**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM l0-KSB**

 

**Annual Report Pursuant to Section 13 or**

**15(d) of the Securities Exchange Act of 1934**

 

For the fiscal year ended **December 31, 2003**

 

**Commissionfile number 333-97215**

 

### **Northern Growers, LLC**

(Name of Small BusinessIssuer in its Charter)

 

| **South  Dakota**                                                |   | **77-0589881**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

**205 East22nd Avenue**

**Milbank,South Dakota 57242**

(Address of PrincipalExecutive Offices) (Zip Code)

 

**(605) 432-5675**

(Issuer’s TelephoneNumber, Including Area Code)

 

Securities registeredunder Section 12(b) of the Exchange Act:

### **None**

 

Securities registeredunder Section 12(g) of the Exchange Act:

### **None**

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

 

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ý  Yes     o  No

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10–KSB.   ý

 

State issuer’s revenues for its most recent fiscal year.   $70,857,262

 

The aggregate market value of the registrant’s Class A capital unitsheld by non-affiliates of the registrant was $11,925,000, based on theaggregate price paid for the equity shares of the cooperative prior to thereorganization from a cooperative to Northern Growers, LLC.

 

As of the date of this filing, there were 6,328,500 Class A capitalunits of the registrant outstanding.

 

Transitional Small Business DisclosureFormat:     o Yes     ý No

 

 

### **PART I**

 

**Item 1.    Descriptionof Business.**

 

**OVERVIEW**

 

Northern Growers, LLC (also referred to as“we,” “our,” or “us”) is a South Dakota limited liability company that owns andmanages a 77.16% interest in Northern Lights Ethanol, LLC (also referred to as“Northern Lights”).  Broin InvestmentsI, LLC, owns the remaining minority interest. Northern Lights built and operates a 40 million gallon ethanol plantnear Big Stone City, South Dakota which produces ethanol and distiller’s driedgrains with solubles, or DDGS.  NorthernLights began grinding corn on June 26, 2002 and the first ethanol was producedon July 5, 2002.  Northern Growers’members are primarily local agricultural producers and they supply asignificant portion of the plant’s corn requirements.

 

Northern Growers was originally formed as aSouth Dakota cooperative, but on March 27, 2003 the members of Northern Growersapproved a reorganization to a South Dakota limited liability company madeeffective on April 1, 2003.  As a resultof the reorganization, each member received one Class A capital unit of a newlyformed South Dakota limited liability company in exchange for each equity shareowned in the cooperative.  Accordingly,this report discusses the consolidated financial performance, results ofoperations, and capital resources of Northern Lights, Northern Growers, and thecooperative as if the cooperative had been a limited liability company sinceits inception.

 

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**THE ETHANOL PLANT AND PRODUCTION PROCESS**

 

Anethanol plant is essentially a fermentation plant.  The ground corn, which contains starch, is mixed with water toform a mash.  The mash is heatedand enzymes added to convert the starch into fermentable sugars.  Fermentation occurs when yeast is added toconvert the sugars into alcohol and carbon dioxide.  The carbon dioxide may either be captured and sold, if nearbymarkets exist, or released into the atmosphere.  Fermentation produces a mixture called “beer,” which containsabout 10% alcohol and 90% water.  The“beer” is then boiled in a distillation column to separate the water, resultingin ethyl alcohol that is 90 to 95% pure. The mixture then goes through a dehydration process, which increases thealcohol content to 99% or greater.  Thisproduct is then mixed with a certified denaturant to make the product impotableand commercially saleable.

 

Thesolids removed during the distillation process are centrifuged and thenconveyed to the DDGS’ dryer system.  Asyrup is added to the mixture as it enters the dryer, where moisture isremoved.  This process producesDDGS.  DDGS is produced from theprotein, fiber, vitamins, and minerals that are not used in producingethanol.  Ethanol production from cornuses only the starch contained in the corn.

 

NorthernLights’ plant was designed and built by Broin and Associates, Inc. of SiouxFalls, South Dakota.  Under a licenseagreement, Broin licenses to Northern Lights, for a fee, the technology for theoperation of the ethanol plant for as long as the plant exists.  Broin’s technology consists of all ofBroin’s proprietary rights, including patents, copyrights, trade secrets,formulas, research data, processes, know-how, and specifications related toBroin’s design and construction of the ethanol plant. If either Northern Lightsor Broin breaches the terms of the agreement, the non-breaching party mayexercise any remedies available to it, including specific performance andrequesting injunctive relief.

 

**THE ETHANOL INDUSTRY**

 

Although ethanol can be produced from anumber of different types of grains, approximately 90% of ethanol in the UnitedStates today is produced from corn. Current annual domestic ethanol production capacity is approximately 3.1billion gallons.

 

Ethanol contains 35% oxygen by weight.  When combined with gasoline, ethanol acts asan oxygenate, which is to say it increases the percentage of oxygen ingasoline.  As a result, the gasolineburns more cleanly, and releases less carbon monoxide and other exhaustemissions into the atmosphere.  Oxygenatedgasoline is commonly referred to as reformulated gasoline or “RFG.”  Although not all scientists agree about theexistence or extent of environmental benefits associated with the use ofethanol, the use of ethanol is commonly viewed as a way to improve the qualityof automobile emissions.

 

Because of federal and state policiespromoting cleaner air, and state and federal tax programs and productionincentives, the ethanol industry has grown substantially in recent years.  Currently, U.S. ethanol plants have thecapacity to produce approximately 3.1 billion gallons of ethanol annually,compared to only 175 million gallons in 1980. There are more than 74 ethanol production facilities located in theUnited States, with the great majority of them located in the

 

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Midwestern corn-producing states of Illinois, Wisconsin, Minnesota,Iowa, North Dakota, South Dakota, Nebraska, and Kansas.  Including Northern Lights, South Dakotacurrently has 10 plants producing approximately 377 million gallons of ethanolannually and one additional plant under construction that will have thecapacity to produce an additional 45 million gallons per year.

 

**ETHANOL MARKETING**

 

The targetmarket area for the ethanol produced at Northern Lights includes local,regional and national markets.  Shippingis done by truck and rail. The plant site is served by multiple South Dakotastate highways and Interstate Highway 29, which provide transportation links inall directions.

 

The plant hasrail facilities and connections to the Burlington Northern Santa Fe railroadsystem, which facilitate transporting the ethanol to national targetmarkets.  A majority of the ethanolproduced at Northern Lights is marketed by rail.  The national target rail markets for the facility include theMidwest, Pacific Northwest, South, Southwest, East coast, and California.

 

Northern Lights contracts with Ethanol Products, LLC, a Broin affiliate, to market the ethanol produced at the plant.  Northern Lights’ marketing agreement with Ethanol Products is in effect until 2007 and is renewed automatically for five-year terms, unless either party gives ninety (90) days written notice of termination prior to the end of the current term.  Under the contract, Ethanol Products charges Northern Lights marketing administrative fees based on the number of gallons of ethanol sold.  Ethanol Products is responsible for invoicing all shipments, receiving payments from customers, and paying freight when necessary.  All accounts receivable losses arising from the marketing of ethanol are Northern Lights’ sole responsibility.

 

Ethanol Products currentlymarkets ethanol for producers located in Minnesota, South Dakota, North Dakota,Iowa, Michigan and Missouri.  Although Northern Growers reliesentirely on Ethanol Products to market the ethanol it produces, EthanolProducts is not dependent on one or a limited number of major customers.

 

The sale and marketing of ethanol could beadversely affected by decisions pending before the U.S. Environmental Protection Agency (EPA).  On July 17, 2003, the United States Court ofAppeals for the Ninth Circuit vacated the EPA’s decision of June 2001 whichdenied the state of California’s request for waiver from the oxygenated fuelrequirement of the 1990 Clean Air Act Amendments.  The court subsequently remanded the matter to the EPA toreconsider California’s request for waiver from the oxygenatedrequirement.  The oxygenated requirementresulted from the 1990 Clean Air Act Amendments when Congress required the useof a reformulated gasoline in certain high smog-ozone areas in the UnitedStates.  Congress required that thereformulated gasoline contain at least 2% oxygen by weight, the two primarychoices of oxygenates being ethanol and methyl tertiary butyl ether (“MTBE”).  In April 1999, California requested that theEPA waive the oxygen requirement for California, asserting that it could complywith air emission requirements of the Clean Air Act without a mandatory oxygencontent through the use of a non-ethanol based, reformulated gasoline calledCaRFG3.  In June 2001, however, the EPAdenied California’s request for waiver from the oxygenated requirement.  In addition, after determining that MTBE wasa public health threat, California decided to ban MTBE entirely by January 1,

 

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2004.  This resulted in ethanol being the primarymeans to meet the two percent oxygenated fuel requirement.

 

Inanticipation of the MTBE ban in California and as a result of the EPA’s denialof California’s waiver request, many refineries in California have incorporatedethanol into the blending process to comply with the oxygenated fuelrequirement.  If the EPA reverses itsJune 2001 decision, it is uncertain whether refineries would switch to orcommence using CaRFG3 or other reformulated gasoline in California.  If the EPA reverses its decision and asignificantly large number of refineries switched to CARFG3 or otherreformulated gasoline, and with California being one of the largest consumersof ethanol, it could harm our and the ethanol industry’s efforts to market andsell ethanol.

 

Inlate January 2004, the EPA announced a proposal to grant the State of NewHampshire a waiver from the oxygenate fuel requirement.  The waiver would allow New Hampshire to usea reformulated gasoline without adding an oxygenate such as ethanol.  If New Hampshire is officially granted awaiver by the EPA, and more states subsequently request and are grantedwaivers, this could materially and adversely affect our and the ethanolindustry’s efforts to market and sell ethanol in the future.

 

**THE DDGS INDUSTRY**

 

Distiller’s dried grains with solubles, orDDGS, is a co-product of the ethanol production process.  DDGS is a high protein, high energy feedsupplement marketed primarily to the dairy, beef, sheep, swine, and poultryindustries.  DDGS is a popular animalfeed supplement, with approximately 6.4 million tons produced in North Americaannually.  Most DDGS is sold for use inanimal feeds within the United States and Canada, and a small percentage isexported primarily to Europe.  The vastmajority of DDGS is fed to ruminant animals in the dairy and beef sector.  However, new technologies, which haveallowed for the production of a more consistent, quality product, have helpedcreate a market for DDGS in the swine and poultry industries as well.

 

When operatedat its annual name-plate capacity of 40 million gallons, the Northern Lightsplant has the ability to dry all distiller’s grains produced at the plant.  The plant yields approximately 17 pounds ofDDGS per bushel of corn.

 

**DDGS MARKETING**

 

NorthernLights contracts with Dakota Gold Marketing (formerly known as DakotaCommodities), a division of Broin Enterprises, Inc., to market all of the DDGSproduced at the plant.  The DDGSmarketing contract is in effect until 2007 and automatically renews foradditional five-year terms, unless discontinued by either party upon at leastthree months prior written notice. Northern Lights pays Dakota Gold Marketing a marketing fee based on thegross monthly sales of DDGS.  Dakota GoldMarketing is responsible for invoicing all loads, receiving payments fromcustomers and paying freight when necessary. All accounts receivable losses arising from the sales of DDGS are DakotaGold Marketing’s sole responsibility.

 

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Dakota Gold Marketing markets DDGS to local,regional and national markets.  NorthernLights ships the majority of DDGS to national markets, primarily in thesouthwestern United States, and the rest to local and regional markets.  Shipments to the national markets areprimarily done by rail.  Northern Lightsships DDGS to local or regional markets primarily by truck.  Northern Lights also contracts with DakotaGold Marketing for the use of railcars in the shipping of DDGS, paying DakotaGold Marketing a flat fee per railcar in connection with a DDGS shipment.  Although Northern Lights relies entirely onDakota Gold Marketing to market its DDGS Dakota Gold Marketing is not dependenton one or a limited number of major customers.

 

**COMPETITION**

 

Northern Lights is in direct competition withnumerous other ethanol and DDGS producers, many of which have significantlygreater resources than Northern Lights. The ethanol industry has grown to over 74 production facilities in theUnited States. Industry authorities estimate that these facilities are capableof producing approximately 3.1 billion gallons of ethanol per year.  The largest ethanol producers include:Archer Daniels Midland, Cargill, Verasun Energy Corporation, Aventine RenewableEnergy and New Energy Corporation, all of which are capable of producing moreethanol than Northern Lights.  Inaddition, there are numerous, recently formed, regional farmer-owned entitiesor other ownership-type entities of a similar size to Northern Lights. Mostethanol producers also produce DDGS or competing animal feed products such asdistiller’s wet grains.  In SouthDakota, there are currently six ethanol plants within a 100-mile radius ofNorthern Lights with a total annual production capacity of approximately 295million gallons of ethanol.

 

Further, at least 17 new ethanol plants witha combined production capacity of over 598 million gallons are currently underconstruction and additional plans to expand existing plants have also been announced,which would increase the ethanol production capacity of competitors.  Management is unable to determine the numberand production capacity of plants that ultimately may be constructed, thetiming of such construction, or the effect of resulting production upon thedemand or price for products produced by Northern Lights.

