. The Company determined the estimated benchmark yield approximated the stated interest rate.

$20.0 Million Term Loan Agreement

On January 31, 2013, the Company and those of its subsidiaries that are parties (collectively, the “Loan Parties”) to the existing First Lien Notes, the Second Lien Notes, and the 6.00% Convertible Notes (collectively, the “Notes”) entered into a $20.0 million term loan agreement with certain lenders and U.S. Bank, as administrative agent, collateral agent, and ship mortgage trustee (the “$20.0 Million Agreement”). The loan under the $20.0 Million Agreement matures on September 30, 2016 and accrues interest at 8.00% per annum, payable quarterly commencing March 31, 2013 with interest calculated assuming accrual beginning January 8, 2013. The $20.0 Million Agreement does not provide for any amortization of principal, and the full outstanding amount of the loan is payable on September 30, 2016. Horizon Lines is not permitted to optionally prepay the $20.0 Million Agreement except for prepayment in full (together with a prepayment premium equal to 5.0% of the principal amount prepaid) following repayment in full of the First Lien Notes and the $75.0 Million Agreement.

In connection with the issuance of the $20.0 Million Agreement, Horizon Lines paid financing costs of $0.6 million during 2013. The financing costs have been recorded as a reduction to the carrying amount of the $20.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $20.0 Million Agreement.

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The covenants in the $20.0 Million Agreement are substantially similar to the negative covenants contained in the indentures governing the Notes, which indentures permit the incurrence of the term loan borrowed under the $20.0 Million Agreement and the contribution of such amounts to Horizon Alaska. The proceeds of the loan borrowed under the $20.0 Million Agreement were contributed to Horizon Alaska to enable it to acquire the Vessels.

On January 31, 2013, the fair value of the $20.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $20.0 Million Agreement, the Company utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $20.0 Million Agreement. The Company determined the estimated benchmark yield approximated the stated interest rate.

6.00% Convertible Notes

On October 5, 2011, the Company issued $178.8 million in aggregate principal amount of new 6.00% Series A Convertible Senior Secured Notes due 2017 (the “Series A Notes”) and $99.3 million in aggregate principal amount of new 6.00% Series B Mandatorily Convertible Senior Secured Notes (the “Series B Notes” and, together with the Series A Notes, collectively the “6.00% Convertible Notes”). The 6.00% Convertible Notes were issued pursuant to an indenture, which the Company and the Loan Parties entered into with U.S. Bank , as trustee and collateral agent, on October 5, 2011 (the “6.00% Convertible Notes Indenture”).

During 2012, the Company completed various debt-to-equity conversions of the 6.00% Convertible Notes. On October 5, 2012, all outstanding Series B Notes not previously converted into shares of the Company’s common stock were mandatorily converted into Series A Notes as required by the terms of the 6.00% Convertible Notes Indenture. As of December 22, 2013, $2.0 million face value of the Series A Notes remains outstanding. The Series A Notes bear interest at a rate of 6.00% per annum, payable semiannually. The Series A Notes mature on April 15, 2017 and are convertible at the option of the holders, and at the Company’s option under certain circumstances, into shares of the Company’s common stock or warrants, as the case may be. Upon conversion, foreign holders may, under certain conditions, receive warrants in lieu of shares of common stock.

The conversion rate of the remaining Series A Notes may be increased in certain circumstances to compensate the holders thereof for the loss of the time value of the conversion right (i) if at any time the Company’s common stock or the common stock into which the new notes may be converted is greater than or equal to $11.25 per share and is not listed on the NYSE or NASDAQ markets or (ii) if a change of control occurs, unless at least 90% of the consideration received or to be received by holders of common stock, excluding cash payments for fractional shares, in connection with the transaction or transactions constituting the change of control, consists of shares of common stock, American Depositary Receipts or American Depositary Shares traded on a national securities exchange in the United States or which will be so traded or quoted when issued or exchanged in connection with such change of control. Upon a change of control, holders will have the right to require the Company to repurchase for cash the outstanding Series A Notes at 101% of the aggregate principal amount, plus accrued and unpaid interest.

The long-term debt and embedded conversion options associated with the 6.00% Convertible Notes were recorded on the Company’s balance sheet at their fair value on October 5, 2011. On October 5, 2011, the fair value of the long-term debt portion of the Series A Notes and Series B Notes was $105.6 million and $58.6 million, respectively. The original issue discounts associated with the 6.00% Convertible Notes still outstanding are being amortized through interest expense through the maturity of the Series A Notes.

As of December 22, 2013, the fair value of the embedded conversion features was $0.1 million, which was calculated using the Black-Scholes Pricing Model. The Company recorded a non-cash gain of $0.3 million, $19.4 million and $84.5 million during the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively, for the change in fair value of embedded conversion features, which was recorded within other expense on the Condensed Consolidated Statement of Operations.

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Warrants

Certain warrants, not including the warrants issued to SFL, were issued pursuant to a warrant agreement, which the Company entered into with The Bank of New York Mellon Trust Company, N.A, as warrant agent, on October 5, 2011, as amended by Amendment No. 1, dated December 7, 2011 (the “Warrant Agreement”). Pursuant to the Warrant Agreement, each warrant entitles the holder to purchase common stock at a price of $0.01 per share, subject to adjustment in certain circumstances. In connection with a reverse stock split in December 2011, warrant holders will receive 1/25th of a share of the Company’s common stock upon conversion. As of December 22, 2013 there were 1.1 billion warrants outstanding for the purchase of up to 53.0 million shares of the Company’s common stock. Upon issuance, in lieu of payment of the exercise price, a warrant holder will have the right (but not the obligation) to require the Company to convert its warrants, in whole or in part, into shares of its common stock without any required payment or request that the Company withhold, from the shares of common stock that would otherwise be delivered to such warrant holder, shares issuable upon exercise of the Warrants equal in value to the aggregate exercise price.

Warrant holders will not be permitted to exercise or convert their warrants if and to the extent the shares of common stock issuable upon exercise or conversion would constitute “excess shares” (as defined in the Company’s certificate of incorporation) if they were issued in order to abide by the foreign ownership limitations imposed by the Company’s certificate of incorporation. In addition, a warrant holder who cannot establish to the Company’s reasonable satisfaction that it (or, if not the holder, the person that the holder has designated to receive the common stock upon exercise or conversion) is a United States citizen will not be permitted to exercise or convert its warrants to the extent the receipt of the common stock upon exercise or conversion would cause such person or any person whose ownership position would be aggregated with that of such person to exceed 4.9% of the Company’s outstanding common stock.

The warrants contain no provisions allowing the Company to force redemption, and there is no conditional obligation of the Company to redeem or convert the warrants. Each warrant is convertible into shares of the Company’s common stock at an exercise price of $0.01 per share, which the Company has the option to waive. In addition, the Company has sufficient authorized and unissued shares available to settle the warrants during the maximum period the warrants could remain outstanding. As a result, the warrants do not meet the definition of an asset or liability and were classified as equity on the date of issuance, on December 23, 2012, and on December 22, 2013. The warrants will be evaluated on a continuous basis to determine if equity classification continues to be appropriate.

Fair Value of Financial Instruments

The estimated fair value of the Company’s debt as of December 22, 2013 and December 23, 2012 totaled $488.9 million and $411.4 million, respectively. The fair value of the First Lien Notes and the Second Lien Notes is based upon quoted market prices. The fair value of the other long-term debt approximates carrying value.

Contractual maturities of long-term debt obligations as of December 22, 2013 are as follows (in thousands):

2014	$	7,875
2015		9,750
2016		482,497
2017		1,991
2018		—
Thereafter		—
	$	502,113

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4. Impairment Charges

The Company made progress payments for three new cranes, which are still in the construction phase, that were initially purchased for use in its Anchorage, Alaska terminal. These cranes were expected to be installed and become fully operational in December 2010. However, the Port of Anchorage Intermodal Expansion Project encountered significant delays. During 2011, the Company was marketing these cranes for sale and expected to complete the sale within one year. As a result of the reclassification to assets held for sale during 2011, the Company recorded an impairment charge of $2.8 million to write down the carrying value of the cranes to their estimated fair value less costs to sell. During the third quarter of 2013, the Company entered into a letter of intent to sell two of the three cranes. During the third quarter of 2013, the Company recorded an additional impairment charge of $2.6 million to write down the carrying value of the cranes to their estimated proceeds less costs to sell, which approximated fair value (Level 2). The Company completed the sale of the cranes during the fourth quarter of 2013. The Company is currently exploring alternatives for the remaining crane and expects to install it at the Company’s terminal in Kodiak, Alaska.

