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, 2005 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, 2005
and 2004.
(b) Exhibit 23 - Consent of Independent Registered Public Accounting Firm
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/ Robert C. Diehl
---------------------------------
Member of the Horizon Bank Compensation
and Retirement Committee
Trustee, Horizon Bank Employee Stock
Ownership Plan
By: /s/ Robert C. Diehl
----------------------------
Robert C. Diehl (name)
---------------------------------
Director (title)
---------------------------------
Horizon Bank (bank)
Date: September 26, 2005
Horizon Bank
Employee Stock Ownership Plan
Report of Independent Registered Public Accounting Firm and
Financial Statements with Supplemental Information
March 31, 2005 and 2004
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
MARCH 31, 2005 AND 2004
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PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees
Horizon Bank Employee Stock Ownership Plan
We have audited the statement of net assets available for benefits of the
Horizon Bank Employee Stock Ownership Plan (the "Plan") as of March 31, 2005 and
2004, and the related statement of changes in net assets available for benefits
for the year ended March 31, 2005. 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 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. 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 benefits of the
Horizon Bank Employee Stock Ownership Plan as of March 31, 2005 and 2004, and
the related statement of changes in net assets available for benefits for the
year ended March 31, 2005, 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 schedule on page 8 is
presented for the purpose of additional analysis and is not a required part of
the basic financial statements but is 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 schedule
is the responsibility of the Plan's management. The supplemental schedule has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/Moss Adams LLP
Bellingham, Washington
September 15, 2005
1
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
MARCH 31, 2005 AND 2004
- --------------------------------------------------------------------------------------------------------------
2005 2004
------------------------------------- -------------------------------------
Allocated Unallocated Total Allocated Unallocated Total
---------- -------- ---------- ---------- -------- ----------
<s> <c> <c> <c> <c> <c> <c>
ASSETS
Cash and cash equivalents $ 2,042 $ - $ 2,042 $ 3,436 $ - $ 3,436
Investment in Horizon
Financial Corp. common
stock, at market value 4,152,579 171,205 4,323,784 4,311,560 340,118 4,651,678
---------- ------- ---------- ---------- -------- ----------
Total assets 4,154,621 171,205 4,325,826 4,314,996 340,118 4,655,114
---------- ------- ---------- ---------- -------- ----------
LIABILITIES
Loan payable to Horizon
Bank - 72,101 72,101 - 144,205 144,205
---------- ------- ---------- ---------- -------- ----------
Total liabilities - 72,101 72,101 - 144,205 144,205
---------- ------- ---------- ---------- -------- ----------
NET ASSETS AVAILABLE
FOR BENEFITS $4,154,621 $99,104 $4,253,725 $4,314,996 $195,913 $4,510,909
========== ======= ========== ========== ======== ==========
2
See accompanying notes to these financial statements
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR YEAR ENDED MARCH 31, 2005
- --------------------------------------------------------------------------------
Allocated Unallocated Total
---------- ----------- ---------
ADDITIONS TO NET ASSETS
Employer contributions $ 14,598 $ 82,126 $ 96,724
Dividends on Horizon Financial
Corp. common stock 126,415 - 126,415
Interest income 92 - 92
Net unrealized appreciation of
Horizon Financial Corp.
common stock 122,980 (96,809) 26,171
Allocation of 9,180 shares of
Horizon Financial Corp.
common stock 72,104 - 72,104
---------- -------- ----------
Total additions to net assets 336,189 (14,683) 321,506
---------- -------- ----------
DEDUCTIONS FROM NET ASSETS
Interest expense - 10,022 10,022
Fees 14,597 - 14,597
Withdrawals 481,967 - 481,967
Allocation of 9,180 shares of
Horizon Financial Corp.
common stock - 72,104 72,104
---------- -------- ----------
Total deductions from net assets 496,564 82,126 578,690
---------- -------- ----------
NET INCREASE (DECREASE) IN ASSETS (160,375) (96,809) (257,184)
NET ASSETS AVAILABLE FOR BENEFITS
Beginning of year 4,314,996 195,913 4,510,909
---------- -------- ----------
End of year $4,154,621 $99,104 $4,253,725
========== ======== ==========
See accompanying notes to these financial statements 3
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
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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 2.31% of the outstanding common shares of Horizon
Financial Corp. (the "Corporation"). The shares were purchased by the ESOP with
funds borrowed from the Bank. The borrowing is collateralized by the unallocated
shares of Horizon Financial Corp. 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 Corporation common
stock derived from contribution or dividends, earnings, losses, expenses, and
unrealized appreciation or depreciation. Each participant's allocation of shares
derived from Bank 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's maintained for each participant is credited
annually with his or her allocable share of cash dividends and any net income
(or loss) earned by the Plan. The Plan had approximately $2,043 and $3,436 in
net cash assets allocated in such a manner at March 31, 2005 and 2004,
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. Upon termination all amounts in participants
accounts are nonforfeitable.
