FORM 11-K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27062
A. Full title of the plan and the address of the plan, if different from
that of the issuer named below:
Horizon Bank Employee Stock Ownership Plan
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
Horizon Financial Corp.
1500 Cornwall Avenue
Bellingham, Washington 98226
Financial Statements and Exhibits
- ---------------------------------
(a) Financial Statements
The Horizon Bank Employee Stock Ownership Plan become effective as of
July 1, 1986. Filed as a part of this report on Form 11-K are the audited
financial statements of the Plan as of and for the years ended March 31, 2002
and 2001.
(b) Exhibit 23 Consent of Independent Auditors
Signatures
The Plan. Pursuant to the requirements of the Securities and Exchange Act
of 1934, the trustees (or other persons who administer the employee benefit
plan) have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
/s/V. Lawrence Evans
---------------------------------
Member of the Horizon Bank Compensation
and Retirement Committee
Trustee, Horizon Bank Employee Stock
Ownership Plan
By: /s/V. Lawrence Evans
-----------------------------
V. Lawrence Evans (name)
---------------------------------
Chief Executive Officer (title)
---------------------------------
Horizon Bank (bank)
---------------------------------
Date: September 30, 2002
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Independent Auditor's Report and Financial Statements
With Supplemental Information
March 31, 2002 and 2001
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
MARCH 31, 2002 AND 2001
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PAGE
INDEPENDENT AUDITOR'S REPORT.............................................. 1
FINANCIAL STATEMENTS
Statement of Net Assets Available for Benefits....................... 2
Statement of Changes in Net Assets Available for Benefits............ 3
Notes to Financial Statements........................................ 4-7
SUPPLEMENTAL SCHEDULE
Form 5500, Required Portions of Schedule H........................... 8
INDEPENDENT AUDITOR'S REPORT
To the Board of Trustees
Horizon Bank Employee Stock Ownership Plan
We have audited the statement of net assets available for benefits of Horizon
Bank Employee Stock Ownership Plan (the "Plan") as of March 31, 2002 and 2001,
and the related statement of changes in net assets available for benefits for
the year ended March 31, 2002. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
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 statement of net assets available for Plan benefits
of Horizon Bank Employee Stock Ownership Plan as of March 31, 2002 and 2001,
and the related statement of changes in net assets available for Plan benefits
for the year ended March 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules on page 8
are presented for the purpose of additional analysis and are not a required
part of the basic financial statements but are supplementary information
required by the Department of Labor's Rules and Regulations for Reporting and
Disclosure under the Employee Retirement Income Security Act of 1974. The
supplemental schedules have been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Moss Adams LLP
Bellingham, Washington
August 9, 2002
1
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
MARCH 31, 2002 AND 2001
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2002 2001
----------------------------------- -------------------------------------
Allocated Unallocated Total Allocated Unallocated Total
---------- ----------- ---------- ---------- ----------- -----------
<s> <c> <c> <c> <c> <c> <c>
Assets
Cash and cash equivalents $ 2,028 $ - $ 2,028 $ 1,687 $ - $ 1,687
Investment in Horizon Bank
common stock, at market
value 2,603,345 371,556 2,974,901 1,843,546 355,199 2,198,745
---------- --------- ---------- ---------- ---------- ----------
Total assets 2,605,373 371,556 2,976,929 1,845,233 355,199 2,200,432
---------- --------- ---------- ---------- ---------- ----------
Liabilities
Loan payable to Horizon Bank - 288,413 288,413 - 360,517 360,517
---------- --------- ---------- ---------- ---------- ----------
Total liabilities - 288,413 288,413 - 360,517 360,517
---------- --------- ---------- ---------- ---------- ----------
Net Assets (Deficit) Available
for Benefits $2,605,373 $ 83,143 $2,688,516 $1,845,233 $ (5,318) $1,839,915
========== ========= ========== ========== ========== ==========
See accompanying notes to these financial statements. 2
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HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR YEAR ENDED MARCH 31, 2002
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Allocated Unallocated Total
---------- ------------ ----------
Additions To Net Assets
Employer contributions $ 6,048 $ 97,331 $ 103,379
Dividends on Horizon Bank common stock 106,637 - 106,637
Interest income 321 - 321
Net unrealized appreciation (deprecia-
tion) of Horizon Bank common stock 591,394 88,461 679,855
Allocation of 7,344 shares of Horizon
Bank common stock, at market value 72,104 - 72,104
---------- --------- ----------
Total additions to net assets 776,504 185,792 962,296
---------- --------- ----------
Deductions From Net Assets
Interest expense - 25,227 25,227
Fees 6,048 - 6,048
Withdrawals 10,316 - 10,316
Allocation of 7,344 shares of Horizon
Bank common stock, at market value - 72,104 72,104
---------- --------- ----------
Total deductions from net assets 16,364 97,331 113,695
---------- --------- ----------
Net Increase (Decrease) In Assets 760,140 88,461 848,601
Net Assets (Deficit) Available For Benefits
Beginning of year 1,845,233 (5,318) 1,839,915
---------- --------- ----------
End of year $2,605,373 $ 83,143 $2,688,516
========== ========= ==========
See accompanying notes to these financial statements. 3
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HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
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NOTE 1 - DESCRIPTION OF PLAN
The following description of the Horizon Bank Employee Stock Ownership Plan
(the "Plan") provides only general information. Participants should refer to
the Plan Agreement for a more complete description of the Plan's provisions.