5. Restructuring

On December 5, 2012, the Company announced that it would discontinue its sailing that departed Jacksonville, Florida each Tuesday and arrived in San Juan, Puerto Rico the following Friday. In association with the service change, the Company recorded a pre-tax restructuring charge of $3.1 million during the fourth quarter of 2012. The $3.1 million charge was comprised of an equipment-related impairment charge of $2.2 million and union and non-union severance and employee related expense of $0.9 million. The Company recorded additional charges of $1.0 million and $0.5 million during 2013 as a result of the return of a portion of its excess leased equipment and additional union and non-union severance, respectively. The Company expects to complete the return of its remaining excess leased equipment during the first quarter of 2014.

The Company also initiated a plan during the fourth quarter of 2012 to further reduce its non-union workforce beyond the reductions associated with the Puerto Rico service change and recorded a charge of an additional $1.2 million of expenses for severance and other employee-related costs. The Company’s non-union workforce was reduced by approximately 38 positions in total, including 26 existing and 12 open positions. The workforce reduction was completed on January 31, 2013.

During April 2013, the Company moved its northeast terminal operations to Philadelphia, Pennsylvania from Elizabeth, New Jersey. In association with the relocation of the terminal operations, the Company recorded an estimated restructuring charge of $4.1 million during the first quarter of 2013 resulting from the withdrawal from the Port of Elizabeth’s multiemployer pension plan. During the third quarter of 2013, the Company received additional information related to the liability associated with the withdrawal from the Port of Elizabeth’s multiemployer pension plan and recorded an additional $0.8 million restructuring charge. During the fourth quarter of 2013, the Company reached a settlement agreement whereby the Company paid $5.3 million to satisfy its liability associated with the withdrawal from the multiemployer pension plan.

The following table presents the restructuring reserves at December 25, 2011, December 23, 2012, and December 22, 2013, as well as activity during the 2012 & 2013 (in thousands):

	Balance at December 25, 2011		Provision		Payments			Balance at December 23, 2012
Personnel-related costs	$	—	$	2,122	$	(160	)	$	1,962
Equipment and relocation costs		—		2,218		—			2,218
Total	$	—	$	4,340	$	(160	)	$	4,180

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	Balance at December 23, 2012		Provision			Payments			Balance at December 22, 2013
Personnel-related costs	$	1,962	$	450		$	(2,068	)	$	344
Equipment and relocation costs		2,218		974			(2,949	)		243
Multi-employer pension plan withdrawal liability		—		5,278	(1)		(5,278	)		—
Total	$	4,180	$	6,702		$	(10,295	)	$	587

(1) Includes $0.4 million of non-cash interest accretion related to the liability for withdrawal from the Port of Elizabeth’s multi-employer pension plan.

In the consolidated balance sheet as of December 22, 2013, the reserve for restructuring costs is recorded in other accrued liabilities.

6. Discontinued Operations

FSX Service

On October 21, 2011, the Company finalized a decision to terminate the FSX trans-Pacific container shipping service and ceased all operations related to the FSX service during the fourth quarter of 2011. During the fourth quarter of 2011, the Company recorded a restructuring charge as a result of the shutdown of the FSX service. The restructuring charge included, among other things, an amount related to the present value of the Company’s future vessel lease obligations. During 2012, the Company recorded $4.2 million of non-cash accretion of the vessel lease liability.

On April 5, 2012, the Company entered into a Global Termination Agreement with SFL which enabled the Company to terminate early the bareboat charters of the five foreign-built, U.S.-flag vessels that formerly operated in the FSX service. The Global Termination Agreement became effective April 9, 2012. In connection with the Global Termination Agreement, the Company adjusted the restructuring charge related to its vessel lease obligations originally recorded during the fourth quarter of 2011. Based on (i) the issuance to SFL of $40.0 million in aggregate principal amount of Second Lien Notes, (ii) the 9,250,000 warrants issued to SFL on April 9, 2012, (iii) fees associated with the vessel lease termination and reimbursement obligations to the SFL Parties, and (iv) the net present value of the vessel lease liability as of April 9, 2012, the Company recorded an additional restructuring charge of $14.1 million during the 2nd quarter of 2012, which was recorded as part of discontinued operations.

The following table presents the restructuring reserves at December 25, 2011, December 23, 2012, and December 22, 2013, as well as activity during 2012 and 2013 (in thousands):

	Balance at December 25, 2011		Payments			Provisions(1)		Adjustments(2)			Balance at December 23, 2012
Vessel leases, net of estimated sublease(2)	$	77,060	$	(8,163	)	$	4,150	$	(72,300	)	$	747
Rolling stock per-diem and lease termination costs		9,921		(9,785	)		—		(136	)		—
Personnel-related costs		5,330		(5,533	)		510		(307	)		—
Facility leases		135		(157	)		22		—			—
Total	$	92,446	$	(23,638	)	$	4,682	$	(72,743	)	$	747

(1) The Company recorded the net present value of its future lease obligations, net of estimated sublease income, during the fourth quarter of 2011. The $4.2 million recorded during 2012 represents non-cash accretion of the liability.

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(2) On April 5, 2012, the Company entered into a Global Termination Agreement which enabled the Company to terminate these vessel leases in advance of the originally scheduled expiration date. The Company paid the remaining liability related to the lease termination during the first quarter of 2013.

	Balance at December 23, 2012		Payments			Provisions		Balance at December 22, 2013
Vessel lease termination	$	747	$	(766	)	$	19	$	—

During 2013, the Company incurred legal and professional fees associated with an arbitration proceeding. The Company was seeking reimbursement of certain costs and expenditures related to previously co-owned assets that were utilized as part of the Company’s FSX service. During the third quarter of 2013, an arbitration panel awarded the Company $3.0 million plus reimbursement of $0.8 million of legal fees and expenses, which was recorded as part of discontinued operations.

Logistics Operations

During 2011, the entire component comprising the third-party logistics operations was discontinued. As part of the divestiture, the Company transitioned some of the operations and personnel to other logistics providers.

During the year ended December 26, 2010, the Company recorded a $5.0 million valuation allowance to adjust the carrying value of the net assets of its discontinued operations to the estimated fair value less costs to sell. As a result of better than expected cash collections of the accounts receivable, the Company reduced the valuation allowance against the net assets of its discontinued operations by $3.2 million during 2011, and decreased the 2011 loss from discontinued operations by the same amount.

Assets and Liabilities of Discontinued Operations

Assets of discontinued operations, which was comprised of uncollected accounts receivable, totaled $0.1 million as of December 23, 2012. The Company collected these outstanding trade receivable balances throughout 2013. Liabilities of discontinued operations totaled $0.2 million and $0.9 million as of December 22, 2013 and December 23, 2012, respectively, and were comprised of liabilities associated with the shutdown of the Company’s FSX and third-party logistics services. The Company expects to satisfy these liabilities during the first quarter of 2014. The assets and liabilities of discontinued operations are included within other current assets and other accrued liabilities, respectively, on the Condensed Consolidated Balance Sheets.

Results of Operations of Discontinued Operations

The following table presents summarized financial information for the discontinued operations included in the Consolidated Statements of Operations (in thousands):

	December 22, 2013
	FSX Service		Logistics		Total
Operating revenue	$	3	$	—	$	3
Operating income		2,333		—		2,333
Net income		1,421		—		1,421

	December 23, 2012
	FSX Service			Logistics		Total
Operating revenue	$	490		$	—	$	490
Restructuring charge		14,113			—		14,113
Operating loss		(16,115	)		—		(16,115	)
Net loss		(20,295	)		—		(20,295	)

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	December 25, 2011
	FSX Service			Logistics		Total
Operating revenue	$	177,958		$	13,762	$	191,720
Restructuring charge		119,314			—		119,314
Operating loss		(180,002	)		2,114		(177,888	)
Net (loss) income		(177,793	)		1,570		(176,223	)

The following table presents summarized cash flow information for the discontinued operations included in the Consolidated Statements of Cash Flows (in thousands):

	December 22, 2013
	FSX Service		Logistics		Total
Cash provided by operating activities	$	1,806	$	—	$	1,806
Cash provided by in investing activities		—		—		—
Change in cash from discontinued operations	$	1,806	$	—	$	1,806

	December 23, 2012
	FSX Service			Logistics		Total
Cash (used in) provided by operating activities	$	(26,030	)	$	319	$	(25,711	)
Cash provided by investing activities		6,000			—		6,000
Change in cash from discontinued operations	$	(20,030	)	$	319	$	(19,711	)

	December 25, 2011
	FSX Service			Logistics			Total
Cash used in operating activities	$	(54,527	)	$	3,939		$	(50,588	)
Cash used in investing activities		(647	)		(58	)		(705	)
Change in cash from discontinued operations	$	(55,174	)	$	3,881		$	(51,293	)

7. Property and Equipment

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

	December 22, 2013				December 23, 2012
	Historical Cost		Net Book Value		Historical Cost		Net Book Value
Vessels and vessel improvements	$	227,705	$	129,384	$	156,705	$	63,855
Containers		39,894		24,710		35,604		20,573
Chassis		20,435		11,847		13,745		5,626
Cranes		27,409		12,088		28,070		13,371
Machinery & equipment		34,367		11,784		32,088		10,535
Facilities & land improvement		30,065		21,171		29,862		22,508
Software		24,177		1,041		23,562		1,308
Construction in progress		14,813		14,813		22,274		22,274
Total	$	418,865	$	226,838	$	341,910	$	160,050

On January 31, 2013, the Company, through its newly-formed subsidiary Horizon Alaska, acquired off of charter the Vessels for a purchase price of $91.8 million. The charter for the Vessels was due to expire in January 2015. For each chartered vessel, the Company generally had the following options in connection with the expiration of the charter: (i) purchase the vessel for its fixed price or fair market value, (ii) extend the charter for

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an agreed upon period of time at a fixed price or fair market value charter rate or, (iii) return the vessel to its owner. The $91.8 million purchase price was partially offset by certain liabilities, including an unfavorable lease liability and accrued vessel rent, to arrive at the Vessels’ carrying value as of the purchase date of $75.2 million.