 

We also expect that additional ethanol andDDGS producers will enter the market if the demand for ethanol continues toincrease.  Northern Lights competes withother ethanol and DDGS producers on the basis of price and, to a lesser extent,delivery service.  Northern Lights alsocompetes, in part, with other ethanol producers in proximity to the NorthernLights’ plant to procure corn.  Webelieve, however, that Northern Lights can continue to compete favorably withother ethanol and DDGS producers primarily because it continues to procure cornat favorable prices and from an ample corn supply.

 

As the demand for ethanol increases, NorthernLights may also have to compete with international ethanol producers fromcountries such as Brazil, who may have lower production costs and comparabletransportation costs to those of the United States’ coastal markets.

 

NorthernLights also competes with producers of MTBE. MTBE is the other oxygenate commonly used in fuels for compliance withthe Federal Clean Air Act mandates and is ethanol’s major competitor in theoxygenate market.  MTBE, however, hasbeen the subject of serious environmental concerns.  Accordingly, seventeen states, including California and New York,two of the largest state consumers of ethanol, have enacted laws prohibitingthe use of MTBE as an

 

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oxygenate in fuels.  Nevertheless, many major oil companiesproduce MTBE and, because it is petroleum-based, its use is strongly supportedby  these companies.  These companies have significant resourceswith which to market MTBE, to influence legislation, and influence publicperception of MTBE.  These companiesalso have sufficient resources to begin production of ethanol should theychoose to do so.

 

Alternativefuels, gasoline oxygenates, and ethanol production methods are continuallyunder development by ethanol and oil companies with far greater resources thanwe have.  New products or methods ofethanol production developed by larger, better financed competitors couldprovide them with competitive advantages over us and harm our business.

 

**PROCUREMENTS**

 

**Corn**

 

The major raw material required for NorthernLights to produce ethanol and DDGS is corn. To operate at name-plate capacity of 40 million gallons of ethanolannually, the plant requires approximately 15 million bushels of cornannually.  Unless a corndelivery exemption has been granted, our members are required to deliver cornto the plant on a trimester basis and receive payment for their corn based onindividually contracted prices, or an average of market prices at predeterminedelevators, plus a freight allowance. Based on the number of capital units outstanding, 6,328,500 bushels ofcorn are required to be delivered annually by our members.  This represents 41% of the corn necessaryfor the operation of the plant at name-plate capacity.  The balance of Northern Lights’ cornrequirements is purchased on the open market from local producers based upon aschedule of prices for current and future delivery prepared by management.

 

SinceSeptember 24, 2003, our members may apply on an annual basis to be releasedfrom the corn delivery requirement if the member historically has not producedenough grain to meet the requirement; if the member does not produce enoughgrain to meet the requirement because the member’s grain is fed to livestock;or if the member produces and stores the majority of the member’s grain morethan 40 miles from the Northern Lights plant. Our Board of Managers has the sole discretion to determine whether ornot to grant our members exemptions from the corn delivery requirement.  Since September 2003, approximately 24% ofour members have been granted annual exemptions from the corn deliveryrequirement.

 

The plant’slocation in Grant County, South Dakota, provides accessibility to corn atnecessary levels.  In 2002,approximately 7.6 million bushels of corn for grain were produced in GrantCounty and 39.4 million bushels of corn for grain were produced in the nearbySouth Dakota counties of Codington, Day, Deuel, Hamlin, and Roberts.  Another 33.8 million bushels were producedin the nearby Minnesota counties of Big Stone and Lac Qui Parle.

** **

**Hedging**

 

Northern Lights contractswith Broin Management under a corn price risk management agreement to developand implement hedging strategies to manage the risk associated with thefluctuation in the price of corn. Hedging means protecting the price at which Northern Lights buys cornand the price at which it will sell ethanol and DDGS in the future. It is a wayto attempt to

 

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reduce the risk caused by the pricefluctuation of corn, which has fluctuated historically as a result of generaleconomic, market, and government factors.  Hedging practices are also utilized to balance Northern Lights’daily cash corn ownership relative to its forward contracted ethanol sales. Allcash corn contracts purchased by the plant are either hedged or owned at thepredetermined cash price based on the current futures price of corn, as well asBroin Management’s view on future price direction.  The agreement withBroin Management became effective in 2001 and is automatically renewed for one-yearterms following the expiration of the prior term, unless 30 days notice isgiven by either party to terminate the agreement.

 

#### **Steam**

 

The production of ethanolrequires a significant amount of steam. Steam is used for cooking, evaporation, and distillation.  Steam is typically produced from on-siteboilers that require natural gas as an energy source.  Northern Lights, however, receives the majority of its steamdirectly from the Big Stone Power Plant, a coal fired, electrical generatingfacility located immediately adjacent to the ethanol plant, co-owned by OtterTail Corporation, Montana-Dakota Utilities and Northwestern PublicService.  The steam sale agreement intowhich Northern Lights entered provides steam to the ethanol plant up to amaximum of 140 million BTU’s per hour. The agreement’s term is ten years, ending on June 1, 2012, butautomatically renews for two additional five-year terms unless terminated byeither party by the giving of 12 months advance notice of suchtermination.  Since March 2003, OtterTail has provided Northern Lights with a consistent supply of steam to meet itsrequirements.  However, Otter Tailoccasionally interrupts the steam supply due to scheduled preventivemaintenance plant shut downs.  Thisinterruption occurs for approximately one week, two times per year.

 

**Natural Gas**

 

Northern Lights depends lesson natural gas for the production of ethanol and DDGS than most ethanol plantsbecause it receives the majority of its steam requirements from the Big StonePower Plant.  However, in the event moresteam is necessary or the supply of steam from the Big Stone Power Plant isunexpectedly diminished or interrupted, Northern Lights has two on-site boilersto produce steam.  The two boilersrequire natural gas as an energy source. Thus, Northern Lights contracts with NorthWestern Public Servicepursuant to which NorthWestern distributes natural gas from NorthWesternNatural Gas Company’s pipeline to the ethanol plant.  The agreement with NorthWestern is for a term of ten years endingin 2012.  Since plant operations werecommenced, there have been no interruptions in the supply of natural gas fromNorthWestern.

 

**Electricity**

 

NorthernLights contracts with Otter Tail Power Company to provide all the electricpower and energy requirements for the ethanol plant.  The agreement commenced at the start of plant operations in 2002for a one-year term. It automatically renews for additional one-year termsunless terminated with 12 months written notice by either party.  Since operations were commenced, NorthernLights has had no interruption or shortages in the supply of electricity to theplant.

 

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**Water**

 

Theproduction of ethanol requires a significant amount of water.  Northern Lights contracts with the city ofBig Stone City and Big Stone Power Plant to supply and meet its waterrequirements for the ethanol and DDGS production process.  TheBig Stone City agreement is in effect until 2012, and automatically renews fortwo five-year terms unless terminated by either party with 12 months advancewritten notice.  The Big StonePower Plant agreement is in effect until 2012 and automatically renews for twofive-year terms unless terminated by either party with 12 months advancewritten notice.  Since Northern Lights’operations were commenced, the city of Big Stone City and Big Stone Power Planthave provided an ample and consistent supply of water to meet its requirements.

 

**GOVERNMENT REGULATION**

 

Various federal and state laws, regulations, andprograms have led to the increasing use of ethanol in fuel, includingsubsidies, tax credits and other forms of financial incentives.  Some of these laws provide economicincentives to produce ethanol and others mandate the use of ethanol.  Congress currently provides certain federaltax incentives for oxygenated fuel producers and marketers, including those whopurchase ethanol to blend with gasoline in order to meet federally mandatedoxygenated fuel requirements. Generally, these tax incentives include an exemption from the federalexcise tax on gasoline blended with at least 10%, 7.7%, or 5.7% ethanol, andincome tax credits for blenders of ethanol mixtures and small ethanolproducers.  The federal tax incentivesare scheduled to expire on September 30, 2007. Additionally, Congress provides an ethanol production incentive toethanol producers through the United States Department of Agriculture CommodityCredit Corporation’s Bioenergy Program. Under the program, incentive payments are allocated to ethanol producerspartially based on an increase in gallons of ethanol produced compared to theprior year’s production.  Because aplant typically experiences the highest increase in production during the firstyear of operations compared to the prior year’s, a plant of Northern Lights’size is usually allocated the maximum payment during the first year ofproduction.  The maximum allocation perprogram year to an ethanol producer is $7.5 million, and the maximum annualfunding authorized under the program is $150 million.

 

Although Northern Lights received its maximumallocation during the 2003 program year (October 1, 2002 through September 30,2003), many plants received less than the maximum allocation during the 2003program year because more plants started production and submitted applicationsfor payment in 2003 than available funding under the program.  Management is unable to predict whether theprogram will have sufficient funding in the 2004 program year to cover therequisite payments to eligible producers, or whether more plants will apply forpayment than available funding.  TheBioenergy Program is also scheduled to expire on September 30, 2007.

 

South Dakota also provides an incentive productionpayment to ethanol producers.  Theproduction incentive consists of a direct payment to South Dakota ethanolproducers of up to $.20 per gallon, which is divided among producers of fuelethanol within South Dakota up to a maximum of $1 million per year per plant (amaximum of $83,333 per month) and a maximum of $10 million over the life of aplant.  However, no more than $5 millionin payments may be distributed to all ethanol plants in South Dakota during the2004 program year (which ends on June 30, 2004) and no more than $6 million inpayments may be distributed during the 2005 program year.  The payments are distributed to each plantin proportion to the total number of gallons of

 

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ethanolproduced annually by all plants in South Dakota.  As more plants commence production, or existing plants increaseproduction, each plant will receive a lower proportionate share of the maximumpayment under the program.

 

The revocation, amendment, or non-renewal of any oneor more of these laws, regulations or programs, or a lack of funding under theprograms, could adversely affect the future use of ethanol and our business andoperations in a material way.  Anymaterial reduction of the use of ethanol would have an adverse effect on ourprofitability and viability.

 

**ENVIRONMENTAL MATTERS**

 

NorthernLights’ operations are subject to various federal, state, and local laws andregulations with respect to environmental matters, including air and waterquality and underground fuel storage tanks. Compliance with these laws and regulations may require Northern Lightsto incur expenditures for such things as new or upgraded equipment orprocesses, some of which could be material to its business.  If Northern Lights were found to haveviolated federal, state, or local environmental laws or regulations, it couldincur liability for cleanup costs, damage claims from third parties, and civilor criminal penalties that could materially and adversely affect its business.

 

NorthernLights could be adversely impacted by agency regulatory actions that occurredin 2002 and 2003.  In 2002, a number ofethanol plants in Minnesota entered into consent decree settlements with theState of Minnesota and the U.S. Environmental Protection Agency (EPA) arisingfrom alleged emission violations.  Civilpenalties were assessed against each ethanol plant, additional emissionsdevices were required, new testing protocols were established and air qualitypermits were modified by the settlement agreements.  The EPA has since said that it intends to “level the playingfield,” inferring actions against other ethanol producers.  In April 2003, the EPA entered into aconsent decree with Archer Daniels arising from alleged emissions violations inseveral of its plants.  Civil penaltieswere assessed, additional emissions devices and monitoring programs wererequired, and a new testing protocol for emissions was imposed on it.

 

OnJanuary 6, 2003, the EPA issued formal information requests to ethanol plantsdesigned, constructed, and/or managed by Broin and Associates and BroinManagement.  The EPA also issued similarinformation requests around this time to other ethanol and non-ethanol relatedplants and companies.  The requests toBroin required that the subject ethanol plants, including Northern Lights,provide the EPA with certain emissions data, presumably to determine whetherthe plants were in compliance with the Clean Air Act.  If the EPA determines that Northern Lights has not complied withthe Clean Air Act or its Title V Air Quality Operating Permit, the EPA couldrequire additional pollution control mechanisms and internal control processesthat are not currently planned for this plant. To date, no action has been taken by the EPA, nor are we able to predictthe form or magnitude of any regulatory action, if any, that may be initiatedby the EPA as a result of these requests.

 

In late2002, the South Dakota Department of Environment and Natural Resources (DENR)began requiring applicants for new ethanol plants in South Dakota to include anew method for quantifying emissions from the plants.  The new method is commonly referred to as the Midwest ScalingMethod or the “multiplier.”  When themultiplier is used, emission test results are higher

 

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than when traditional test measuresare employed.  On June 24, 2003, theDENR, applying the multiplier in its emissions calculations, informed NorthernLights that it may have exceeded its emission limits in its Title V Air QualityOperating Permit, even though the multiplier is not required in NorthernLights’ Title V Air Quality Operating Permit. While the use of the multiplier is not required in Northern Lights’Title V Air Quality Operating Permit, any future imposition of the multipliercould make it more difficult for Northern Lights to comply with its Title V AirQuality Operating Permit.  Any futureimposition of the multiplier may also require additional pollution controlmechanisms and internal control processes that are not currently planned for thisplant, or result in the assessment of certain sanctions if Northern Lights isunable to comply with state or federal air quality standards.