General - The Plan was formed on July 1, 1986 to provide certain benefits to
the employees of Horizon Bank (the "Bank") and was subsequently amended
several times. The Plan operates as a leveraged employee stock ownership plan
(ESOP), and is designed to qualify under section 401(a) and comply with
Section 4975(e)(7) and the regulations thereunder of the Internal Revenue Code
(the "Code"). The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA), and subsequent amendments.
The Plan owns approximately 2.73% of the outstanding common shares of Horizon
Bank. The shares were purchased by the ESOP with funds borrowed from the Bank.
The borrowing is collateralized by the unallocated shares of Horizon Bank
common stock.
Bank Contributions - The current loan from the Bank was estimated to be repaid
over a period of ten years by Bank contributions to the Plan as determined by
the Board of Directors. As the Plan makes each payment of principal and
interest, an appropriate percentage of stock is allocated to eligible
employees' accounts in accordance with applicable regulations under the Code.
Participation - All employees of the Bank are eligible to participate in the
Plan after 24 consecutive months of service provided they complete 1,000 hours
of service during each of those two years. Enrollment in the Plan occurs on
the Entry Date, either April 1, or October 1, coincident with or next
following the date on which two years of eligible service is completed.
Participants who are employed on the last working day of the Plan year are
eligible for an allocation of Bank contributions for the year, pursuant to
Plan documents.
Participant Accounts - Two separate accounts are maintained for each
participant, a Participant's Employer Stock Account and an Other Investment
Account. The Participant Employer Stock Account maintained for each
participant will be credited annually with his or her allocable share of
Horizon common stock derived from contribution or dividend. Each participant's
allocation of shares derived from Horizon contributions is based on the same
proportion that each participant's compensation bears to the total
compensation of all such participants for the plan year.
The Other Investments Account maintained for each participant is credited
annually with his or her allocable share of dividends and any net income (or
loss) earned by the Plan. The Plan had approximately $2,000 and $1,700 in net
cash assets allocated in such a manner at March 31, 2002 and 2001,
respectively.
Vesting - Participants are always fully vested in their accounts under the
Plan. There are no special rules under the Plan with respect to the service
that will be credited for vesting purposes.
Forfeiture - Participant accounts under the Plan are always fully vested and
nonforfeitable.
4
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HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
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NOTE 1 - DESCRIPTION OF PLAN (Continued)
Administration of Plan Assets - Plan assets are held and managed by the
Trustee of the Plan. Unallocated shares of the Plan are pledged to the Bank
and are released as repayments are made on the Bank's loan to the Plan. The
Trustee also handles Bank contributions and distributions. Various other
administrative functions are performed by a third party administrator. Any
third party administrator expenses incurred are paid by the Bank.oting Rights
Each participant is entitled to exercise voting rights attributable to the
shares allocated to his or her account and is notified by the Trustee prior to
the time that such rights are to be exercised. The Trustee is not permitted to
vote any allocated shares for which instructions have not been given by a
participant. The Trustee is required, however, to vote any unallocated shares
on behalf of the collective best interest of plan participants and
beneficiaries.
Payment of Benefits - On retirement, death, disability or termination, a
participant may elect to receive a lump sum amount or installment payments
over a fixed reasonable period not to exceed the life expectancy of the
employee or the employee's beneficiaries. Terminated participants with an
account balance of less than $5,000 may receive a lump sum amount, based upon
the sole discretion of the Plan Administrator. Distributions are made in cash
or, if participant elects, in the form of the Bank's common stock plus cash
for any fractional shares.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting - The financial statements of the Plan are prepared on the
accrual basis of accounting.
Investment Valuation and Income Recognition - The common shares of Horizon
Bank are valued at market value as determined by quoted market price.
Dividend income is accrued on the ex-dividend date. Purchases and sales of
securities are recorded on a trade-date basis. Realized gains and losses from
security transactions are reported on the average cost method.