The majority of depreciation expense is related to vessels. Depreciation expense related to vessels was $13.4 million, $9.7 million and $10.4 million for the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively. Depreciation expense related to capitalized software was $0.9 million, $1.0 million and $1.7 million for the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively. Depreciation expense related to assets recorded under capital lease was $1.4 million, $0.9 million and $0.6 million during the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively.

8. Intangible Assets

Intangible assets other than goodwill consist of the following (in thousands):

	December 22, 2013			December 23, 2012
Customer contracts/relationships	$	141,430		$	141,430
Trademarks		63,800			63,800
Deferred financing costs		15,691			13,781
Total intangibles with definite lives		220,921			219,011
Less: accumulated amortization		(185,767	)		(170,438	)
Total intangible assets, net	$	35,154		$	48,573

Estimated annual amortization expense associated with the Company’s definite lived intangible assets for each of the succeeding five fiscal years is as follows (in thousands):

Fiscal Year Ending
2014	$	9,863
2015		7,638
2016		7,101
2017		4,253
2018		4,253

Due to the announced shutdown of the Company’s FSX service and deterioration in earnings during 2011, the Company recorded an estimated goodwill impairment charge of $117.5 million in the fiscal third quarter ended September 25, 2011. The impairment charge represented the Company’s best estimate of the interim goodwill impairment. The Company recorded an estimated charge, because it had not yet completed its interim goodwill impairment analysis due to complexities involved in determining the implied fair value of its goodwill. The Company completed its interim goodwill impairment analysis during the fourth quarter of 2011 and recorded an adjustment to decrease the estimated goodwill impairment charge by $2.2 million. The carrying value of goodwill and accumulated goodwill impairment charges as of the end of 2011 was $198.8 million and $135.9 million, respectively. There have been no goodwill impairment charges since 2011.

The Company used the income approach, specifically a discounted cash flow method, to derive the fair value of the Company’s reporting unit for goodwill impairment assessment, because there are not observable inputs available (Level 3 hierarchy as defined by ASC 820, Fair Value Measurement). This approach calculates fair value by estimating the after-tax cash flows attributable to the Company’s reporting unit and then discounts the after-tax cash flows to a present value using a risk-adjusted discount rate. The Company selected this method as the most meaningful in assessing goodwill for impairment, because it most reasonably measures the Company’s income producing assets. The Company considered using the market approach and the cost approach,

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but concluded they are not appropriate in valuing its reporting unit given the lack of relevant market comparisons available for application of the market approach and the inability to reasonably replicate the value of the specific assets within its reporting unit for application of the cost approach. However, market approach information was incorporated into the Company’s test to ensure the reasonableness of the Company’s conclusions on estimated value under the income approach.

In applying the income approach to its accounting for goodwill, the Company made assumptions about the amount and timing of future expected cash flows, vessel replacement plans, terminal value growth rates and the discount rate. The amount and timing of future cash flows within the discounted cash flow analysis is based on the Company’s most recent operational budgets, long range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period in the Company’s discounted cash flow analysis (the terminal period) and reflects the Company’s best estimate for perpetual growth of its reporting unit. The Company used a discount rate of 15% to apply to the reporting unit’s future expected cash flows in the terminal period as the discount rate represents the best estimate of the Company’s weighted-average costs of capital at the goodwill impairment assessment date. The discount rate used in the estimate of fair value considered the Company’s actual cost of capital on the October 5, 2011 comprehensive refinancing date (see Note 3 for further discussion).

The Company completed its interim goodwill impairment analysis in the fourth quarter of 2011 and determined the actual amount of goodwill impairment for 2011. The Company’s impairment analysis indicated the fair value of long term assets, including property, plant, and equipment, and customer contracts, exceeded book value. Thus, the goodwill impairment was a result of both the deterioration in earnings and the appreciation in value of certain of the Company’s underlying assets. The 2011 goodwill impairment charge is included in operating expenses in the accompanying consolidated statement of operations.

The Company’s performed its annual goodwill impairment test during the fourth quarter of 2013 and 2012. Fair value, as calculated using the methodology above, exceeded book value and step two was not necessary.

9. Other Accrued Liabilities

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

	December 22, 2013		December 23, 2012
Vessel operations	$	12,286	$	14,592
Payroll and employee benefits		16,101		13,409
Marine operations		5,382		7,677
Terminal operations		8,477		8,765
Fuel		5,193		5,546
Interest		6,817		4,946
Legal settlements		4,382		6,500
Restructuring		587		4,180
Other liabilities		18,181		21,743
Total other accrued liabilities	$	77,406	$	87,358

The Company has recorded certain of its legal settlements at their net present value and is recording accretion of the liability balance through interest expense. In addition to the current accrued liabilities related to legal settlements, the Company also has commitments to make payments after December 22, 2014. The Company is required to make payments related to the plea agreement with the Antitrust Division of the Department of Justice of $4.0 million on or before March 24, 2015 and $4.0 million on or before March 21, 2016, both of which are included in other long term liabilities.

F-24

10. Fair Value Measurement

U.S. accounting standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value. The three levels of inputs used to measure fair value are as follows:

Level 1:	Observable inputs such as quoted prices in active markets
Level 2:	Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3:	Unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions

As of December 22, 2013, the Company’s liabilities measured at fair value on a recurring basis are as follows:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Conversion features within Series A Notes (Note 3)	$	—	$	—	$	120	$	120
Total liabilities	$	—	$	—	$	120	$	120

As of December 23, 2012, the Company’s liabilities measured at fair value on a recurring basis are as follows:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Conversion features within Series A Notes (Note 3)	$	—	$	—	$	392	$	392
Total liabilities	$	—	$	—	$	392	$	392

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11. Net (Loss) Income Per Common Share

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted daily average number of shares of common stock outstanding during the period. In periods when the Company generates net income from continued operations, diluted net (loss) income per share is based upon the weighted daily average number of shares of common stock outstanding for the period plus dilutive potential common shares, including stock options, restricted stock units, and warrants to purchase common stock, using the treasury-stock method and from convertible stock using the “if converted” method (in thousands, except per share amounts):

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
Numerator:
Loss from continuing operations	$	(33,354	)	$	(74,403	)	$	(53,194	)
Income (loss) from discontinued operations		1,421			(20,295	)		(176,223	)
Net loss	$	(31,933	)	$	(94,698	)	$	(229,417	)
Denominator:
Denominator for basic loss per common share:
Weighted average shares outstanding		36,498			22,794			1,464
Effect of dilutive securities:
Stock-based compensation		—			—			—
Warrants		—			—			—
Denominator for diluted net loss per common share		36,498			22,794			1,464
Basic net loss per common share from continuing operations	$	(0.91	)	$	(3.26	)	$	(36.33	)
Basic net income (loss) per common share from discontinued operations		0.04			(0.89	)		(120.37	)
Basic net loss per common share	$	(0.87	)	$	(4.15	)	$	(156.70	)
Diluted net loss per common share from continuing operations	$	(0.91	)	$	(3.26	)	$	(36.33	)
Diluted net income (loss) per common share from discontinued operations		0.04			(0.89	)		(120.37	)
Diluted net loss per common share	$	(0.87	)	$	(4.15	)	$	(156.70	)

Warrants outstanding to purchase 52.6 million, 57.2 million and 0.9 million common shares have been excluded from the denominator during the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively, as the impact would be anti-dilutive. In addition, a total of 5.9 million and 2.9 million shares related to RSUs have been excluded from the denominator during the years ended December 22, 2013 and December 23, 2012, respectively, as the impact would be anti-dilutive.