 

On December29, 2003, Northern Lights, along with five other ethanol plants in South Dakotamanaged by Broin Management, filed an administrative petition before the SouthDakota Board of Minerals and Environment. The petition requests that the Board of Minerals and Environment bar theDENR from using and applying the multiplier to Northern Lights’ emission testingresults to determine compliance under the Title V Air Quality Permit and CleanAir Act.  A hearing on the petition wasscheduled for March 18, 2004, but the hearing has been continued until a later,undetermined date.  For additionalinformation on this proceeding, please see “Item 3—Legal Proceedings” below.

 

**MANAGEMENT AND EMPLOYEES**

 

Broin Management, LLC, a Broin affiliate,manages the day-to-day operations of the ethanol plant under a managementagreement with Northern Lights.  Underthe agreement, Northern Lights pays Broin Management a fixed annual fee and anincentive bonus based on annual net income. Northern Lights also pays certain expenses incurred with respect to theoperation of the plant while other expenses, including, but not limited to, theprovision of a full-time technical manager and general manager, are included aspart of Broin Management’s fees.  Theagreement is in effect until July 1, 2005 and automatically renews for anadditional three-year term unless either party provides a 90-day advancewritten notice of termination.  NorthernLights may only terminate Broin Management “for cause,” which is defined in theagreement as illegal or unethical conduct, or failure or refusal to performunder the management agreement.

 

Broin Managementhired Mr. Blaine Gomer as Northern Lights’ general manager.  Mr. Gomer oversees and is responsible foroperations and production at Northern Lights on a day-to-day basis.  The general manager is a full-time, on-siteposition, but Mr. Gomer is an employee of Broin Management, LLC.  For Mr. Gomer’s biographical information,see “Item 9–Directors, Executive Officers, Promoters and Control Persons;Compliance with Section16(a) of the Exchange Act–Management and Key Employees.”

 

As of March 1, 2004, Northern Lights employed39 employees, including a commodities manager, a commoditiessupervisor, an operations manager, a maintenance manager, a microbiologist, achief mechanical operator, a controller, plant operators, maintenancetechnicians, grains assistants, a membership coordinator, accountants, and anadministrative assistant.  This does notinclude contract employees, or Mr. Gomer and the technical manager who areemployees of Broin Management.

 

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**Item 2.  Description of Property.**

 

Northern Lights’ plant is located immediatelyadjacent to the Big Stone Power Plant near the city of Big Stone City in GrantCounty, South Dakota.  The land on whichthe plant is located is leased from Big Stone-Grant Industrial Development andTransportation, LLC, which is owned by Otter Tail Power Company, Montana-DakotaUtilities, and NorthWestern Public Service. The term of the lease is for 99 years. The total rent to be paid by Northern Lights for the first five years ofoperations starting in 2002 is $12,000, or $2,400 per year.  Starting January 1, 2006, and every fiveyears after this period, rent is increased by 5% from the immediately precedingfive-year period.  In addition, theplant site is served by multiple state highways, is near Interstate Highway 29,and has rail facilities and connections to the Burlington-Northern-Santa FeRailroad system to facilitate transporting the ethanol and DDGS produced at theplant to national target markets.  Allof Northern Lights’ tangible and intangible property, including its leaseholdinterest, easement rights, improvements, equipment, personal property, andcontracts, serve as the collateral for the debt financing with U.S. BankNational Association, of Sioux Falls, South Dakota, which is described belowunder “Item 6–Management’s Discussion and Analysis or Plan ofOperations–Liquidity and Capital Resources.”

 

**Item 3. Legal Proceedings.**

 

From time totime, we may be subject to litigation incidental to our business.  Northern Lights is currently a party in apending matter before the South Dakota Board of Minerals and Environment inPierre, South Dakota.  On December 29,2003, Northern Lights, five other ethanol plants in South Dakota, and BroinManagement filed a petition for an order to show cause and declaratory judgmentbefore the South Dakota Board of Minerals and Environment.  The respondent in the proceeding is theSouth Dakota Department of Environment and Natural Resources (DENR).  The petition requests that the Board of Mineralsand Environment bar the  DENR from usingand applying a new method called the Midwest Scaling Method, or“multiplier.”  The Board ofMinerals and Environment is a nine person citizen board that serves aquasi-judicial and legislative role in matters involving the South Dakota airquality laws.  The Board of Minerals andEnvironment has authority to hear petitions regarding the application of theDENR’s rules governing air quality matters. A hearing on the matter was scheduled for March 18, 2004, but it hassince been continued to a later, undetermined date.

 

The petitionalleges that the DENR’s use of the multiplier is inappropriate andunlawful.  Northern Lights and the otherpetitioners contend that South Dakota and federal regulations do not require orpermit the use of the multiplier. Historically, ethanol plants have measured certain emissions using EPApromulgated referenced methods.  Usingthe multiplier, however, changes the way emission quantities are reported,typically increasing the reported quantity of emissions and potentially makingit more difficult to comply with Title V Air Quality Operating Permit and thestandards under the Clean Air Act.

 

In addition,as described above under Item 1—Description of Business, EnvironmentalMatters,” we do not know if the EPA will take action with respect to itsJanuary 6, 2003, formal information requests. However, Broin Management, acting on behalf of Northern Lights and other

 

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ethanol plants managed by BroinManagement, has recently held discussions with the EPA regarding theapplication and use of the multiplier for quantifying certain emissions.  These discussions are ongoing and generallyrelate to all ethanol plants managed by Broin. It is uncertain whether the issues surrounding the use of the multipliercan be resolved with the EPA, or what the effect will be on Northern Lights ifresolution short of a formal proceeding is or is not attained.

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

We did not submit any matter to a vote of oursecurity holders through the solicitation of proxies or otherwise during thefourth quarter of 2003.

 

### **PART II**

 

**Item 5. Market for Common Equity and Related Stockholder Matters.**

 

There is no public trading market for ourcapital units.  Capital units may onlybe transferred in accordance with our Capital Units Transfer System.  The Capital Units Transfer System providesfor transfers by gift to family members, upon death, and through a qualified matchingservice, subject to our Board of Managers’ approval.  Since March 8, 2004, the qualified matching service has beenoperated through a registered Alternative Trading System (ATS) owned andoperated by Alerus Securities Corporation, a registered broker-dealer based inGrand Forks, North Dakota, which may be accessed at www.alerusagstock.com.  As of March 1, 2004, we had 649members.  Because the operation of ourqualified matching service through Alerus is relatively new, we do not have anyhistorical information regarding the trading of our capital units.

 

Under the terms of our Operating Agreement,we are required to make annual (or more frequent) distributions to our membersand may not retain more than $200,000 of net cash from operations, unless (i) asuper majority of our Board (75%) decides otherwise, (ii) it would violate orcause a default under the terms of any debt financing or other creditfacilities, or (iii) it is otherwise prohibited by law.

 

In 2003, Northern Lights made cash distributionsto us of approximately $4.05 million and $1.2 million to the minority member ofNorthern Lights.  We, in turn,distributed to our members approximately $3.6 million, or $.576 per capitalunit.  In February 2004, Northern Lightsmade a cash distribution to us of approximately $1.55 million and $450,000 tothe minority member.  We, in turn,distributed approximately $1.35 million to our members, or $.212 per capitalunit.  Because the February 2004distribution was approved by our Board of Managers in close proximity toDecember 31, 2003, the distribution is reflected as a current liability on ourDecember 31, 2003 financial statements.

 

**Item 6. Management’s Discussion and Analysis or Plan of Operation.**

 

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**CAUTIONARYSTATEMENT REGARDING**

**FORWARD-LOOKINGINFORMATION**

 

You should read the following discussionalong with the audited financial statements and notes to the audited financialstatements included elsewhere in this report. This report contains forward-looking statements, including, but notlimited to, those under “Management’s Discussion andAnalysis-Results of Operations,” and “Liquidity and Capital Resources,” involving future events,future business and other conditions, our future performance, and our expectedoperations.  These statements arebased on management’s beliefs and expectations and on information currentlyavailable to management.  Forward-looking statements mayinclude statements which use words such as “believe,” “expect,” “anticipate,”“intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,”“may,” “future,” “potential,” or the negatives of these words, and all similarexpressions.

 

Forward-lookingstatements involve numerous assumptions, risks and uncertainties.  Northern Lights’ and our actual results oractual business or other conditions may differ materially from thosecontemplated by any forward-looking statements.  While we believe that these statements are accurate, our businessis dependent upon general economic conditions and various conditions specificto our industry and future trends and these factors could cause actual resultsto differ materially from the forward looking statements that have beenmade.  In particular,

 

•                  Although management expects demand for ethanol to increase, demand islargely driven by federal and state environmental regulations, which are oftensubject to change.

 

•                  Any lowering of gasoline prices will likely alsolead to lower prices for ethanol and adversely affect Northern Lights’ operating results.

 

•                  The ethanolindustry and Northern Lights’ business are sensitive to corn prices.  When corn prices increase, Northern Lights’operating results may suffer.

 

•                  The ethanol industry and Northern Lights aresensitive to natural gas prices.  Whennatural gas prices increase, Northern Lights’ operating results may suffer.

 

•                  Theethanol industry and Northern Lights are partially dependent upon governmentsubsidies and incentive payments. Northern Lights’ operating income may be adversely impacted by adecrease in or termination of available government subsidies and incentivepayments.

 

•                  The ethanol industry and Northern Lights maybe subject to additional regulation, such as environmental restrictions, orregulatory action, which could include fines, penalties, or injunctive reliefas a result of any potential excessive emissions, which could increase costs.

 

•                  Northern Lights is dependent upon BroinManagement, LLC to manage the day-to-day activities of the plant and uponBroin-related entities to market the ethanol and DDGS produced at theplant.  If any of these entities ceaseproviding services to Northern Lights, the plant’s operations may be adverselyaffected.

 

We are notunder any duty to update the forward-looking statements contained in thisreport.  We cannot guarantee futureresults or performance or what future business conditions will

 

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be like.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of this report.

 

**Overview**

 

On March 27,2003, our members approved our reorganization from a cooperative to a limitedliability company.  The reorganizationbecame effective on April 1, 2003.  Uponcompletion of the reorganization to a limited liability company, we became theowner of the cooperative’s 77.16% interest in Northern Lights Ethanol, LLC, acompany that owns and operates a 40 million gallon ethanol plant near Big StoneCity, South Dakota.  The plant beganproduction on July 5, 2002.  Prior tothat time, Northern Lights was in the development stage.

 

NorthernLights’ business consists of the production of ethanol and an ethanolco-product, DDGS.  In addition tofederal and state government incentive programs, the primary factors thatinfluence our operating and financial performance are the prices at which wesell ethanol and DDGS and the costs related to production.  Although there are various costs related tothe production process, the most significant are the price at which we purchasecorn and the costs of natural gas and steam.

 

#### **Results of Operations**

 

Northern Lights started ethanol operations on July 5, 2002 and beganoperating at full capacity in August 2002. Accordingly, the income, production, and sales data for the year endedDecember 31, 2002 do not reflect a full year of operations.

 

Our net income for the year ended December 31, 2003 was $5.6 million,consisting of $9.2 million of operating income, offset by $1.8 million ofinterest expense and $1.8 million of income allocated to the minority member inNorthern Lights.  Our net income for theyear ended December 31, 2002 was $3.9 million, consisting of $6.1 million ofoperating income for the six months the plant was operating, offset by $1.0million of interest expense and $1.2 million of income allocated to theminority interest.  Our net income forthe year ended December 31, 2003 was lower than the proportional amount duringthe six operational months in 2002 primarily as a result of the decrease inincentive revenue received in 2003.

 

Sales for theyear ended December 31, 2003 were approximately $65.6 million, consisting of$51.9 million in sales of ethanol (79%) and $13.7 million in sales of DDGS(21%).  For the year ended December 31,2002, sales of ethanol represented 80% of total sales and sales of DDGSrepresented 20% of total sales.

 

Ourethanol and DDGS sales could be affected by various factors.  The price of ethanol and sales tends to bearsome direct relationship to the price of gasoline.  As the price of gasoline decreases, the price of ethanol tends todecrease.  Any lowering of gasolineprices will likely also lead to lower prices for ethanol and reduce our salesand profitability.  The price of ethanoland sales could also change based upon the principles of supply anddemand.  Increased production of ethanolcould result in lower prices for ethanol and sales if the demand for ethanoldoes not keep up with the expected increase in supply.  We expect that existing ethanol plants willconstruct additions to increase their production and that new fuel gradeethanol plants will be constructed in addition to the 17 plants currently underconstruction.  Increased production ofethanol will also lead to increased supplies of DDGS.  Those increased supplies could lead to lower prices and sales

 

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for DDGS.  Further, if the EPA begins to grant states like New Hampshire andCalifornia waivers from the oxygenated fuel requirement under the 1990 CleanAir Act Amendments, our sales could be adversely affected.