4
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
- --------------------------------------------------------------------------------
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.
Voting 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 - Upon 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's
beneficiaries. Distribution of a participant's account shall commence as soon as
administratively feasible, but no later than one year after the close the Plan
year in which the participant separates. All distributions shall be in the form
of the Bank's common stock, cash, or a combination thereof. Fractional shares
may be distributed in the form of cash.
Diversification - Diversification is offered to participants close to retirement
so that they may have the opportunity to move part of the value of their
investment in the Corporation's stock into investments which are more
diversified. Participants who are at least age 55 with at least 10 years of
participation in the Plan may elect to diversify a portion of their account.
Diversification is offered to each eligible participant over a six-year period.
In each of the first five years, a participant may diversify up to 25 percent of
the number of shares allocated to his or her account, less any shares previously
diversified. In the sixth year, the percentage changes to 50 percent. As of
March 31, 2005, no participants have elected to diversify in this manner.
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
Financial Corp. 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.
5
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2005 and 2004
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).
Stock is allocated 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. 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.
Therefore, the Plan administrator believes they are qualified and the related
trust is tax exempt as of the financial statement date.
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'
accounts will be distributed 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.
Benefit Payments - The Plan recognizes benefit payments in the period it is
actually paid.
Operating Expenses - All expenses of maintaining the Plan are paid by the Plan.
The Plan is subsequently reimbursed by the Bank for the expenses in the form of
an employer contribution.
NOTE 3 - INVESTMENTS IN HORIZON FINANCIAL CORP. COMMON STOCK
The Plan's investments, at March 31, are presented as follows:
2005 2004
------------------------ ----------------------
Allocated Unallocated Allocated Unallocated
---------- ----------- --------- -----------
Horizon Financial Corp.
Common shares:
Number of shares 222,539 9,175 232,680 18,355
========== ======== ========== ========
Cost $1,478,149 $72,101 $1,439,547 $144,205
========== ======== ========== ========
Market value $4,152,579 $171,205 $4,311,560 $340,118
========== ======== ========== ========
6
HORIZON BANK
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENTS IN HORIZON FINANCIAL CORP. COMMON STOCK (Continued)
During 2005, 25,971 shares of Horizon Financial Corp. common stock were
distributed to terminated participants representing the employer stock account
portion of their account balance. The shares were subsequently redeemed by the
Corporation.
During 2005, dividends were used to purchase 6,650 shares of Horizon Financial
Corp. common stock which were subsequently allocated to participant's accounts.
The investment in Horizon Financial Corp. common stock represents an investment
in excess of 5% of Plan assets at March 31, 2005 and 2004.
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 Financial Corp. 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%.
Based on the above agreements, principal repayments are expected to be as
follows:
Minimum
Principal
Payment
March 31 Due
-------- ---------
2006 72,101
--------
Total $ 72,101
========
NOTE 5 - EMPLOYER CONTRIBUTIONS
The Bank is obligated to make contributions in cash to the Plan equal to the
amount necessary to enable the Plan to make its regularly scheduled payments of
principal and interest due on its term loans.
7
SUPPLEMENTAL SCHEDULE
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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, 2005
- --------------------------------------------------------------------------------
Schedule H, Line 4i-Schedule of Assets (Held at End of Year)
(e)
(a) (b) (c) (d) Current
Issuer Investment Description Cost Value
- ---- ----------------- ---------------------- ----------- ----------
* Horizon Financial 231,714 Shares of $1.00
Corp. par common stock $ 1,550,250 $4,323,784
* Horizon Bank Cash 2,042 2,042
* Party-in-interest as defined by ERISA
8
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Horizon Financial Corporation
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-88571) pertaining to the Bank of Bellingham 1993 Employee
Stock Ownership Plan of our report dated September 15, 2005, 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,
2005.
/s/Moss Adams LLP
Bellingham, Washington
September 26, 2005