Certain of the Company’s unvested stock-based awards during 2012 and 2011 contained non-forfeitable rights to dividends. In periods when the Company generates net income from continuing operations, shares are included in the denominator for these participating securities. However, in periods when the Company generates a net loss from continuing operations, shares are excluded from the denominator for these participating securities as the impact would be anti-dilutive. A total of 3 thousand and 5 thousand shares have been excluded from the denominator for basic net loss per share during the years ended December 23, 2012 and December 25, 2011, respectively.

On August 27, 2012, the Company adopted a rights plan (the “Rights Plan”) intended to avoid an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, and thereby preserve the current ability of the Company to utilize certain net operating loss carryovers and other tax benefits of the Company. As part of the Rights Agreement, the Company authorized and declared a dividend

F-26

distribution of one right (a “Right”) for each outstanding share of Common Stock to stockholders of record at the close of business on September 7, 2012. Each Right entitles the holder to purchase from the Company a unit consisting of one ten-thousandth of a share (a “Unit”) of Series A Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”) at a purchase price of $8.00 per Unit, subject to adjustment (the “Purchase Price”). Until a Right is exercised, the holder thereof, as such, will have no separate rights as a stockholder of the Company, including the right to vote or to receive dividends in respect of Rights. The issuance of the Rights alone does not cause any change in the number of shares deliverable upon the exercise of the Company’s outstanding warrants or convertible notes, or the exercise price or conversion price (as applicable) thereof. The Company intends to (i) include in its proxy statement for the Company’s 2014 Annual Meeting of Stockholders a proposal soliciting stockholder approval of the Rights Plan or (ii) repeal the Rights Plan prior to the 2014 Annual Meeting. In the event that the Company elects to include a proposal to approve the Rights Plan in the proxy statement, and the Company does not receive the affirmative vote of the majority of shares present in person or represented by proxy at the 2014 Annual Meeting of Stockholders and entitled to vote on the matter, then the Company intends to take action to repeal the Rights Plan.

12. Leases

The Company leases certain equipment and facilities under operating lease agreements. Non-cancelable, long-term leases generally include provisions for maintenance, options to purchase at fair value and to extend the terms. Rent expense under operating lease agreements totaled $51.2 million, $71.3 million and $110.6 million for the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively.

Future minimum lease obligations at December 22, 2013 are as follows (in thousands):

Fiscal Year Ending December	Non-Cancelable Operating Leases		Capital Leases
2014	$	49,702	$	4,730
2015		48,283		4,685
2016		13,308		3,712
2017		9,109		1,685
2018		6,872		42
Thereafter		9,709		—
Total future minimum lease obligation	$	136,983		14,854
Less: amounts representing interest				(2,439	)
Present value of future minimum lease obligation				12,415
Current portion of capital lease obligation				(3,598	)
Long-term portion of capital lease obligation			$	8,817

13. Employee Benefit Plans

Savings Plans

The Company provides a 401(k) Savings Plan for substantially all of its employees who are not part of collective bargaining agreements. Under provisions of the savings plan, an employee is immediately vested with respect to Company contributions. Historically, the Company has matched 100% of employee contributions up to 6% of qualified compensation. However, during the fourth quarter of 2009, the Company reduced its match to 50% of employee contributions up to 6% of qualified compensation. At the beginning of 2012, the Company reinstated the 100% match of employee contributions of up to 6% of qualified compensation. The cost for this benefit totaled $1.8 million during each of the years ended December 22, 2013 and December 23, 2012 and $1.0 million for the year ended December 25, 2011. The Company also administers a 401(k) plan for certain union employees with no Company match.

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Pension and Post-Retirement Benefit Plans

The Company provides pension and post-retirement benefit plans for certain of its union workers. Each of the plans is described in more detail below.

Pension Plans

The Company sponsors a defined benefit plan covering approximately 30 current and retired union employees as of December 22, 2013. The plan provides for retirement benefits based only upon years of service. Employees whose terms and conditions of employment are subject to or covered by the collective bargaining agreement between Horizon Lines and the International Longshore & Warehouse Union Local 142 are eligible to participate once they have completed one year of service. Contributions to the plan are based on the projected unit credit actuarial method and are limited to the amounts that are currently deductible for income tax purposes. The Company recorded net periodic benefit costs of $0.8 million, $0.6 million, and $0.7 million during the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively. The plan was underfunded by $2.5 million and $2.9 million at December 22, 2013 and December 23, 2012, respectively.

The HSI pension plan covering approximately 50 salaried employees was frozen to new entrants as of December 31, 2005. Contributions to the plan are based on the projected unit credit actuarial method and are limited to the amounts that are currently deductible for income tax purposes. The Company recorded net periodic benefit costs of $0.2 million, $0.3 million, and $0.2 million during the years ended December 22, 2013, December 23, 2012 and December 25, 2011, respectively. The plan was underfunded by $1.8 million and $3.1 million at December 22, 2013 and December 23, 2012, respectively.

Post-retirement Benefit Plans

In addition to providing pension benefits, the Company provides certain healthcare (both medical and dental) and life insurance benefits for eligible retired members (“post-retirement benefits”). For eligible employees hired on or before July 1, 1996, the healthcare plan provides for post-retirement health coverage for an employee who, immediately preceding his/her retirement date, was an active participant in the retirement plan and has attained age 55 as of his/her retirement date. For eligible employees hired after July 1, 1996, the plan provides post-retirement health coverage for an employee who, immediately preceding his/her retirement date, was an active participant in the retirement plan and has attained a combination of age and service totaling 75 years or more as of his/her retirement date. The net periodic benefit costs related to the post-retirement benefits were $0.6 million during each of the years ended December 22, 2013 and December 23, 2012, and $0.7 million during the year ended December 25, 2011. The post-retirement benefit plan was underfunded by $5.4 million and $6.1 million at December 22, 2013 and December 23, 2012, respectively.

Effective June 25, 2007, the HSI plan provides for post-retirement medical, dental and life insurance benefits for salaried employees who had attained age 55 and completed 20 years of service as of December 31, 2005. Any salaried employee already receiving post-retirement medical coverage as of June 25, 2007 will continue to be covered by the plan. For eligible union employees hired on or before July 1, 1996, the healthcare plan provides for post-retirement medical coverage for an employee who, immediately preceding his/her retirement date, was an active participant in the retirement plan and has attained age 55 as of his/her retirement date. For eligible union employees hired after July 1, 1996, the plan provides post-retirement health coverage for an employee who, immediately preceding his/her retirement date, was an active participant in the retirement plan and has attained age 55 and has a combination of age and service totaling 75 years or more as of his/her retirement date. The Company recorded net periodic benefit costs of $0.3 million during each of the years ended December 22, 2013 and December 23, 2012, and $0.4 million during the year ended December 25, 2011. The plan was underfunded by $4.8 million and $5.0 million at December 22, 2013 and December 23, 2012, respectively.

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Obligations and Funded Status

	Pension Plans						Post-retirement Benefit Plans
	2013			2012			2013			2012
	(In thousands)
Change in Benefit Obligation:
Beginning obligations	$	(15,619	)	$	(12,184	)	$	(11,122	)	$	(10,077	)
Service cost		(549	)		(452	)		(327	)		(275	)
Interest cost		(638	)		(662	)		(461	)		(522	)
Actuarial (loss) gain		1,635			(2,739	)		1,454			(474	)
Benefits paid		442			418			226			226
Ending obligations		(14,729	)		(15,619	)		(10,230	)		(11,122	)
Change in Plans’ Assets:
Beginning fair value		9,606			8,558			—			—
Actual return on plans’ assets		678			799			—			—
Employer contributions		589			667			—			—
Benefits paid		(442	)		(418	)		—			—
Ending fair value		10,431			9,606			—			—
Funded status at end of year	$	(4,298	)	$	(6,013	)	$	(10,230	)	$	(11,122	)

Net Periodic Benefit Cost

	Pension Plans						Post-retirement Benefit Plans
	2013			2012			2013			2012
	(In thousands)
Service cost	$	549		$	452		$	327		$	275
Interest cost		638			662			461			522
Expected return on plan assets		(715	)		(640	)		—			—
Amortization of prior service cost		254			254			103			103
Amortization of transition obligation		102			102			—			—
Amortization of loss (gain)		170			137			(63	)		(70	)
Net periodic benefit cost	$	998		$	967		$	828		$	830

Rate Assumptions

	Pension Benefits						Post-retirement Benefits
	2013			2012			2013			2012
Weighted-average discount rate used in determining net periodic cost		4.2	%		5.3	%		4.2	%		5.3	%
Weighted-average expected long-term rate of return on plan assets in determination of net periodic costs		7.5	%		7.5	%		0.0	%		0.0	%
Weighted-average rate of compensation increase(1)		0.0	%		0.0	%		0.0	%		0.0	%
Weighted-average discount rate used in determination of projected benefit obligation		4.8	%		4.2	%		4.9	%		4.2	%
Assumed health care cost trend:
Initial trend		N/A			N/A			7.5	%		8.0	%
Ultimate trend rate		N/A			N/A			5.0	%		4.5	%