 

In addition tosales revenue, Northern Lights recorded incentive revenue of approximately $5.3million during the year ended December 31, 2003 and $7.1 million for the sixmonths of production in the year ended December 31, 2002.  Incentive revenue consists of incomereceived from federal and state governments in connection with Northern Lights’ethanol production.  For the years endedDecember 31, 2003 and 2002, Northern Lights recorded approximately $4.1 millionand $6.7 million, respectively, of incentive revenue from the United StatesDepartment of Agriculture’s Commodity Credit Corporation under its BioenergyProgram.  Of the $4.1 million earned inthe year ended December 31, 2003, $4.0 million is attributed to the 2003program year, which ended September 30, 2003, and $100,000 is for the 2004program year.  Of all the incomerecorded in the year ended December 31, 2002, $3.2 million was attributed tothe 2002 program year, and $3.5 million was attributed to the 2003 programyear.  The maximum allocation perprogram year under the Bioenergy Program is $7.5 million, which Northern Lightsearned in the 2003 program year.

 

Northern Lights recorded incentive income of approximately $1.2 millionfrom the state of South Dakota for the year ended December 31, 2003, andapproximately $400,000 for the year ended December 31, 2002.  Of this $1.2 million for the year endedDecember 31, 2003, $600,000 is attributed to the 2003 program year, which endedJune 30, 2003 and $600,000 is for the 2004 program year.  Northern Lights’ maximum allocation perprogram year under the South Dakota program is $1.0 million, although themaximum payment per month is set at one-twelfth of $1.0 million as of the 2004program year.  Northern Lights receivedits maximum allocation in the 2003 program year.

 

Management anticipates that it will receive less incentive income underthe Bioenergy Program in the 2004 program year because the incentive paymentsare partially based on the increase in gallons of ethanol produced compared tothe prior year’s production.  Therefore,Northern Lights will receive lower payments under this program in the futurebecause the increase in its production as compared to prior year’s productionwill be smaller than Northern Lights’ first year of production.  In addition, we anticipatethat we will not receive any further payments under the South Dakota incentiveprogram until the 2005 program year (beginning July 1, 2004) because themaximum incentive payment of $5 million to all South Dakota plants during the2004 program year has already been allocated and distributed.  While the maximum payment to all plants inSouth Dakota during the 2005 program year will be increased to $6 million, wemay receive less under this program if more plants in South Dakota commence orincrease production of ethanol. Furthermore, the Bioenergy Program also may not have sufficient funds to cover theallocations to eligible producers in future years, as most recently experiencedduring the 2003 program year.  UnlessCongress extends the Bioenergy Program, it is also currently scheduled toexpire September 30, 2007.

 

NorthernLights’ cost of revenues, which includes production expense, for the year endedDecember 31, 2003 was approximately $58.9 million.  Northern Lights’ costs of revenues decreased to approximately 90%of sales for the year ended December 31, 2003, as compared to approximately 98%of sales for the six months of operations during the year ended December 31,2002.  The decrease in the cost ofrevenue as a percentage of sales results primarily from a 14%

 

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and 8% increase in the netsales price of ethanol and DDGS, respectively, and a 6% increase in the rate ofproduction.  These positive results,however, were partially offset by a 28% increase in total energy costs from2002 to 2003.  The increase in energycosts was primarily due to a 55% increase in the price of natural gas from 2002to 2003.

 

Our cost of revenues could be materially affected by the price of corn.  Production of ethanol and DDGS requires a substantial amount of corn.  The price of corn is affected by weather, governmental policy, disease, and other factors.  A significant reduction in the quantity of corn harvested due to adverse weather conditions such as drought, planting, domestic and foreign government farm policies and programs, carryout, demand and supply or other factors, could result in increased corn prices and costs which would increase the cost to produce ethanol.  The significance and impact of these factors on the price of corn is difficult to predict.  Significant variations in actual growing conditions from normal growing conditions also may adversely affect our ability to procure corn.  Any events that tend to negatively affect the supply of corn will tend to increase prices and harm our business.  Further, the price of corn has fluctuated significantly in the past and may fluctuate in the future.  If we cannot manage price fluctuation effectively, our costs may be materially and adversely affected.

 

Northern Lights incurred general and administrative expense of approximately $2.7 million and recorded interest expense of $1.8 million on its long-term debt for the year ended December 31, 2003.  For the six months of operations in the year ended December 31, 2002, Northern Lights incurred $1.0 million of general and administrative expense and recorded interest expense of $1.0 on its long-term debt.

 

**Liquidityand Capital Resources**

 

*Cash Flow From Operations.*  The net cash flow provided by operatingactivities was approximately $13.2 million for the year ended December 31,2003.  The cash flow from operationsconsisted of net income of $5.6 million, net non-cash expenses of $4.3 million,and $3.3 million net change in assets and liability balances.  The $3.3 million change in asset andliability balances is primarily due to a reduction of accounts receivableresulting from the collection of a Bioenergy Program payment in August 2003,and an increase in accounts payable for corn payments owed to producers whohave delivered corn to the plant.  Theincrease in corn payable results from producers who requested to defer paymentto them until the next calendar year, and from payments made at the end of thetrimester to our members who elected the trimester average price for theircommitted bushels.

 

*Cash Flow From Investing Activities.*  The net cash usedfor investing activities was approximately $1.1 million for the year endedDecember 31, 2003.  The purchase ofplant and equipment associated with final plant construction accounted forapproximately $800,000 of the total $1.1 million increase in investingactivities.  Of the $800,000 in costs,Northern Lights spent $580,000 for the installation of a second regenerativethermal oxidizer, which is a pollution control device designed to reduceemissions.

 

*Cash Flow From Financing Activities.*  Net cash used forfinancing activities was approximately $13.8 million for the year endedDecember 31, 2003, consisting of repayment of

 

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principal onNorthern Lights’ debt of $9.4 million, including a $5 million repayment on its$5 million variable rate, revolving note, a $3.7 million cash distribution toour members, and a $1.2 million cash distribution to the minority member ofNorthern Lights.

 

OnJuly 11, 2001 Northern Lights entered into a Loan Agreement and Note with U.S.Bank National Association, Sioux Falls, South Dakota, for up to $31.1 millionin debt financing to fund the balance of the construction costs and otherstart-up expenses for the ethanol plant. Until the construction loan was converted to a term loan, NorthernLights made quarterly interest only payments to U.S. Bank at a variable rateequal to one percent plus the prime rate announced by U.S. Bank.  As of January 1, 2003, Northern Lightsrefinanced the outstanding balance on its Construction Note with U.S. Bank intoa $11.1 million variable-rate, non-revolving note; a $15 million fixed-ratenote; and a $5 million variable-rate, revolving note.

 

The$15 million fixed-rate note bears 6.95% interest annually and requires equalquarterly payments of approximately $521,000 with a balloon payment due onDecember 31, 2007.  There is aprepayment penalty if Northern Lights prepays the loan prior to its maturity byany means other than the mandated prepayments calculated based on NorthernLights’ excess cash flow under the Loan Agreement.  Under the Loan Agreement, Northern Lights is required to prepayU.S. Bank a portion of the principal of the loan by May 1 of each year in anamount equal to 15% of the excess cash flow but not more than 20% of theoutstanding principal balance of the loan. The Loan Agreement defines excess cash flow as the net income of NorthernLights before deductions for depreciation and amortization less expendituresfor fixed and capital assets not financed by debt, required principal paymentsincluding capitalized lease obligations, and interest expense.  A total of $2.8 million in principalpayments were made on the fixed rate note during the year ended December 31,2003, including $1.7 million in payments relating to the excess cash flowpayment.

 

The$11.1 million variable-rate, non-revolving note bears interest at 1.00% overU.S. Bank’s prime rate.  This noterequires quarterly payments of interest and amortized principal on the basis ofa ten-year term.  This note is due onDecember 31, 2007.  As of December 31,2003, Northern Lights’ variable rate was 5.0%. A total of $1.2 million in principal payments were made on the variablerate note during the year ended December 31, 2003.

 

The$5 million variable-rate, revolving note bears interest at 1.00% over U.S.Bank’s prime rate, requires quarterly interest only payments, and is due onDecember 31, 2007.  The revolvingfeature permits Northern Lights to re-borrow in multiples of $100,000 on arevolving basis, the difference between the outstanding principal amount on thenote and $5 million.  Northern Lights pays an unused commitment fee of0.5% per annum that is assessed quarterly on any funds not borrowed under thenote.  As of December 31, 2003, therewas no outstanding principal balance on the note, and the variable rate was5.0%.

 

Thenotes from U.S. Bank are secured by Northern Lights’ leasehold interest,easement rights, improvements, personal property (including generalintangibles), and contracts (including an assignment of its interest in theDesign/Build Contract with Broin and agreements with Otter Tail Corporation andNorthWestern Public Service).

 

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TheLoan Agreement requires that Northern Lights provide U.S. Bank with auditedannual and unaudited quarterly financial statements.  In addition, it contains minimum debt service coverage ratios,minimum working capital, minimum tangible net worth and other standard negativeand affirmative covenants, all of which have been complied with as of December31, 2003.  If an event of default, asdefined in the Loan Agreement, U.S. Bank may terminate the Loan Agreement anddeclare the entire amount immediately due and owing.  Events of defaultunder the Agreement include failure to make payments when due or violation ofone or more of the Agreement’s covenants.

 

OnJune 5, 2002, Northern Lights executed a promissory note for up to $1 millionin favor of U.S. Bank National Association for the acquisition and installationof a regenerative thermal oxidizer, which is a pollution control devicedesigned to reduce emissions.  OnDecember 15, 2002, Northern Lights executed an additional promissory note forup to $500,000 in favor of U.S. Bank National Association for the acquisitionand installation of a second regenerative thermal oxidizer to supplement theplant’s primary regenerative thermal oxidizer. Northern Lights paid interest on the outstanding balances of thepromissory notes at a rate of one percent plus the prime rate announced by U.S.Bank.  The promissory notes were securedby the regenerative thermal oxidizers and a lien on all payments that NorthernLights receives or is entitled to receive under the Commodity CreditCorporation Bioenergy Program.  Thepromissory notes were due on May 1, 2003.

 

OnMay 1, 2003, Northern Lights paid U.S. Bank interest and principal on the twopromissory notes of $50,427 and $300,000, respectively.  The remaining principal balance on the twonotes was refinanced as a new $1.2 million note.  Northern Lights pays interest on the outstanding balance of thepromissory note at a fixed rate of 5.70%. Northern Lights makes quarterly principal and interest payments on thenote of $84,406 with the final payment due on May 1, 2007.  For the year ended December 31, 2003,Northern Lights made $434,000 in principal payments on the note. The newpromissory note is secured by the regenerative thermal oxidizers and a lien onall payments that Northern Lights receives or is entitled to receive under theCommodity Credit Corporation Bioenergy Program.

 

NorthernLights incurred approximately $1.8 million in interest expense for the yearended December 31, 2003, compared to $1.0 million for the year ended December31, 2002.  In addition, for the yearended December 31, 2002, Northern Lights capitalized $488,000 of interest fromits construction loan during the first six months of 2002.

 

Inaddition to Northern Lights’ long-term debt, the following table providesinformation regarding the consolidated contractual obligations of NorthernGrowers as of December 31, 2003:

 
|                               |   | **Total** |       | **Less than  One Year** |      | **One to  Three  Years** |      | **Four to  Five  Years** |       | **After Five  Years** |      |
|------------------------------------|--------|-----------|------------|-------------------------|-----------|--------------------------|-----------|--------------------------|------------|-----------------------|-----------|
|                               |   |      |       |                    |      |                     |      |                     |       |                  |      |
| Long-Term Debt                     |   | $         | 23,188,299 |                    | 3,134,922 |                     | 6,203,896 |                     | 13,849,481 |                  | —    |   |
|                               |   |      |       |                    |      |                     |      |                     |       |                  |      |
| Land Lease                         |   | 389,515   |       | 2,400                   |      | 4,920                    |      | 5,040                    |       | 377,155               |      |
|                               |   |      |       |                    |      |                     |      |                     |       |                  |      |
| Management Agreements              |   | 512,417   |       | 347,167                 |      | 165,250                  |      | —                   |       | —                |      |
|                               |   |      |       |                    |      |                     |      |                     |       |                  |      |
| Unconditional Purchase Obligations |   | 1,827,090 |       | 217,080                 |      | 434,160                  |      | 434,160                  |       | 741,690               |      |
|                               |   |      |       |                    |      |                     |      |                     |       |                  |      |
| Total Contractual Cash Obligations |   | $         | 25,917,321 |                    | 3,701,569 |                     | 6,808,226 |                     | 14,288,681 |                  | 1,118,845 |   |

 

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##### **Northern Lights expects to continue operating its plant at or above itsfull name-plate capacity of 40 million gallons for the next 12 months.  Northern Lights expects to have sufficientcash from operations to cover its operating and administrative costs andintends to fund working capital, minor capital expenditures, and debt-serviceobligations for the next 12 months primarily through cash flows generated fromits operating activities.  In the event,however, that the DENR or the EPA require the application of the MidwestScaling Method or the “multiplier” for quantifying emissions, or other similaremissions quantification method, we may have to fund certain capitalexpenditures through debt or equity financing in order to pay for certainemission control equipment and processes. Management is unable to predict the costs and effects that themultiplier would have on the operation of the plant.**

 

##### **Off-Balance Sheet Arrangements**

 

We do not useor have any off-balance sheet financial arrangements.