Allocated and Unallocated Net Assets - The borrowing from Horizon Bank (Note
4) is collateralized by the unallocated shares of stock. The Bank has no
rights against shares once they are allocated under the ESOP. Accordingly, the
financial statements of the Plan for the years ended March 31, 2002 and 2001
present separately the assets and liabilities and changes therein pertaining
to:
* the accounts of employees with rights in allocated stock (Allocated), and
* stock not yet allocated to employees (Unallocated), and
* stock is reallocated based on annual loan principal payments
Tax Status - The Plan applied for and obtained a determination letter dated
July 1987 in which the IRS stated that the Plan, as designed, was
substantially in compliance with applicable requirements of the Internal
Revenue Code. The Plan has been amended since receiving the determination
letter. However, the Plan administrator believes that the Plan is designed and
is currently being operated in compliance with the applicable provisions of
the Internal Revenue Code.
5
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HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Plan Termination - Although it has not expressed any intent to do so, the Bank
has the right to terminate the Plan at any time. Upon termination,
participants will become fully vested in their account balances. Such vested
amounts will be distributed to participants in accordance with the Plan
documents.
Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 3 - INVESTMENTS IN HORIZON BANK COMMON STOCK
The Plan's investments, at March 31, are presented as follows:
2002 2001
------------------------ ------------------------
Allocated Unallocated Allocated Unallocated
---------- ----------- ---------- -----------
Horizon Bank
Common shares 257,248 36,715 207,140 39,910
========== =========== ========== ===========
Market value $2,603,345 $ 371,556 $1,843,546 $ 355,199
========== =========== ========== ===========
On June 25, 2002, Horizon Bank declared a 25% stock split. All shares have
been restated to reflect the stock split.
On April 24, 2001, Horizon Bank declared a 15% stock dividend. Allocated
shares of 28,494 and unallocated shares of 718, post stock split, were added
to the Plan.
During 2002 and 2001, 966 and 16,860 shares, respectively, of Horizon Bank
common stock were distributed to terminated participants representing the
vested portion of their account balance. The shares were subsequently redeemed
by the Bank.
The investment in Horizon Bank common stock represents in excess of 5% of Plan
assets at March 31, 2002 and 2001.
NOTE 4 - LOAN PAYABLE TO HORIZON BANK
In April 1996, the Bank provided funds in the amount of $500,000 to the Plan
which were used to acquire 40,000 shares of Horizon Bank common stock. The
loan requires minimum repayments annually, all of which have been met by the
Plan. The loan is secured by all unallocated shares of stock and bears
interest at a fixed rate of 7.0%.
In May 1999, Horizon Financial Corp. provided funds in the amount of $154,725
to the Plan which were used to acquire 12,500 shares of Horizon Bank common
stock. The loan requires minimum repayments annually, all of which have been
met by the Plan. The loan is secured by all unallocated shares of the stock
and bears interest at a fixed rate of 7.0%.
6
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HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
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NOTE 4 - LOAN PAYABLE TO HORIZON BANK (Continued)
Based on the above agreements principal repayments are expected to be as
follows:
Minimum
Principal
Payment
March 31 Due
-------- --------
2003 $ 72,104
2004 72,104
2005 72,104
2006 72,101
--------
Total $288,413
========
7
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HORIZON BANK EMPLOYEE STOCK OWNERSHIP PLAN
EIN 91-1347394 PLAN NO. 002
FORM 5500, REQUIRED PORTIONS OF SCHEDULE H
MARCH 31, 2002
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Schedule H, Line 4i Schedule of Assets (Held at End of Year)
(e)
(a) (b) (c) (d) Current
Issuer Investment Description Cost Value
- ---- ---------------- ----------------------- ---------- ----------
* Horizon Bank 257,248 Shares of no
par common stock $1,701,451 $2,974,901
* Horizon Bank Cash 2,028 2,028
Schedule H, Line 4j Schedule of Reportable Transactions
(b)
Description (g)
of Assets Current
(include (e) Value of
interest Expense Asset (h)
rate and Incurred (f) on Net
Identity maturity (c) (d) with Cost Trans- Gain
of Party in case Purchase Lease Trans- of action of
Involved of a loan Price Rental action Asset Date Loss)
- ------------- ---------- ------- ------ ------ ------- ------ -----
*Horizon Bank 8,931 Shares
of common
stock $ 107,048 $ - $ - $107,048 $107,048 $ -
* Party-in-interest as defined by ERISA
8
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Supplemental Schedules
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CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Horizon Financial Corporation
We consent to the incorporation by reference in the registration statement on
Form S-8 (No. 33-99780) pertaining to the 1986 Stock Option and Incentive
Plan; and the Registeration Statement on Form S-8 (No. 333-88571) pertaining
to the Bank of Bellingham 1993 Employee Stock Ownership Plan of our report
dated August 9, 2002, with respect to the financial statements and schedules
of the Horizon Bank Employee Ownership Plan included in this Annual Report
(Form 11-K) for the fiscal year ended March 31, 2002.
/s/ Moss Adams LLP
Bellingham, Washington
September 27, 2002