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

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For every 1% increase in the assumed health care cost trend rate, service and interest cost will increase $0.2 million and the Company’s benefit obligation will increase $1.4 million. For every 1% decrease in the assumed health care cost trend rate, service and interest cost will decrease $0.1 million and the Company’s benefit obligation will decrease $1.1 million. Expected Company contributions during 2014 total $1.3 million, all of which is related to the pension plans. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

Fiscal Year Ending	Pension Benefits		Post-retirement Benefits
2014	$	565	$	326
2015		602		333
2016		607		345
2017		666		378
2018		761		373
2019-2023		4,324		2,087
	$	7,525	$	3,842

The Company’s pension plans’ investment policy and weighted average asset allocations at December 22, 2013 and December 23, 2012 by asset category are as follows:

Asset Category	Pension Benefits at December 22, 2013			Pension Benefits at December 23, 2012
Cash		4	%		3	%
Equity securities		59	%		62	%
Debt securities		37	%		35	%
		100	%		100	%

The objective of the pension plan investment policy is to grow assets in relation to liabilities, while prudently managing the risk of a decrease in the pension plans’ assets. The pension plan management committee has established a target investment mix with upper and lower limits for investments in equities, fixed-income and other appropriate investments. Assets will be re-allocated among asset classes from time-to-time to maintain the target investment mix. The committee has established a target investment mix of 65% equities and 35% fixed-income for the plans. All pension plan assets are classified within Level 1 of the fair value hierarchy.

The expected return on plan assets is based on the asset allocation mix and historical return, taking into account current and expected market conditions.

Other Plans

Under collective bargaining agreements, the Company participates in a number of union-sponsored, multi-employer benefit plans. Payments to these plans are made as part of aggregate assessments generally based on hours worked, tonnage moved, or a combination thereof. Expense for these plans is recognized as contributions are funded.

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The Company participates in the following multi-employer health and benefit plans:

	EIN/Pension Plan Number	5% Contributor	Multi-employer Contributions (in thousands)						Surcharge Imposed	Expiration Date of Collective Bargaining Agreement
Health and Benefits Fund			2013		2012		2011
ILA — PRSSA Welfare Fund	66-0214500 - 501	Yes	$	2,975	$	3,288	$	3,159	No	September 30, 2014
MEBA Medical and Benefits Plan	13-5590515 - 501	Yes		2,569		2,505		2,876	No	June 15, 2022
MM&P Health and Benefit Plan	13-6696938 - 501	Yes		2,115		2,223		2,780	No	June 15, 2017
Alaska Teamster — Employer Welfare Trust	91-6034674 - 501	Yes		2,300		2,740		3,064	No	June 30, 2015
All Alaska Longshore Health and Welfare Trust Fund	91-6070467 - 501	Yes		2,231		2,097		2,112	No	June 30, 2015
Seafarers Health and Benefits Plan(1)	13-5557534 - 501	Yes		5,150		4,845		6,263	No	June 30, 2017
Western Teamsters Welfare Trust	91-6033601 - 501	No		3,282		3,434		2,731	No	March 31, 2013
Office and Professional Employees Welfare Fund	23-7120690 - 501	No		127		116		139	No	November 9, 2014
Stevedore Industry Committee Welfare Benefit Plan	99-0313967 - 501	Yes		2,982		3,074		3,265	No	June 30, 2014
			$	23,731	$	24,322	$	26,389

(1) Contributions made to the Seafarers Health and Benefits Plan are re-allocated to the Seafarers Pension Fund at the discretion of the plan Trustee.

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The Company participates in the following multi-employer pension plans:

	EIN/Pension Plan Number	Pension Protection Act Zone Status		FIP/RP Status Pending/ Implemented	5% Contributor	Multi-employer Contributions (in thousands)						Surcharge Imposed	Expiration Date of Collective Bargaining Agreement
Pension Fund		2013	2012			2013		2012		2011
ILA-PRSSA Pension Fund	51-0151862 - 001	Green	Green	No	Yes	$	2,967	$	2,698	$	2,391	No	September 30, 2014
MEBA Pension Trust	51-6029896 - 001	Green	Green	No	No		2,624		2,191		—	No	June 15, 2022
Masters, Mates and Pilots Pension Plan	13-6372630 - 001	Green	Green	No	Yes		2,602		3,435		4,457	No	June 15, 2017
Masters, Mates and Pilots Adjustable Pension Plan	46-2237700 - 001	N/A	N/A	No	Yes		488		—		—		June 15, 2017
Local 153 Pension Fund	13-2864289 - 001	Red	Red	Implemented	No		311		275		330	No	November 9, 2014
Alaska Teamster- Employer Pension Plan	92-6003463 - 024	Red	Red	Implemented	Yes		2,648		3,340		3,210	Yes	June 30, 2015
All Alaska Longshore Pension Plan	91-6085352 - 001	Green	Green	No	Yes		960		876		846	No	June 30, 2015
Seafarers Pension Fund(1)	13-6100329 - 001	Green	Green	No	Yes		—		—		—	No	June 30, 2017
Western Conference of Teamsters Pension Plan	91-6145047 - 001	Green	Green	No	No		3,899		4,239		4,717	No	March 31, 2013
Western Conference of Teamsters Supplemental Benefit Trust	95-3746907 - 001	Green	Green	No	Yes		361		340		203	No	March 31, 2013
Western States Office and Professional Employees Pension Fund	94-6076144 - 001	Red	Red	Implemented	No		96		71		81	No	November 9, 2014
Hawaii Stevedoring Multiemployer Pension Plan	99-0314293 - 001	Yellow	Yellow	Implemented	Yes		3,310		3,151		2,631	No	June 30, 2014
Hawaii Terminals Multiemployer Pension Plan	20-0389370 - 001	Yellow	Yellow	Implemented	No		281		237		277	No	June 30, 2014
NYSA-ILA Pension Trust Fund and Plan(2)	13-5652028 - 001	Red	Red	Implemented	No		5,573		1,072		852	Yes	N/A
						$	26,120	$	21,925	$	19,995

(1) The Company does not make contributions directly to the Seafarers Pension Plan. Instead, contributions are made to the Seafarers Health and Benefits Plan and subsequently re-allocated to the Seafarers Pension Fund at the discretion of the plan Trustee.

(2) The Company does not have a collective bargaining agreement with the NYSA-ILA Pension Trust Fund and Plan. Contributions made during 2013 primarily related to withdrawal from the Port of Elizabeth’s multiemployer pension plan.

14. Stock-Based Compensation

Stock-based compensation costs are measured at the grant date, based on the estimated fair value of the award, and are recognized as an expense in the income statement over the requisite service period. Compensation costs related to stock options, restricted shares and restricted stock units (“RSUs”) granted under the Amended and Restated Equity Incentive Plan (the “Plan”), the 2009 Incentive Compensation Plan (the “2009 Plan”) the 2012 Incentive Compensation Plan (“the 2012 Plan”), and purchases under the Employee Stock Purchase Plan, as amended (“ESPP”) are recognized using the straight-line method, net of estimated forfeitures. Under the Plan, up to an aggregate of 123,546 shares of common stock may be issued, of which, no shares are available for future issuance as of December 22, 2013. Under the 2009 Plan, up to an aggregate of 40,000 shares of common stock may be issued, of which, 37,390 shares are available for future issuance as of December 22, 2013. Under the 2012 Plan, up to an aggregate of 4,450,000 shares of common stock may be issued, of which, 914,166 shares are available for future issuance as of December 22, 2013. Stock options and restricted shares granted to employees under the Plan and the 2009 Plan typically cliff vest and become fully exercisable on the third anniversary of the grant date, provided the employee who was granted such options/restricted shares is continuously employed by the Company or its subsidiaries through such date, and provided any performance based criteria, if any, are met. RSUs granted under the 2012 Plan typically contain a graded vesting schedule with a portion vesting each year over a three-year period.