 

**Recent Accounting Pronouncements**

 

Management has reviewed therecent accounting pronouncements and has not identified any that are relevantto our financial statements.

 

**Critical Accounting Policies and Estimates**

 

Preparation ofour financial statements require estimates and judgments to be made that affectthe amounts of assets, liabilities, revenues and expenses reported.  Such decisions include the selection of theappropriate accounting principles to be applied and the assumptions on which tobase accounting estimates.  Managementcontinually evaluates these estimates based on historical experience and otherassumptions we believe to be reasonable under the circumstances.

 

The difficultyin applying these policies arises from the assumptions, estimates and judgmentsthat have to be made currently about matters that are inherently uncertain,such as future economic conditions, operating results and valuations as well asmanagement intentions.  As thedifficulty increases, the level of precision decreases, meaning that actualresults can and probably will be different from those currently estimated.

 

Of thesignificant accounting policies described in the notes to the financialstatements, we believe that the following may involve a higher degree ofestimates, judgments, and complexity.

 

## *Commitmentsand Contingencies. *Contingencies,by their nature, relate to uncertainties that require management to exercisejudgment both in assessing the likelihood that a liability has been

 

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## *incurred, as well as in estimating the amount of thepotential expense.  In conformity withaccounting principles generally accepted in the United States, we accrue anexpense when it is probable that a liability has been incurred and the amountcan be reasonably estimated.*

 

## *InventoryValuation. *NorthernLights accounts for its corn inventory at estimated net realizable marketvalue.  Corn is an agriculturalcommodity that is freely traded, has quoted market prices, may be sold withoutsignificant further processing, and has predictable and insignificant costs ofdisposal.  Northern Lights derives itsestimates from local market prices determined by grain terminals in itsarea.  Changes in the market values ofcorn inventory is recognized as a component of cost of revenues.  Ethanol and DDGS are stated at netrealizable value.  Work-in-process andchemical inventory are stated at an average cost method.

 

###### *RevenueRecognition. *Revenue from the production of ethanol and relatedproducts is recorded when title transfers to customers, net of allowances forestimated returns.  Generally, ethanoland related products are shipped FOB shipping point.  Interest income is recognized when earned.

 

Revenue from federal and state incentive programs is recorded when wehave produced or sold the ethanol and satisfied the reporting requirementsunder each applicable program.  When itis uncertain that we will receive full allocation and payment due under thefederal incentive program, we derive an estimate of the incentive revenue**for therelevant period based on various factors including the most recentlyused payment factor applied to the program. The estimate is subject to change as management becomes aware of increasesor decreases in the amount of funding available under the federal incentiveprogram or other factors that affect funding or allocation of funds under suchprogram.

 

## *Long-LivedAssets. *Depreciationand amortization of our property, plant, and equipment is provided on thestraight-line method by charges to operations at rates based upon the expecteduseful lives of individual or groups of assets.  Economic circumstances or other factors may cause management’sestimates of expected useful lives to differ from actual.

 

Long-livedassets, including property, plant and equipment, and investments are evaluatedfor impairment on the basis of undiscounted cash flows whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  An impaired asset iswritten down to its estimated fair market value based on the best informationavailable.  Considerable managementjudgment is necessary to estimate discounted future cash flows and may differfrom actual cash flows.

 

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## *Accountingfor Derivative Instruments and Hedging Activities. *Northern Lights minimizes theeffects of changes in the price of agricultural commodities by engaging BroinManagement, LLC to use exchange-traded futures and options contracts tominimize its net positions in these inventories and contracts.  Northern Lights accounts for changes inmarket value on exchange-traded futures and option contracts at exchangevalues. Northern Lights also accounts for changes in value of forward purchaseand sales contracts at local market prices determined by grain terminals in itsarea.  Changes in the market value ofall these contracts are recognized in earnings as a component of cost ofrevenues.

 

**Item 7.    FinancialStatements.**

 

Northern Growers’ financialstatements, described as follows, are appended to the signature page of thisreport beginning at page F-1.

 

•                  IndependentAuditor’s Report, dated February 3, 2004.

 

•                  ConsolidatedBalance Sheets as of December 31, 2003 and 2002.

 

•                  ConsolidatedStatement of Operations for the years ended December 31, 2003, and 2002.

 

•                  ConsolidatedStatements of Changes in Members’ Equity for the years ended December 31, 2003and 2002.

 

•                  ConsolidatedStatements of Cash Flows for the years ended December 31, 2003 and 2002.

 

•                  Notes toFinancial Statements.

 

**Item 8.    Changesin and Disagreements With Accountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 8A. Controlsand Procedures**

 

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES

 

Our chiefexecutive officer and chief financial officer, after evaluating theeffectiveness of our “disclosure controls and procedures” (as defined in Rule13a-14(c) under the Securities Exchange Act of 1934, as amended) as of the endof the period covered by this report, have concluded that our disclosurecontrols and procedures are effective in ensuring that material informationrequired to be disclosed is included in the reports that we file with theSecurities and Exchange Commission.

 

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CHANGES IN INTERNAL CONTROLS

 

There were nosignificant changes in our or Northern Lights’ internal controls or, to theknowledge of our management, in other factors that could significantly affectthese controls subsequent to the end of the period covered by this report.

 

### **PART III**

 

**Item 9. Directors, Executive Officers, Promoters and Control Persons; ComplianceWith Section 16(a) of the Exchange Act.**

 

NORTHERN GROWERS, LLC’S BOARD OF MANAGERS

 

Fifteen individuals serve on our Board ofManagers.  The table below describesimportant information about the current members of our Board of Managers.

 
| **Name, Address, Title  and  Principal Occupation**                                    |   | **Age** |   | **Term  Expiring** |   | **Background**                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------------------------------------------------------------------------|--------|---------|--------|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Ronald Anderson**47895 S.D. Hwy. 158,  LaBolt, South Dakota  57246,*Farmer*          |   | 59      |   | 2006               |   | Ron has been a farmer for nearly 40 years. He served on the  Board of the Nassau Farmers Elevator for 12 years and as its chairman for six  years. He assisted with the organization of the Grant County Soybean Association,  serving also as its President for six years. He is an active member of  American Lutheran Church in Milbank. Ron also attended Augustana College in  Sioux Falls, South Dakota for one year before returning to farming in 1964.       |
|                                                                                   |   |    |   |               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Glenn Berdan**36306 Co. Rd. 65  Ortonville, Minnesota  56278

*Farmer*               |   | 48      |   | 2006               |   | Glenn has been a farmer for over 30 years. Glenn is a former  Chairman of the Board of Farmers Union Oil Company and Board member of  Centrol Inc. of Morris, Minnesota. He is a former member of the Cenex  Regional Resolutions Committee and First English Lutheran Church Council. He  currently serves on the Board of Upper Minnesota River Watershed District.                                                                                                 |
|                                                                                   |   |    |   |               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Dennis Flemming**,  P.O. Box 3  LaBolt, South Dakota  57246*Farm  Elevator Operator* |   | 51      |   | 2004               |   | Dennis has been the General Manager of the LaBolt Farmers Grain  Co., Inc., a grain elevator located in LaBolt, South Dakota since April  2001.  He previously owned the South  Shore Elevator Co. in South Shore, South Dakota.                                                                                                                                                                                                                                 |
|                                                                                   |   |    |   |               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Lars Herseth**39949 114th Street  Houghton, SD  57449*Farmer*                        |   | 57      |   | 2006               |   | Lars has been a farmer since 1969.  He is a former State Representative and  State Senator with the state of South Dakota Legislature, serving as  Representative for 12 years and Senator for 8 years. He also currently serves  on the Board of the American Coalition of Ethanol and as a member of the  South Dakota Corn Utilization Council. He received a Bachelor of Arts degree  in Government and History from the University of South Dakota in 1969. |
|                                                                                   |   |    |   |               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Mark Lounsbery**48187 SD Hwy. 20  Revillo, South Dakota  57259                       |   | 56      |   | 2005               |   | Mark has been a farmer for the past 35 years.  He is a former member of the Board of the  South Dakota Corn Utilization Council and is a member of the Board of the  American Corn Growers Association.                                                                                                                                                                                                                                                          |

 

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| *Farmer*                                                                                                      |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                          |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Robert Metz**46602 127th   Street  Browns Valley, Minnesota 56219*Farmer*                              |   | 46     |   | 2004   |   | Robert has been a farmer for the past 27 years.  He currently represents South Dakota as  Vice President of the American Soybean Association.  He also currently serves as President of  the National Bio-Diesel Board.  He serves as a member of the South Dakota  Corn Growers Association and Farm Credit Ag Advisory Board and is Trustee of  St. Anthony’s Catholic Church.  He is  a former board member of the Browns Valley School District and the Browns  Valley Community Elevator.                  |
|                                                                                                          |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Robert Narem**14313 469th Ave.  Twin Brooks, SD 57269  (605) 432-6099*Chief  Executive Officer**Agronomist* |   | 48     |   | 2005   |   | Robert has been employed  with Soil Consultant, Inc. as an agronomist since 1982 and currently serves  as President. He is a member of the South Dakota Independent Crop Consultant  Association and vice president of the South Dakota Certified Crop Advisor  Committee. He is also a supervisor of Kilborn Township. He graduated from  South Dakota State University in Brookings, South Dakota, in 1977, with a  major in Park Management, and from South Dakota State University in 1982 with  a Masters of Science degree in Agronomy. |
|                                                                                                          |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Jeff Olson**2494 300th St.  Madison, Minnesota56256*Farmer*                                                 |   | 41     |   | 2004   |   | Jeff has been a farmer for the last 19 years.  He currently serves on the Board of the  Lac Qui Parle County Planning and Zoning Committee.  He is also President of Minnesota Valley Lutheran Church.  He graduated from South Dakota State  University in Brookings, South Dakota with a Bachelor of Science degree in  Agriculture Education in 1985.                                                                                                                                                                       |
|                                                                                                          |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Ronald Olson**44228 150th Street,Waubay, South Dakota  57273*Farmer*                                        |   | 40     |   | 2004   |   | Ron has been  a farmer for the last 19 years. He currently serves on the Board of the  National Corn Growers and South Dakota Corn Utilization Council. He is also a  Deacon of the Egeland Lutheran Church. He graduated from South Dakota State  University in Brookings, South Dakota, with a Bachelor of Associate’s degree  in Agriculture in 1986.                                                                                                                                                                                 |
|                                                                                                          |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **James Peterson**16952 482nd Avenue,  Revillo, South Dakota  57259*President  Farmer and State Legislator*   |   | 60     |   | 2006   |   | James has been a farmer for over 35 years.  He has served as State Representative for  District 4 in the state of South Dakota Legislature since 2000. James  graduated from Augustana College in Sioux Falls, South Dakota, with a  Bachelor of Arts degree in 1966.                                                                                                                                                                                                                                                                    |
|                                                                                                          |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Delton Strasser**13975 SD Hwy. 123  Wilmot, South Dakota  57279*Secretary  Farmer*                          |   | 59     |   | 2006   |   | Del has been a farmer for over 38 years.  He is director and former Chairman of the  Board of the South Dakota Corn Utilization Council.  He formerly served on the Board of the National Corn Growers  Association and has been President of the Zion Community Church since  2000.  He is also a former 4-H  leader.  He attended Trinity College  in Chicago, Illinois, for one year.                                                                                                                                  |
|                                                                                                          |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Steve Street**16153  486th Avenue  Revillo, South Dakota  57259*Vice  President*                            |   | 52     |   | 2004   |   | Steve has been a farmer for over 31 years.  He currently serves on the Board of the  South Dakota Corn Utilization Council, He is the former President of the  Board of the Revillo Grain Elevator and currently serves as Treasurer of the  Township of Adams.  Steve graduated  from South Dakota State University in Brookings, South Dakota, in 1972, with  a major in Agronomy.                                                                                                                                                |

 

24

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| *Farmer*                                                                     |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------------------------------------------------------------------|--------|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                         |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Gregory Toben**47906 171st Street  Clear Lake, South Dakota  57226*Farmer* |   | 51     |   | 2005   |   | Greg has been a farmer for over 30 years.  He is the Chairman of the Deuel County,  South Dakota, FSA Committee and a supervisor for the Lowe Township  Board.  He is also a member of the  Deuel School Board.  Greg attended  South Dakota State University in Brookings, South Dakota.                                                                                                                                                               |
|                                                                         |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Robert Wittnebel**2971 121st Ave.  Nassau, Minnesota 56257  *Farmer*  |   | 64     |   | 2005   |   | Robert has been a farmer for over 33 years.  He is a member of the American Legion,  VFW, and Trinity Lutheran Church.  He  also serves on the Board of Hilltop Madison Lutheran Home.  He earned a Bachelor of Science Degree in  Agricultural Education from South Dakota State University in 1961.                                                                                                                                                   |
|                                                                         |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Bill Whipple**13453 460th Avenue  Wilmot, South Dakota  57279*Farmer*      |   | 59     |   | 2005   |   | Bill has been a farmer for over 29 years with Whipple Ranch,  Inc., where he is President and Manager.   He currently serves on the Board of the South Dakota Corn Growers  Association.  He belongs to the  American Legion and the South Dakota Soybean Association.  He is also Supervisor of Spring Grove  Township.  Bill graduated from South  Dakota State University in Brookings, South Dakota, in 1969, with a major in  Animal Science. |

 

EXECUTIVE OFFICERS OF NORTHERN GROWERS, LLC

 

Our executive officers are set forth below.

 
| **Name**             |   | **Age** |   | **Position**                                         |
|----------------------|--------|---------|--------|------------------------------------------------------|
| **Robert  Narem**    |   | 48      |   | Chief Executive Officer and Chief Financial  Officer |
| **James  Peterson**  |   | 60      |   | President                                            |
| **Steve  Street**    |   | 52      |   | Vice President                                       |
| **Delton  Strasser** |   | 59      |   | Secretary                                            |

 

NORTHERN LIGHTS ETHANOL, LLC’S BOARD OF MANAGERS

 

Northern Lights Ethanol, LLC’s Board ofManagers consist of seven individuals. Broin Investments I elects two members of the Board and our Board ofManagers elects five members of the Board. Our Board selected Mark Lounsbery, Jim Peterson, Del Strasser, Steve Street,and Bob Wittnebel, whose biographical information is provided above, torepresent us on Northern Lights’ Board. Broin Investments I, LLC appointed Jeffrey S. Broin, 37, and Larry Ward,48, as their representatives on the Board of Northern Lights.