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The following compensation costs are included within selling, general, and administrative expenses on the consolidated statements of operations (in thousands):

	Fiscal Years Ended
	December 22, 2013		December 23, 2012		December 25, 2011
Restricted stock units	$	2,764	$	2,006	$	81
Restricted stock		131		163		586
Stock options		—		—		60
Employee stock purchase plan		—		—		31
Total	$	2,895	$	2,169	$	758

Restricted Stock Units

The following table details grants of RSUs during 2012 and 2013:

Grant Date	Recipient	Total RSUs Outstanding		Vesting Criteria	RSUs Vested as of December 22, 2013		Potential Future Vesting Dates
							December 31, 2013		March 31, 2014		December 31, 2014		March 31, 2015		June 30, 2015
July 5, 2012	CEO		1,500,000	Time-Based		250,000		500,000		—		500,000		—		250,000
July 5, 2012	CEO		1,500,000	Performance-Based		—		—		—		1,500,000		—		—
July 25, 2012	Board of Directors		900,000	Time-Based		180,000		—		360,000		—		360,000		—
July 25, 2012	Management		1,109,584	Time-Based		221,917		—		443,833		—		443,834		—
July 25, 2012	Management		1,109,583	Performance-Based		—		—		—		—		1,109,583		—
December 26, 2012	Management		120,834	Time-Based		—				72,500		—		48,334		—
December 26, 2012	Management		120,833	Performance-Based		—		—		—		—		120,833		—
June 1, 2013	Management		87,500	Time-Based		—				52,500		—		35,000		—
June 1, 2013	Management		87,500	Performance-Based		—		—		—		—		87,500		—
						651,917		500,000		928,833		2,000,000		2,205,084		250,000

The grant date fair value of the RSUs granted during 2012 and 2013 was determined using the closing price of the Company’s common stock on the grant date. The time-based RSUs will vest solely if the employee remains in continuous employment with the Company. A portion of the performance-based RSUs would have vested on March 31, 2013 and March 31, 2014, however, the Company did not meet the performance goals established for 2012 or 2013. Accordingly, the Company did not record any expense during 2012 or 2013 related to these performance-based RSUs. Per the terms of the agreement, if any of the performance-based RSUs do not vest on their assigned performance date solely because the performance goals are not met, then such RSUs shall remain outstanding and shall be eligible to vest on subsequent performance dates to the extent performance goals are established and met for such subsequent year. The performance-based RSUs will vest on December 31, 2014 and March 31, 2015 if certain performance goals for 2014 are met and the employee remains in continuous employment with the Company.

Each vested RSU shall be settled within 30 days following termination of the employment with the Company or termination of the director’s service as a member of the Board of Directors. All of the vested RSUs granted to the Company’s Chief Executive Officer and members of its Board of Directors shall be settled in shares of the Company’s common stock. Fifty percent of the vested RSUs granted to members of the Company’s management shall be settled in shares of the Company’s common stock and the remaining 50% of such vested RSUs shall be settled, in the discretion of the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”), either in shares of the Company’s common stock, cash or any combination thereof. The amount of any cash is to be determined based on the value of a share of the Company’s common stock on the settlement date.

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A summary of the status of the Company’s RSU awards for the fiscal year 2013 is presented below:

Restricted Stock Units	Number of Units			Weighted- Average Fair Value at Grant Date
Nonvested at December 23, 2012		6,119,167		$	1.87
Granted		416,667			1.51
Vested		(651,917	)		1.86
Forfeited		—			—
Nonvested at December 22, 2013		5,883,917		$	1.85

As of December 22, 2013, there was $6.9 million of unrecognized compensation expense related to the RSUs, which is expected to be recognized over a weighted-average period of 1.3 years.

Restricted Stock

A summary of the status of the Company’s restricted stock awards for the fiscal year 2013 is presented below:

Restricted Shares	Number of Shares			Weighted- Average Fair Value at Grant Date
Nonvested at December 23, 2012		8,327		$	134.25
Granted		—			—
Vested		(4,144	)		123.00
Forfeited		(840	)		365.75
Nonvested at December 22, 2013		3,343		$	89.75

As of December 22, 2013, there was $22 thousand of unrecognized compensation expense related to all restricted stock awards, all of which is expected to be recognized during the first quarter of 2014.

Stock Options

Stock options granted under the Plan have been granted at an option price equal to the closing market value of the stock on the date of the grant. Options granted under the Plan have 10-year contractual terms and typically become exercisable after one or three years after the grant date, subject to continuous service with the Company. The Compensation Committee approves the grants of nonqualified stock options by the Company, pursuant to the Plan. These options are granted on such approval date. The Company has not granted any stock options since 2008. As of December 22, 2013, there was no unrecognized compensation costs related to stock options.

F-34

A summary of option activity for the fiscal year 2013 under the Plan is presented below:

Options	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (000’s)
Outstanding at December 23, 2012		36,059		$	390.75		4.34	$	—
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(9,230	)		357.50
Outstanding, vested and exercisable at December 22, 2013		26,829		$	402.25		2.55	$	—

Employee Stock Purchase Plan

On April 19, 2006, the Board of Directors voted to implement an employee stock purchase plan (as amended, the “ESPP”) effective July 1, 2006. The Company had reserved 12,354 shares of its common stock for issuance under the ESPP. On June 2, 2009, the Company’s stockholders approved the 2009 Employee Stock Purchase Plan (“2009 ESPP”). The 2009 ESPP reserved an additional 24,000 shares of its common stock for future purchases. As of December 22, 2013, there were 10,162 shares of common stock reserved for issuance under the ESPP. Effective April 1, 2011, the Company suspended the ESPP. There will be no stock-based compensation expense recognized in connection with the ESPP until such time the ESPP is reinstated.

15. Income Taxes

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversal of deferred tax liabilities) during the periods in which those temporary differences will become deductible. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses and its outlook for future years.

During 2009, the Company determined that it was unclear as to the timing of when it will generate sufficient taxable income to realize its deferred tax assets. Accordingly, the Company recorded a valuation allowance against its deferred tax assets. The valuation allowance is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance. In addition, until such time the Company determines it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets, income tax benefits associated with future period losses will be fully reserved.

As a result of the loss from continuing operations and income from discontinued operations and other comprehensive income during 2013, the Company was required to record a tax benefit from continuing operations with an offsetting tax expense from discontinued operations and other comprehensive income. For 2013, the Company recorded a tax benefit in continuing operations of $2.3 million. As such, the Company’s tax benefit recorded in continuing operations will approximate the income from discontinued operations and other comprehensive income multiplied by the statutory tax rate during 2013.

During 2012, the Company completed the unwind of its former interest rate swap. The interest rate swap and its tax effects were initially recorded in other comprehensive income and any changes in market value of the interest rate swap along with their tax effects were recorded directly to other comprehensive income. However, at the time the Company established its valuation allowance against its net deferred tax assets, the impact was

F-35

recorded entirely against continuing operations, thereby establishing disproportionate tax effects within other comprehensive income for the interest rate swap. During 2012, to eliminate the disproportionate tax effects from other comprehensive income, the Company recorded a charge to other comprehensive income in the amount of $1.6 million and an income tax benefit of $1.6 million.

During 2012, the Company recognized the impact of the conversion of the Series A Notes and Series B Notes to equity and the Global Termination Agreement with SFL. These significant events had a minimal impact on the Company’s Condensed Statement of Operations during 2012, as the Company continues to recognize a full valuation allowance against virtually all of its net deferred tax assets for U.S. federal and state tax purposes. However, the change for such significant events resulted in the elimination of substantially all of the deferred tax liabilities related to the debt instruments. After the impact of the valuation allowance, the Company recorded a decrease to its current deferred tax asset of $2.4 million and an offsetting decrease to its noncurrent deferred tax liability of $2.4 million during 2012.

During 2006, the Company elected the application of tonnage tax. Prior to the establishment of a full valuation allowance, the Company’s effective tax rate was impacted by the Company’s income from qualifying shipping activities as well as the income from the Company’s non-qualifying shipping activities and fluctuated based on the ratio of income from qualifying and non-qualifying activities.

During 2012, after evaluating the merits and requirements of the tonnage tax regime, the Company revoked its election under subchapter R of the tonnage tax regime effective for the tax years beginning January 1, 2012. As a result, the activities attributable to the Company’s operation of the vessels in the Puerto Rico tradelane are no longer eligible as qualifying shipping activities under the tonnage tax regime, and therefore, the income (loss) derived from the Puerto Rico vessels will no longer be excluded from corporate income tax for U.S. federal income tax purposes. The Company’s decision was made based on several factors, including the expected economic challenges in Puerto Rico in the foreseeable future. Under the eligibility requirements of the tonnage tax regime, the Company may not elect back into the tonnage tax regime until five years following its revocation. The Company will reevaluate the merits of the tonnage tax regime at such time in the future.

The Company accounted for the revocation of the tonnage tax as a change in tax status of its qualifying shipping activities. Accordingly, the Company recognized the impact of the revocation of its tonnage tax election in the first quarter of 2012, the period for which the Company filed its revocation statement with the Internal Revenue Service. The revocation had a minimal impact on the Company’s Condensed Consolidated Statement of Operations during 2012. The change in tax status resulted in the revaluation of the Company’s deferred taxes. The overall decrease in the Company’s net deferred tax assets was approximately $3.0 million, before the impact of the valuation allowance. After offsetting the decrease in net deferred tax assets with the valuation allowance, the impact on the Company’s net deferred taxes was minimal.

The Company’s effective tax rate for the years ended December 22, 2013, December 23, 2012 and December 25, 2011 was 5.5%, 1.9% and 0.2%, respectively.