 

Jeff and Larry have been integrally involvedin the Northern Lights plant from the early planning stages and have beeninstrumental in the construction and management of ethanol plants in theMidwest and in ethanol product marketing since 1987.  Jeff and Larry may be contacted at Broin’s office at 2209 E. 57thStreet North, Sioux Falls, South Dakota 57104. Jeff is currently the Chief Executive Officer of Broin and Associates,Inc. and Chief Managing Officer of Broin Management, LLC and has been ChiefExecutive Officer of Broin Enterprises, Inc. since 1987.  Jeff also managed Broin Enterprises’ ethanolplant in Scotland, South Dakota for approximately 10 years.  Jeff has a Bachelor of Science degree inAgricultural Business from the University of Wisconsin.  Since 1990, Jeff has served on the Board ofthe American Coalition of Ethanol.  Hehas also served on the Board of the South Dakota Ethanol Producers Associationsince 1991, and as a member of the Renewable Fuels Association since 1997.  He is also an associate member of the

 

25

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South Dakota Corn Growers Association and he serves on the boards of 14other ethanol plants operated and managed by Broin Management.

 

Larry Ward is currently the director of ProjectDevelopment for the Broin Companies and has been involved in the ethanolindustry in various management positions since 1997.  In his current position, Larry performs a variety of rolesrelated to ethanol project formation and financing, including ethanol marketingstrategies.  He is currently a member oran advisor to the Boards of 12 ethanol plants that are either currentlyoperating or being developed.  Mr. Wardreceived a degree in Business from Mankato State University, Mankato,Minnesota, in 1980, and a Masters of Business Administration from theUniversity of South Dakota, Vermillion, South Dakota in 1990.

 

EXECUTIVE OFFICERS OF NORTHERN LIGHTS ETHANOL, LLC.

 

The Executive Officers of Northern LightsEthanol, LLC are Delton Strasser, President; Jeff Broin, Vice-President; SteveStreet, Secretary; and Robert Wittnebel, Treasurer.  Detailed information about all executive officers of NorthernLights except Jeff Broin can be found under “Northern Growers, LLC’s Board ofManagers” above.

 

Although Northern Lights’ Board of Managershas the authority to manage and oversee the business and affairs of NorthernLights, its manager, Broin Management, is responsible for the day-to-daymanagement decisions and for running the ethanol plant pursuant to the managementagreement discussed above under “Item 1. Description of Business-Management andEmployees.”

 

MANAGEMENT AND KEY EMPLOYEES

 

Members of Northern Lights’ management andkey employees are set forth below.

 
| **Name**            |   | **Age** |   | **Position**           |
|---------------------|--------|---------|--------|------------------------|
| **Blaine  Gomer**   |   | 42      |   | General Manager        |
| **Jennifer  Block** |   | 35      |   | Controller             |
| **Holly  Meyer**    |   | 41      |   | Membership Coordinator |

 

Northern Lights’ day-to-day affairs aremanaged by Blaine Gomer,  NorthernLights’ General Manager.  Blaine isemployed by Broin Management, which manages the operation of the ethanolplant.  Jennifer Block is NorthernLights’ Controller.  Jennifer isresponsible for Northern Lights’ financial records and preparing consolidatedfinancial statements for Northern Growers and Northern Lights.  Holly Meyer is the Membership Coordinatorfor Northern Lights.  Holly isresponsible for maintaining Northern Growers’ membership records, providinggeneral assistance to Northern Growers’ members, maintaining Northern Growers’bank accounts, and handling all sales and transfer of capital units.

 

Blaine Gomer graduated from South DakotaState University, Brookings, South Dakota in 1986, earning a Bachelor ofScience Degree in Agriculture majoring in Dairy Science (Manufacturing) with aminor in Microbiology.  Blaine alsoreceived an Associate of Applied Science Degree in Engineering/ArchitecturalDrafting from Lake Area Technical Institute in

 

26

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Watertown, South Dakota in 1981. Blaine’s management experience and positions previous to being GeneralManager of Northern Lights include: Regional Operations Manager, Leprino FoodsCompany, Norfolk, Nebraska from 1998 to 2002; Plant Manager, Dairy Farmers ofAmerica, Inc., Hartington, Nebraska from 1994 to 1998; Plant Manager, DairyFarmers of America Inc., Willows, California from 1992 to 1994, plus othermiddle management positions within the Dairy Farmers of America Inc.organization from 1986 to 1992 at various Midwest locations.

 

JenniferBlock, CMA, graduated in 1986 from Webster High School in Webster, SouthDakota.  She attended Southwest StateUniversity in Marshall, Minnesota, for a year, and graduated from MoorheadState University in Moorhead, Minnesota in 1991 with a Bachelor of ScienceDegree, majoring in Accounting. Jennifer completed the national certification for her CertifiedManagement Accountant designation in 1999. From 1992 until joining Northern Lights in 2002, Jennifer was theAccounting Manager for Dakota Western Corporation in Agency Village, SouthDakota, a plastics manufacturer.

 

Holly Meyer graduated from Marietta HighSchool in Marietta, Minnesota.  Shereceived a Bachelor of Arts degree in Business Administration from Mount MartyCollege, Watertown, South Dakota.  Hollyworked at Revillo Farmers Elevator, Revillo, South Dakota from 1993 to 1999 inthe grain and agronomy departments.  Sheworked at LaBolt Farmers Grain, LaBolt, South Dakota from 2001 until coming toNorthern Lights as their Grain Accountant in April of 2002.  Holly moved to the position of membershipcoordinator in April 2003.

 

RELATIONSHIPS BETWEEN BOARD MEMBERS, EXECUTIVE OFFICERS AND KEYEMPLOYEES

 

No family relationship exists between any ofNorthern Growers’ or Northern Lights’ Board members, officers or key employees;however, Jeff Broin serves on the Board of Managers of Northern Lights and is apart owner of Broin Management, LLC and Broin Enterprises, Inc., and Larry Wardalso serves on the Board of Managers of Northern Lights and is an employee ofBroin and Associates and Broin Management.

 

AUDIT COMMITTEE

 

We have a standing Audit Committee. The AuditCommittee is generally responsible for overseeing the accounting, financialreporting, financial practices, internal controls and audit activities ofNorthern Growers. The individuals serving on the Audit Committee are RobertMetz, Gregory Toben, Bob Wittnebel, and Bill Whipple.  Detailed information about each of the Audit Committee memberscan be found under “Northern Growers, LLC’s Board of Managers” above.

 

None of the current members of the AuditCommittee is an “audit committee financial expert” as defined by the SEC.  The primary reason the Audit Committee doesnot have a financial expert is that Northern Growers is an agricultural andproducer-based company.  Theoverwhelming majority of Northern Growers’ 649 members are farmers residing inSouth Dakota, Minnesota, North Dakota, or Iowa.  All of the 15 members of the Board of Managers are also farmersor are involved in a farm-related business, each of whom does not possess allof the necessary attributes to serve as a financial expert.  The rural location and agricultural-based

 

27

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business of Northern Growers makes it difficult to find individuals whohave all of the necessary attributes to serve as a financial expert.  Nevertheless, we believe the collectiveexperience and backgrounds of the Audit Committee members enable them toprovide the necessary oversight and protection. In addition, Broin Management,the manager of Northern Lights’ plant, provides Northern Lights with certainoversight and expertise in accounting, financial, and other matters on whichNorthern Growers’ Audit Committee depends when it carries out its duties andresponsibilities.

 

CODE OF ETHICS

 

We adopted a Code of Ethics on June 26, 2003,a copy of which will be provided, without charge, to any person who requests acopy from us in writing.  To request acopy of our Code of Ethics, please write to the following:

 
| Membership Coordinator              |
|-------------------------------------|
| Northern Growers, LLC               |
| c/o Northern Lights  Ethanol, LLC   |
| 48416 144th  Street                 |
| Big Stone City, South  Dakota 57216 |

 

**Item 10. Executive Compensation.**

 

BOARD OF MANAGERS

 

Members of our Board of Managersare reimbursed for actual expenses of attending Board and committee meetingsand provided a per diem fee for services performed on our behalf in the amountof $125 for each regular Board meeting or committee meeting, and mileagereimbursement.  Our Board members alsoreceive the same membership benefits other members receive in proportion to theirmembership interests.  Members ofNorthern Lights’ Board of Managers receive a $125 per diem fee for attendingeach Board meeting.

 

EXECUTIVE OFFICERS

 

Mr. Robert Narem became our ChiefExecutive Officer on September 11, 2003, replacing Mr. James Peterson, thecurrent President of our Board, who served as our Chief Executive Officerfollowing reorganization and conversion from a cooperative on April 1,2003.  Mr. Peterson also served as thePresident of Northern Growers Cooperative from April 2000 to April 1,2003.  Mr. Narem does not receive asalary or bonus for his services as Chief Executive Officer.  Mr. Narem has not received any options orother long-term incentive awards and does not receive any health-care,retirement, or other benefits except for a per diem fee of $125 for any servicein connection with his position.

 

The following table sets forthall the compensation paid by us during the years ended December 31, 2003, 2002,and 2001 to our principal Executive Officer.

 

28

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|                                  |   |                    |   | **Long-Term Compensation**          |   |
|---------------------------------------|--------|-------------------------|--------|-------------------------------------|--------|
|                                  |   |                    |   | **Awards**                          |   | **Payouts** |   |
|                                  |   |                    |   | **Restricted  Stock  Award(s) ($)** |   | **Securities  Underlying  Options/  SARs (#)** |   | **LTIP  Payouts** |   | **All Other  Compensation  ($)** |   |
|                                  |   | **Annual Compensation** |   |                                |   |   |   |
| **Name and  Principal Position** |   | **Year ended  Dec. 31** |   | **Salary  ($)**                     |   | **Bonus  ($)** |   | **Other Annual  Compensation** |   |   |   |   |   |
|                                  |   |                    |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert Narem                          |   | 2003               | (1)    | —                              |   | — |   | — |   | — |   | — |   | — |   | $ | 1,000 | * |
| *Chief Executive Officer*             |   |                    |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  |   |                    |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| James Peterson                        |   | 2003                    | (1)    | —                              |   | — |   | — |   | — |   | — |   | — |   | $ | 1,750 | * |
| *Chief  Executive*                    |   | 2002                    | (1)    | —                              |   | — |   | — |   | — |   | — |   | — |   | $ | 1,750 | * |
| *Officer*                             |   | 2001                    | (1)    | —                              |   | — |   | — |   | — |   | — |   | — |   | $ | 0.00 | * |

 

----

(1) Robert Narem became Chief Executive Officer of Northern Growers onSeptember 11, 2003, replacing James Peterson who served as Chief ExecutiveOfficer of Northern Growers from April 1, 2003. Mr. Peterson served  as President from April 2000 to April 2003of Northern Growers Cooperative, the predecessor of Northern Growers, LLC’sbefore converting from a cooperative. Mr. Peterson currently serves as thePresident of Northern Growers’ Board of Managers.

 

*Consists of fees and expenses paid to Mr. Narem and Mr. Peterson forserving as Chief Executive Officer of Northern Growers or its predecessor,Northern Growers Cooperative.

 

None of our officers or employeesor Northern Lights’ officers or employees received total compensation exceeding$100,000 during the year ended December 31, 2003. Blaine Gomer, NorthernLights’ General Manager, is an employee of Broin Management, LLC which NorthernLights has engaged to operate the plant. See “Item 1. Description of Business—Management and Employees” for adescription of the management agreement governing our relationship with BroinManagement.