F-36

Income tax (benefit) expense is as follows (in thousands):

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
Current:
Federal	$	39		$	—		$	35
State/territory		145			(288	)		(235	)
Total current		184			(288	)		(200	)
Deferred:
Federal		(2,029	)		(1,537	)		—
State/territory		(80	)		343			326
Total deferred		(2,109	)		(1,194	)		326
Income tax (benefit) expense	$	(1,925	)	$	(1,482	)	$	126

The difference between the income tax (benefit) expense and the amounts computed by applying the statutory federal income tax rates to earnings before income taxes are as follows (in thousands):

	Fiscal Years Ended
	December 22, 2013			December 23, 2012			December 25, 2011
Income tax benefit at statutory rates:	$	(12,350	)	$	(26,606	)	$	(18,574	)
State/territory, net of federal income tax (benefit) expense (excluding valuation allowance)		(262	)		(4,202	)		716
Qualifying shipping income		—			(449	)		4,615
Fines and penalties		825			431			(1,908	)
Goodwill impairment		—			—			38,197
Cancellation of debt		—			2,677			5,553
Gain on change in value of debt conversion features		—			(6,792	)		(14,413	)
Valuation allowance		11,369			34,031			(16,007	)
Interest rate swap		—			(1,573	)		—
Intraperiod allocation		(2,325	)		—			—
Other Items		818			1,001			1,947
Income tax (benefit) expense	$	(1,925	)	$	(1,482	)	$	126

F-37

The components of deferred tax assets and liabilities are as follows (in thousands):

	December 22, 2013			December 23, 2012
Deferred tax assets:
Net operating losses, AMT carryforwards, and state credit carryforwards	$	76,077		$	63,056
Allowance for doubtful accounts		1,701			1,340
Post-retirement benefits		7,984			8,998
Lease termination payment		32,538			33,073
Leases		—			5,510
Other		9,495			15,538
Valuation allowances		(90,135	)		(81,036	)
Total deferred tax assets		37,660			46,479
Deferred tax liabilities:
Depreciation		(26,141	)		(30,428	)
Capital construction fund		(5,598	)		(6,364	)
Intangibles		(3,864	)		(7,117	)
Other		(2,308	)		(2,606	)
Total deferred tax liabilities		(37,911	)		(46,515	)
Net deferred tax liability	$	(251	)	$	(36	)

The Company has net operating loss carryforwards for federal income tax purposes in the amount of $233.3 million and $205.2 million as of December 22, 2013 and December 23, 2012, respectively. In addition, the Company has net operating loss carryforwards for state income tax purposes in the amount of $80.3 million and $68.1 million as of December 22, 2013 and December 23, 2012, respectively. The Federal and state net operating loss carryforwards begin to expire in 2025 and 2019, respectively. Furthermore, the Company has an alternative minimum tax credit carryforward with no expiration period in the amount of $1.4 million as of December 22, 2013 and December 23, 2012. Net operating loss credits generated from tax losses in Guam begin to expire in 2029. The Company has recorded a valuation allowance against the deferred tax assets attributable to the net operating losses generated.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2013		2012		2011
Beginning balance	$	15,428	$	15,380	$	13,596
Additions based on tax positions related to the current year		—		—		860
Additions for tax positions of prior years		—		48		924
Reductions for tax positions of prior years		—		—		—
Ending balance	$	15,428	$	15,428	$	15,380

As a result of the valuation allowance, none of the unrecognized tax benefits, if recognized, would affect the effective tax rate. The Company does not expect that there will be a significant increase or decrease of the total amount of unrecognized tax benefits within the next twelve months.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its income tax expense. During its fiscal years for 2011 through 2013, the Company has not recognized any interest or penalties in its statement of operations. Furthermore, there were no accruals for the payment of interest and penalties at either December 22, 2013 or December 23, 2012.

F-38

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. The tax years which remain subject to examination by major tax jurisdictions as of December 22, 2013 include 2004-2012. The Company’s U.S. federal income tax return for tax year 2011 is currently under audit.

16. Commitments and Contingencies

Legal Proceedings

In May 2013, the U.S. Department of Justice declined to intervene in a qui tam complaint filed in the U.S. District Court for the Central District of California by Mario Rizzo under the Federal False Claims Act. The case was unsealed in May 2013, and we were served with a complaint in June 2013. The case is entitled United States of America, ex rel. Mario Rizzo v. Horizon Lines, LLC et al. The qui tam complaint alleges, among other things, that the Company and another defendant submitted false claims by claiming fuel surcharges in excess of what was agreed by the Department of Defense. The complaint seeks significant damages, penalties and other relief. The Company has filed responsive pleadings and intends to vigorously defend against the allegations set forth in the complaint.

On March 5, 2014, the Company entered into a settlement agreement which resolved pending inquiries of the United States Department of Justice on behalf of the United States Postal Service, the United States Department of Agriculture and the United States Department of Defense (collectively, the “United States”). The settlement agreement relates to a federal qui tam complaint filed by the relator, William B. Stallings, in the United States District Court for the Middle District of Florida, entitled United States of America, ex rel. Stallings v. Sea Star Line, LLC et al., pursuant to the qui tam provisions of the False Claims Act. The claims underlying the qui tam civil complaint were the alleged price fixing of certain ocean transportation contracts between the continental United States and Puerto Rico during the period from April 2002 through April 2008 that involved the United States as a customer. This qui tam action was unsealed on March 6, 2014. The settlement agreement provides that the Company will pay to the United States the total sum of $1.5 million in six different installment payments through April 2015. During the fourth quarter of 2013, the Company recorded a charge of $1.4 million related to this legal settlement, which represents the present value of the expected future payments.

In the ordinary course of business, from time to time, the Company becomes involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo, employees’ personal injury claims, and claims for loss or damage to the person or property of third parties. The Company generally maintains insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company also, from time to time, becomes involved in routine employment-related disputes and disputes with parties with which it has contractual relations. The Company’s policy is to disclose contingent liabilities associated with both asserted and unasserted claims after all available facts and circumstances have been reviewed and the Company determines that a loss is reasonably possible. The Company’s policy is to record contingent liabilities associated with both asserted and unasserted claims when it is probable that the liability has been incurred and the amount of the loss is reasonably estimable.

Standby Letters of Credit

The Company has standby letters of credit, primarily related to its property and casualty insurance programs, as well as customs bonds. On December 22, 2013 and December 23, 2012, these letters of credit totaled $12.9 million and $13.2 million, respectively.

Labor Relations

Approximately 70% of the Company’s total work force is covered by collective bargaining agreements. A collective bargaining agreement, covering approximately 22% of the union workforce expired prior to

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December 22, 2013. The employees covered under this agreement continue to work under the old agreement while we negotiate a new agreement. Our collective bargaining agreements are scheduled to expire as follows: four in 2014, three in 2015, two in 2017, and one in 2022. The agreements scheduled to expire in 2014 represent approximately 31% of the Company’s union work force.

17. Quarterly Financial Data (Unaudited)

Set forth below are unaudited quarterly financial data (in thousands, except per share amounts):

	Fiscal Year 2013
	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
Operating revenue	$	244,491		$	259,784		$	273,663	$	255,372
Operating (loss) income(1)		(4,295	)		15,976			17,918		1,778
(Loss) income from continuing operations	$	(20,073	)	$	(853	)	$	1,603	$	(14,031	)
(Loss) income from discontinued operations(2)		(278	)		(651	)		2,477		(127	)
Net (loss) income(1)(2)	$	(20,351	)	$	(1,504	)	$	4,080	$	(14,158	)
Basic net (loss) income per share from continuing operations	$	(0.58	)	$	(0.02	)	$	0.04	$	(0.36	)
Basic net (loss) income per share from discontinued operations		(0.01	)		(0.02	)		0.07		—
Basic net (loss) income per share	$	(0.59	)	$	(0.04	)	$	0.11	$	(0.36	)
Diluted net (loss) income per share from continuing operations	$	(0.58	)	$	(0.02	)	$	0.02	$	(0.36	)
Diluted net loss per share from discontinued operations		(0.01	)		(0.02	)		0.03		—
Diluted net (loss) income per share	$	(0.59	)	$	(0.04	)	$	0.05	$	(0.36	)

	Fiscal Year 2012
	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
Operating revenue	$	263,354		$	270,939		$	279,604	$	259,825
Operating (loss) income(1)		(6,064	)		1,007			13,222		(3,913	)
(Loss) income from continuing operations	$	(26,802	)	$	(31,140	)	$	1,443	$	(17,904	)
(Loss) income from discontinued operations		(5,707	)		(14,934	)		414		(68	)
Net (loss) income(1)	$	(32,509	)	$	(46,074	)	$	1,857	$	(17,972	)
Basic net (loss) income per share from continuing operations	$	(8.58	)	$	(1.55	)	$	0.05	$	(0.52	)
Basic net (loss) income per share from discontinued operations		(1.83	)		(0.75	)		0.01		—
Basic net (loss) income per share	$	(10.41	)	$	(2.30	)	$	0.06	$	(0.52	)
Diluted net (loss) income per share from continuing operations	$	(8.58	)	$	(1.55	)	$	0.02	$	(0.52	)
Diluted net (loss) income per share from discontinued operations		(1.83	)		(0.75	)		—		—
Diluted net (loss) income per share	$	(10.41	)	$	(2.30	)	$	0.02	$	(0.52	)

(1) The second and third quarter of 2013 include an impairment charge of $2.6 million and $0.7 million, respectively. The first, second, and third quarter of 2013 include a restructuring charge of $4.8 million, $0.4 million, and $1.0 million, respectively. The second and fourth quarter of 2012 include an impairment charge of $0.3 million and $0.1 million, respectively. The fourth quarter of 2012 includes a restructuring charge of $4.3 million.

(2) During 2013, the Company incurred legal and professional fees associated with an arbitration proceeding. The Company was seeking reimbursement of certain costs and expenditures related to previously co-owned assets that were utilized as part of the Company’s FSX service. During the third quarter of 2013, an arbitration panel awarded the Company $3.0 million plus reimbursement of $0.8 million of legal fees and expenses.

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18. Financial Statements of Guarantors

As discussed in Note 3, certain of the Company’s subsidiaries are non-guarantors of outstanding debt instruments. The non-guarantor subsidiaries were formed during 2013. Management has determined that separate complete financial statements of the Guarantors would not be material to users of the financial statements. The following sets forth condensed consolidating financial statements of the guarantor and non-guarantor subsidiaries as of December 22, 2013 and for the year ended December 22, 2013.

Condensed Consolidating Balance Sheet

December 22, 2013

(in thousands)

	Combined Guarantor Subsidiaries			Combined Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	5,236		$	—	$	—		$	5,236
Accounts receivable, net		100,460			—		—			100,460
Materials and supplies		23,369			—		—			23,369
Vessel rent receivable		—			7,884		(7,884	)		—
Deferred tax asset		1,140			—		—			1,140
Other current assets		8,910			5		—			8,915
Total current assets		139,115			7,889		(7,884	)		139,120
Property and equipment, net		145,281			81,557		—			226,838
Goodwill		198,793			—		—			198,793
Intangible assets, net		35,154			—		—			35,154
Due from affiliates		—			1,965		(1,965	)		—
Other long-term assets		24,702			—		—			24,702
Total assets	$	543,045		$	91,411	$	(9,849	)	$	624,607
LIABILITIES AND STOCKHOLDERS’ (DEFICIENCY) EQUITY
Current liabilities:
Accounts payable	$	49,897		$	—	$	—		$	49,897
Current portion of long-term debt, including capital lease		5,848			5,625		—			11,473
Accrued vessel rent		7,884			—		(7,884	)		—
Other accrued liabilities		75,640			1,766		—			77,406
Total current liabilities		139,269			7,391		(7,884	)		138,776
Long-term debt, including capital lease, net of current portion		437,188			67,657		—			504,845
Deferred tax liability		1,391			—		—			1,391
Due to affiliates		1,965			—		(1,965	)		—
Other long-term liabilities		23,387			—		—			23,387
Total liabilities		603,200			75,048		(9,849	)		668,399
Stockholders’ (deficiency) equity:
Preferred stock		—			—		—			—
Common stock		999			—		—			999
Additional paid in capital		368,159			15,914		—			384,073
(Accumulated deficit) retained earnings		(430,340	)		449		—			(429,891	)
Accumulated other comprehensive income		1,027			—		—			1,027
Total stockholders’ (deficiency) equity		(60,155	)		16,363		—			(43,792	)
Total liabilities and stockholders’ (deficiency) equity	$	543,045		$	91,411	$	(9,849	)	$	624,607

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Condensed Consolidating Statement of Operations

Year Ended December 22, 2013

(in thousands)

	Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries		Eliminations			Consolidated
Operating revenue	$	1,033,310		$	14,548	$	(14,548	)	$	1,033,310
Operating expense:
Cost of services (excluding depreciation expense)		880,668			—		(14,548	)		866,120
Depreciation and amortization		30,962			5,888		—			36,850
Amortization of vessel dry-docking		14,701			—		—			14,701
Selling, general and administrative		76,657			52		—			76,709
Restructuring charge		6,324			—		—			6,324
Impairment charge		3,295			—		—			3,295
Legal settlements		1,387			—		—			1,387
Miscellaneous income		(3,910	)		457		—			(3,453	)
Total operating expense		1,010,084			6,397		(14,548	)		1,001,933
Operating income		23,226			8,151		—			31,377
Other expense (income):
Interest expense, net		59,214			7,702		—			66,916
Gain on conversion of debt		(5	)		—		—			(5	)
Gain on change in value of debt conversion features		(271	)		—		—			(271	)
Other expense, net		16			—		—			16
(Loss) income from continuing operations before income tax benefit		(35,728	)		449		—			(35,279	)
Income tax benefit		(1,925	)		—		—			(1,925	)
Net (loss) income from continuing operations		(33,803	)		449		—			(33,354	)
Net income from discontinued operations		1,421			—		—			1,421
Net (loss) income	$	(32,382	)	$	449	$	—		$	(31,933	)

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Condensed Consolidating Statement of Cash Flows

Year Ended December 22, 2013

(in thousands)

	Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities from continuing operations	$	31,167		$	676		$	—	$	31,843
Net cash provided by operating activities from discontinued operations		1,806			—			—		1,806
Cash flows from investing activities:
Purchases of equipment		(21,997	)		(91,849	)		—		(113,846	)
Proceeds from sale of equipment		15,739			—			—		15,739
Net cash flows from investing activities		(6,258	)		(91,849	)		—		(98,107	)
Cash flows from financings activities:
Issuance of debt		20,000			75,000			—		95,000
Borrowing under revolving credit facility		34,300			—			—		34,300
Payments on revolving credit facility		(76,800	)		—			—		(76,800	)
Payments of long-term debt		(2,250	)		—			—		(2,250	)
Payment of financing costs		(5,711	)		—			—		(5,711	)
Payments on capital lease obligations		(2,684	)		—			—		(2,684	)
Intercompany transactions, net		(16,173	)		16,173			—		—
Net cash flows from financing activities		(49,318	)		91,173			—		41,855
Net change in cash from continuing operations		(24,409	)		—			—		(24,409	)
Net change in cash from discontinued operations		1,806			—			—		1,806
Net change in cash		(22,603	)		—			—		(22,603	)
Cash at beginning of year		27,839			—			—		27,839
Cash at end of year	$	5,236		$	—		$	—	$	5,236

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Schedule II

Horizon Lines, Inc.

Valuation and Qualifying Accounts

Years Ended December 2013, 2012 and 2011

(in thousands)

	Beginning Balance		Charged to Cost and Expenses			Deductions			Charged to other Accounts			Ending Balance
Accounts receivable reserve:
Year ended December 22, 2013:
Allowance for doubtful accounts	$	3,325	$	1,280		$	(781	)	$	—		$	3,824
Allowance for revenue adjustments		140		—			(1,203	)		1,223	(1)		160
	$	3,465	$	1,280		$	(1,984	)	$	1,223		$	3,984
Year ended December 23, 2012:
Allowance for doubtful accounts	$	5,766	$	1,596		$	(4,037	)	$	—		$	3,325
Allowance for revenue adjustments		650		—			(2,475	)		1,965	(1)		140
	$	6,416	$	1,596		$	(6,512	)	$	1,965		$	3,465
Year ended December 25, 2011:
Allowance for doubtful accounts	$	6,128	$	2,613		$	(2,975	)	$	—		$	5,766
Allowance for revenue adjustments		632		—			(4,229	)		4,247	(1)		650
	$	6,760	$	2,613		$	(7,204	)	$	4,247		$	6,416
Restructuring costs:
Year ended December 22, 2013	$	4,180	$	6,702		$	(10,295	)	$	—		$	587
Year ended December 23, 2012	$	233	$	4,340		$	(393	)	$	—		$	4,180
Year ended December 25, 2011	$	2,042	$	—		$	(1,809	)	$	—		$	233
Deferred tax assets valuation allowance:
Year ended December 22, 2013	$	81,036	$	10,461		$	—		$	(1,362	)(2)	$	90,135
Year ended December 23, 2012	$	8,392	$	34,325		$	—		$	38,319	(3)	$	81,036
Year ended December 25, 2011	$	16,919	$	(7,207	)	$	—		$	(1,320	)(2)	$	8,392

(1) These amounts are recorded as a reduction to revenue.

(2) Includes $1.4 million and $0.7 million recorded in other comprehensive loss.

(3) Includes $39.3 million related to the valuation allowance on the deferred tax assets previously recorded as discontinued operations.

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