 

We have not issued, eitherdirectly or as part of a long-term incentive plan, any options or stockappreciation rights to any executive officer or board member.

 

**Item 11. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.**

 

The following table sets forththe current beneficial ownership by management of Northern Growers’ capitalunits.

 
| **Title of Class** |   | **Name and Address of  Beneficial  Owner (1)**      |   | **Amount and Nature of  Beneficial Owner (in Units)** |   | **Percent of Class** |   |
|--------------------|--------|-----------------------------------------------------|--------|-------------------------------------------------------|--------|----------------------|--------|
| Class A            |   | Ronald Anderson, Manager (2)                        |   | 20,000                                                |   |                 | *      |
| Class A            |   | Glenn Berdan, Manager                               |   | 6,000                                                 |   |                 | *      |
| Class A            |   | Dennis Flemming, Manager (3)                        |   | 25,000                                                |   |                 | *      |
| Class A            |   | Lars Herseth, Manager                               |   | 20,000                                                |   |                 | *      |
| Class A            |   | Mark Lounsbery, Manager (4)                         |   | 30,000                                                |   |                 | *      |
| Class A            |   | Bob Metz, Manager (5)                               |   | 25,000                                                |   |                 | *      |
| Class A            |   | Robert Narem, Chief Executive Officer,  Manager (6) |   | 15,000                                                |   |                 | *      |
| Class A            |   | Jeff Olson, Manager                                 |   | 5,000                                                 |   |                 | *      |
| Class A            |   | Ronald Olson, Manager                               |   | 25,000                                                |   |                 | *      |
| Class A            |   | James Peterson, President, Manager (7)              |   | 50,000                                                |   |                 | *      |

 

29

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| Class A |   | Delton Strasser, Secretary, Manager  (8)     |   | 20,000  |   |   | * |
|---------|--------|----------------------------------------------|--------|---------|--------|--------|---|
| Class A |   | Steve Street, Vice President, Manager  (9)   |   | 40,000  |   |   | * |
| Class A |   | Gregory Toben, Manager                       |   | 25,000  |   |   | * |
| Class A |   | Bill Whipple, Manager (10)                   |   | 55,000  |   |   | * |
| Class A |   | Robert Wittnebel, Manager                    |   | 5,000   |   |   | * |
| Class A |   | South Dakota Corn Processors Fund            |   | 600,000 |   | 9.5    | % |
| Class A |   | Managers and Executive Officers, as a  group |   | 366,000 |   | 5.7    | % |

 

----

* Percentage of shares beneficially owned does not exceed 1% of theClass.

 

(1) The addresses for each of the individual Managers listed above is setforth under “Northern Growers, LLC’s Board of Managers.”

 

(2)  Includes 15,000capital units owned of record by the Ronald Anderson Trust for which Mr.Anderson is a trustee.

 

(3)  Includes 5,000 capitalunits owned of record by Mr. Flemming’s wife, and 5,000 capital units ownedjointly with Mr. Flemming’s three children.

 

(4) Includescapital units owned jointly with Mr. Lounsbery’s wife.

 

(5)  Includes 10,000capital units owned of record by Mr. Metz’s wife.

 

(6) Includes capital units owned of record by Soil Consultants,Inc. of which Mr. Narem is the owner.

 

(7)  Includes 25,000 capital units owned of recordby Mr. Peterson’s wife.

 

(8)  Includes 20,000 capital units owned jointlywith Mr. Strasser’s wife.

 

(9)  Includes 10,000capital units owned of record by Mr. Street’s wife.

 

(10)  Represents capitalunits owned of record by Whipple Trust of which Mr. Whipple is a trustee andWhipple Ranch, Inc. of which Mr. Whipple is co-owner.

 

**Item 12. Certain Relationships and Related Transactions.**

 

None of our individual Boardmembers and executive officers nor the individual Board members and executiveofficers of Northern Lights have entered into, or anticipate entering into, anycontractual or other transactions between themselves, Northern Lights, or us,except for Corn Delivery Agreements and forms identical to those provided toother members.  As described in “Item10. Executive Compensation-Board of Managers,” Northern Growers’ and NorthernLights’ managers receive per diem fees in reimbursement of expenses for theirBoard and committee services.

 

Jeff Broin and Larry Ward aremembers of the Board of Northern Lights and are also affiliates of each of theBroin entities that are an integral part of Northern Lights’ business.  Northern Lights contracted with Broinaffiliates to assist in virtually all aspects of the ethanol plant, includingsite selection, permitting and zoning, construction, plant management,operation, and the marketing and sale of ethanol and DDGS.  Broin and Associates, Inc. is a Sioux Falls,South Dakota based engineering and construction management firm specializing inthe design, engineering, construction, and plant start-up of new ethanolproduction facilities in the Midwest. Broin and Associates, Inc. is principally owned by Robert, Jeff, Toddand Lowell Broin, and Jeff is

 

30

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the Chief Executive Officer of Broin andAssociates.  Jeff Broin currently serveson Northern Lights’ Board of Managers and 14 other ethanol productionfacilities managed by Broin.  Broin andAssociates, Inc. designed and built the Northern Lights plant.

 

Northern Lights has a ManagementAgreement with Broin Management, a Broin affiliate, pursuant to which BroinManagement manages the day-to-day operations of the ethanol plant.  Northern Lights has an Ethanol Marketing andService Agreement with Ethanol Products, another Broin affiliate, to market theethanol produced at the plant.  NorthernLights also has a marketing agreement with Dakota Gold Marketing (formerlynamed Dakota Commodities), a division of Broin Enterprises, Inc. to market allof the DDGS from the plant.  NorthernLights paid these Broin entities an aggregate of $940,000 and $537,093 underthese contracts for the years ended December 31, 2003 and 2002,respectively.  For more informationregarding Northern Lights’ various agreements with Broin-related entitiesplease see “Item 1. Description of Business.”

 

**Item 13. Exhibits and Reports on Form 8-K.**

 

The following exhibits are filed as part of, or are incorporated byreference into, this report:

 

 (a)          Exhibits.See Exhibit Index

 

 (b)          Reportson Form 8-K. None.

#### ** **

#### **Item 14. Principal Accounting Fees andService**

 

(1) **AuditFees. **Eide Bailly LLP hasbilled us a total amount of $50,400 and $73,236 for professional servicesrendered for the audit of the Company’s various financial statements as ofDecember 31, 2002 and December 31, 2003, and the reviews of the financialstatements included in our Form 10-Q for the 2002 and 2003 fiscal years.

 

(2)**Audit-Related Fees. **Eide Bailly has billed us a total amount of $42,544 and$15,000 for audit-related professional services rendered as of December 31,2002 and December 31, 2003.  Theaudit-related services included services related to the Forms S-4 and 10-QSBfilings made with the SEC to ensure the financial information provided withinthe filing was materially consistent with the financial statements.

 

(3) **Tax Fees. **EideBailly has billed us a total amount of $13,087 and $18,059 for professional taxservices rendered as of December 31, 2002 and December 31, 2003. The taxservices included tax return preparation for August 31, 2002, March 31, 2003,and December 31, 2003.  In addition totax return preparation, Eide Bailly assisted us in completing the informationstatements required by the IRS and provided to our members.

 

(4) **All Other Fees. **Eide Bailly has billed us a total amount of $822 and $0 forother professional services rendered as of December 31, 2002 and December 31,2003.  These other services renderedinclude consultation with Northern Lights management regarding certainfinancial requirements to obtain licensing related to its business.

 

31

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(5)**Audit Committee Pre-Approval Policy.**Beforeour independent auditor, Eide Bailly, can complete any audit or non-auditrelated service, the Audit Committee is required to pre-approve the necessaryservice.  Each service performed by EideBailly is required to be pre-approved in writing indicating the service to beperformed and the costs related to such service.  The Audit Committee is prohibited from approving any service ifit determines that the independence of Eide Bailly may be impaired in connectionwith its audit service function.  EideBailly is also prohibited from performing certain non-audit services that theAudit Committee believes would impair the independence of Eide Bailly in itsaudit service function.

 

The AuditCommittee approved 100% of the audit, audit related, tax and other servicesperformed by Eide Bailly, as described above.

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|   |           | NORTHERN GROWERS, LLC                 |             |
|--------|----------------|---------------------------------------|------------------|
|   |           |                                  |             |
| Date:  | March 30, 2004 |                                  | /s/ Robert Narem |   |
|   |           | Robert Narem, Chief Executive Officer |
|        |                |                                       |                  |  |

 

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
|   |           | NORTHERN GROWERS, LLC                                                                                       |                |
|--------|----------------|-------------------------------------------------------------------------------------------------------------|---------------------|
|   |           |                                                                                                        |                |
| Date:  | March 30, 2004 |                                                                                                        | /s/ Robert Narem    |   |
|   |           | Robert Narem, Chief Executive Officer and  Chief  Financial Officer, Manager (Principal Executive  Officer) |
|   |           |                                                                                                        |                |
|   |           |                                                                                                        |                |
| Date:  | March 30, 2004 |                                                                                                        | /s/ Ronald Anderson |   |
|   |           | Ronald Anderson, Manager                                                                                    |                |
|   |           |                                                                                                        |                |
|   |           |                                                                                                        |                |
| Date:  | March 30, 2004 |                                                                                                        | /s/ Glenn Berdan    |   |
|   |           | Glenn Berdan, Manager                                                                                       |                |
|   |           |                                                                                                        |                |
|   |           |                                                                                                        |                |
| Date:  | March 30, 2004 |                                                                                                        | /s/ Dennis Flemming |   |
|   |           | Dennis Flemming, Manager                                                                                    |                |
|   |           |                                                                                                        |                |
|   |           |                                                                                                        |                |
| Date:  | March 30, 2004 |                                                                                                        | /s/ Lars Herseth    |   |
|   |           | Lars Herseth, Manager                                                                                       |                |
|   |           |                                                                                                        |                |
|   |           |                                                                                                        |                |
| Date:  | March 30, 2004 |                                                                                                        | /s/ Mark Lounsbery  |   |
|   |           | Mark Lounsbery, Manager                                                                                     |                |
|        |                |                                                                                                             |                     |  |  |

 

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| Date:  | March 30, 2004 |                                  | /s/ Robert Metz      |   |
|--------|----------------|---------------------------------------|----------------------|--------|
|   |           | Robert Metz, Manager                  |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ Jeff Olson       |   |
|   |           | Jeff Olson, Manager                   |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ Ronald Olson     |   |
|   |           | Ronald Olson, Manager                 |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ James Peterson   |   |
|   |           | James Peterson, President, Manager    |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ Delton Strasser  |   |
|   |           | Delton Strasser, Secretary, Manager   |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ Steve Street     |   |
|   |           | Steve Street, Vice President, Manager |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ Gregory Toben    |   |
|   |           | Gregory Toben, Manager                |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ Bill Whipple     |   |
|   |           | Bill Whipple, Manager                 |                 |
|   |           |                                  |                 |
|   |           |                                  |                 |
| Date:  | March 30, 2004 |                                  | /s/ Robert Wittnebel |   |
|   |           | Robert Wittnebel, Manager             |                 |

 

33

----

 

**EXHIBIT INDEX**

 
| **Exhibit  No.** |   | **Description**                                                                             |   | **Filed  Herewith** |   | **Incorporated  by  Reference**                                                                             |
|------------------|--------|---------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------------------------------------------------------------------------------------------|
| 2.1              |   | Plan of  Organization                                                                       |   |                |   | Appendix A  to Issuer’s Prospectus filed with the Commission on March 17, 2003 (File No.  333-97215)   |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 3.1              |   | Articles of  Organization                                                                   |   |                |   | Appendix B  to Issuer’s Prospectus filed with the Commission on March 17, 2003                         |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 3.2              |   | Operating  Agreement as adopted on April 1, 2003                                            |   |                |   | Appendix B  to Issuer’s Prospectus filed with the Commission on March 17, 2003                         |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 3.3              |   | Amendment  and Addendum to Operating Agreement dated July 16, 2003                          |   | X                   |   |                                                                                                        |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 4.1              |   | Form of  Class A Certificate                                                                |   |                |   | Exhibit 4.1  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002 (File No.  333-97215) |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 10.1             |   | Design Build  Construction Contract with Broin and Associates, Inc., dated November 2, 2000 |   |                |   | Exhibit 10.1  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002                      |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 10.2             |   | Licensing  Agreement with Broin and Associates, Inc., dated November 2, 2000                |   |                |   | Exhibit 10.2  to the Issuer’s Form S-4 filed with the Commission July 26, 2002                         |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 10.3             |   | Management  Agreement with Broin Management, dated November 2, 2000                         |   |                |   | Exhibit 10.3  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002                      |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 10.4             |   | Corn Price  Risk Management Agreement with Broin Management, dated November 16, 2001        |   |                |   | Exhibit 10.4  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002                      |
|             |   |                                                                                        |   |                |   |                                                                                                        |
| 10.5             |   | Ethanol  Marketing and Services Agreement with Ethanol Products, dated March 5, 2002        |   |                |   | Exhibit 10.5  to the Issuer’s Form S-4/A filed with the Commission on January 8, 2003 (File  No.       |

 

34

----

 
|   |   |                                                                                                          |   |   |   | 333-97215)                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------------------------|
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.6   |   | DDGS  Marketing Agreement with Dakota Commodities, dated April 10, 2002                                       |   |   |   | Exhibit 10.6  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002  |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.7   |   | Loan Agreement  with US Bank, dated July 11, 2001                                                             |   |   |   | Exhibit 10.7  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002  |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.8   |   | Note,  Mortgage and Security Agreement, dated July 11, 2001                                                   |   |   |   | Exhibit 10.8  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002  |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.9   |   | Lease  Agreement with Big Stone – Grant Industrial Development and Transportation,  dated April 18, 2001 |   |   |   | Exhibit 10.9  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002  |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.10  |   | Steam Sale  Agreement with Otter Tail Power Company, dated April 18, 2001                                     |   |   |   | Exhibit  10.10 to the Issuer’s Form S-4 filed with the Commission on July 26, 2002 |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.11  |   | Water and  Fuel Oil Agreement with Otter Tail Power Company, dated August 14, 2001                            |   |   |   | Exhibit 10.11  to the Issuer’s Form S-4 filed with the Commission on July 26, 2002 |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.12  |   | Electric  Service Agreement with Otter Tail Power Company, dated September 26, 2001                           |   |   |   | Exhibit  10.12 to the Issuer’s Form S-4 filed with the Commission on July 26, 2002 |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.13  |   | Water and  Sanitary Sewer Agreement with the City of Big Stone City, dated December 21,  2001                 |   |   |   | Exhibit  10.13 to the Issuer’s Form S-4 filed with the Commission on July 26, 2002 |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.14  |   | Access and  Rail Agreement with Otter Tail Corporation, dated April 18, 2001                                  |   |   |   | Exhibit  10.14 to the Issuer’s Form S-4 filed with the Commission on July 26, 2002 |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.15  |   | Industry  Track Agreement with Burlington Northern and Santa Fe Railway Company, dated  January 8, 2002       |   |   |   | Exhibit  10.15 to the Issuer’s Form S-4 filed with the Commission on July 26, 2002 |
|   |   |                                                                                                          |   |   |   |                                                                                    |
| 10.16  |   | Service  Request Form and                                                                                     |   |   |   | Exhibit  10.17 to the                                                                   |

 

35

----

 
|   |   | Extended  Service Agreement with NorthWestern Public Service, dated March 19, 2002 |   |   |   | Issuer’s  Form S-4 filed with the Commission on July 26, 2002                                                 |
|--------|--------|------------------------------------------------------------------------------------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.17  |   | Security  Agreement and Promissory Note with US Bank, dated June 5, 2002           |   |   |   | Exhibit  10.18 to the Issuer’s Form S-4 filed with the Commission on July 26, 2002                            |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.18  |   | Security  Agreement and Promissory Note with US Bank, dated December 15, 2002      |   |   |   | Exhibit  10.19 to the Issuer’s Form S-4/A filed with the Commission on January 8, 2003                        |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.19  |   | $15 million  Fixed-Rate Note with US Bank, dated January 1, 2003                   |   |   |   | Exhibit  10.20 to the Issuer’s Form S-4/A filed with the Commission on January 8, 2003                        |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.20  |   | $11.1  million Variable-Rate Note with US Bank dated January 1, 2003               |   |   |   | Exhibit  10.21 to the Issuer’s Form S-4/A filed with the Commission on January 8, 2003                        |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.21  |   | $5 million  Revolving Variable-Rate Note with US Bank, dated January 1, 2003       |   |   |   | Exhibit  10.22 to the Issuer’s Form S-4/A filed with the Commission on January 8, 2003                        |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.22  |   | Mortgage in  favor of US Bank, dated December 31, 2002                             |   |   |   | Exhibit  10.23 to the Issuer’s Form S-4/A filed with the Commission on January 8, 2003                        |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.23  |   | Memorandum  of Understanding with Broin Enterprises, Inc., dated January 28, 2003  |   |   |   | Exhibit  10.24 to the Issuer’s Form S-4/A filed with the Commission on March 6, 2003                          |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 10.24  |   | $1.2 million  Promissory Note with US Bank, dated May 1, 2003                      |   |   |   | Exhibit  10.18 to the Issuer’s Form 10-QSB filed with the Commission on August 14,  2003 (File No. 333-97215) |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 31     |   | Rule  13a-14/15d-14(a) Certifications                                              |   | X      |   |                                                                                                               |
|   |   |                                                                               |   |   |   |                                                                                                               |
| 32     |   | Section 1350  Certification                                                        |   | X      |   |                                                                                                               |

 

36

----

 

# **NORTHERN GROWERS, LLC**

 

***CONSOLIDATEDFINANCIAL STATEMENTS***

***DECEMBER 31, 2003 AND 2002***

 

----

 

**NORTHERNGROWERS, LLC**

 

Table of Contents

 
|                                           |   |
|------------------------------------------------|--------|
| **INDEPENDENT AUDITOR’S  REPORT**         |   |
|                                           |   |
| **CONSOLIDATED  FINANCIAL STATEMENTS**         |   |
| Balance Sheets                                 |   |
| Statements of  Operations                      |   |
| Statements  of Changes in Members’ Equity |   |
| Statements of  Cash Flows                      |   |
| Notes to  Consolidated Financial Statements    |   |

 

----

 

## **INDEPENDENTAUDITOR’S REPORT**

 

The Audit Committee

### **Northern Growers, LLC**

Milbank, South Dakota

 

We have audited the accompanying consolidatedbalance sheets of **Northern Growers, LLC** as ofDecember 31, 2003 and 2002, and the related consolidated statementsof operations, changes in members’ equity and cash flows for the years endedDecember 31, 2003 and 2002. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of **Northern Growers, LLC** as of December 31,2003 and 2002, and the results of its operations and cash flows for the yearsended December 31, 2003 and 2002 in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussed in Note 1 to the financialstatements, on April 1, 2003, Northern Growers Cooperative was dissolved andreorganized as Northern Growers, LLC.

 

/s/ Eide Bailly LLP

Minneapolis, Minnesota

February 3, 2004

 

F-1

----

 

### **NORTHERN GROWERS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2003 AND 2002**

 
|                              |   | **2003**       |           | **2002**   |   |
|-----------------------------------|--------|----------------|----------------|------------|--------|
|                              |   |           |           |       |   |
| **ASSETS**                        |   |           |           |       |   |
|                              |   |           |           |       |   |
| CURRENT ASSETS                    |   |           |           |       |   |
| Cash                              |   | **$**          | **2,865,310**  |       | $      | 4,577,457 |   |
| Accounts receivable               |   |           |           |       |   |
| Trade related party               |   | **3,590,952**  |           | 2,705,136  |   |
| Trade                             |   | **500,885**    |           | 615,651    |   |
| Other                             |   | **302,546**    |           | 3,631,712  |   |
| Inventory                         |   | **4,300,904**  |           | 4,003,443  |   |
| Prepaid expenses                  |   | **99,587**     |           | 71,394     |   |
| Investment in commodity contracts |   | **184,622**    |           | 107,095    |   |
| Total current assets              |   | **11,844,806** |           | 15,711,888 |   |
|                              |   |           |           |       |   |
| PROPERTY AND EQUIPMENT            |   |           |           |       |   |
| Land improvements                 |   | **3,520,698**  |           | 3,093,927  |   |
| Equipment                         |   | **33,710,785** |           | 32,988,885 |   |
| Buildings                         |   | **8,124,155**  |           | 8,107,397  |   |
|                              |   | **45,355,638** |           | 44,190,209 |   |
| Less accumulated depreciation     |   | **(3,619,905** | **)**          | (1,173,801 | )      |
| Net property and equipment        |   | **41,735,733** |           | 43,016,408 |   |
|                              |   |           |           |       |   |
| OTHER ASSETS                      |   |           |           |       |   |
| Financing costs                   |   | **205,662**    |           | 303,583    |   |
| Total other assets                |   | **205,662**    |           | 303,583    |   |
|                              |   |           |           |       |   |
|                              |   | **$**          | **53,786,201** |       | $      | 59,031,879 |   |

 

See Notes to Consolidated Financial Statements

 

F-2

----

 
|                                                                                                                  |   | **2003**       |           | **2002**   |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                                                                                                  |   |           |           |       |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                              |   |           |           |       |   |
|                                                                                                                  |   |           |           |       |   |
| CURRENT LIABILITIES                                                                                                   |   |           |           |       |   |
| Accounts payable - trade                                                                                              |   | **$**          | **1,339,505**  |       | $      | 1,154,463 |   |
| Accounts payable - corn                                                                                               |   | **4,179,050**  |           | 3,078,878  |   |
| Accounts payable - related party                                                                                      |   | **204,220**    |           | 444,863    |   |
| Accounts payable - construction - related party                                                                       |   | **476,216**    |           | 438,941    |   |
| Other accrued liabilities                                                                                             |   | **501,574**    |           | 287,041    |   |
| Accrued interest                                                                                                      |   | **10,119**     |           | 172,285    |   |
| Distribution payable - Northern Growers                                                                               |   | **1,343,224**  |           | 170,000    |   |
| Distributions payable - Minority member                                                                               |   | **456,800**    |           | —     |   |
| Notes payable - due upon demand                                                                                       |   | **5,000**      |           | 1,005,000  |   |
| Current portion of note payable                                                                                       |   | **3,134,922**  |           | 3,241,651  |   |
| Total current liabilities                                                                                             |   | **11,650,630** |           | 9,993,122  |   |
|                                                                                                                  |   |           |           |       |   |
| LONG-TERM NOTE PAYABLE                                                                                                |   | **20,053,377** |           | 27,858,349 |   |
|                                                                                                                  |   |           |           |       |   |
| COMMITMENTS AND CONTINGENCIES                                                                                         |   |           |           |       |   |
|                                                                                                                  |   |           |           |       |   |
| MINORITY INTEREST                                                                                                     |   | **5,014,499**  |           | 4,899,960  |   |
|                                                                                                                  |   |           |           |       |   |
| MEMBERS’ EQUITY                                                                                                  |   |           |           |       |   |
| Capital units, $2.00 stated value, 12,000,000 units authorized;  6,328,500 and 6,328,450 units issued and outstanding |   | **12,657,000** |           | 12,656,900 |   |
| Additional paid-in capital                                                                                            |   | **64,900**     |           | 65,000     |   |
| Retained earnings                                                                                                     |   | **4,345,795**  |           | 3,558,548  |   |
|                                                                                                                  |   |           |           |       |   |
| Total members’ equity                                                                                            |   | **17,067,695** |           | 16,280,448 |   |
|                                                                                                                  |   |           |           |       |   |
|                                                                                                                  |   | **$**          | **53,786,201** |       | $      | 59,031,879 |   |

 

F-3

----

 

### **NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2003 AND2002**

 
|                                                 |   | **2003**       |           | **2002**   |       |
|------------------------------------------------------|--------|----------------|----------------|------------|------------|
|                                                 |   |           |           |       |       |
| REVENUES                                             |   |           |           |       |       |
| Sales                                                |   | **$**          | **65,557,322** |       | $          | 25,616,108 |   |
| Incentive                                            |   | **5,299,940**  |           | 7,140,827  |       |
| Total revenues                                       |   | **70,857,262** |           | 32,756,935 |       |
|                                                 |   |           |           |       |       |
| COST OF REVENUES                                     |   | **58,920,917** |           | 25,055,489 |       |
|                                                 |   |           |           |       |       |
| GROSS PROFIT                                         |   | **11,936,345** |           | 7,701,446  |       |
|                                                 |   |           |           |       |       |
| EXPENSES                                             |   |           |           |       |       |
| Startup expenses                                     |   | **—**     |           | 657,132    |       |
| General and administrative                           |   | **2,739,136**  |           | 971,749    |       |
| Total operating expenses                             |   | **2,739,136**  |           | 1,628,881  |       |
|                                                 |   |           |           |       |       |
| INCOME FROM OPERATIONS                               |   | **9,197,209**  |           | 6,072,565  |       |
|                                                 |   |           |           |       |       |
| OTHER INCOME (EXPENSES)                              |   |           |           |       |       |
| Interest income                                      |   | **8,153**      |           | —     |       |
| Interest expense                                     |   | **(1,847,108** | **)**          | (963,714   | )          |
| Other                                                |   | **23,244**     |           | 618        |       |
| Total other income and (expenses)                    |   | **(1,815,711** | **)**          | (963,096   | )          |
|                                                 |   |           |           |       |       |
| INCOME BEFORE MINORITY INTEREST                      |   | **7,381,498**  |           | 5,109,469  |       |
|                                                 |   |           |           |       |       |
| MINORITY INTEREST IN SUBSIDIARY INCOME               |   | **(1,770,430** | **)**          | (1,229,452 | )          |
|                                                 |   |           |           |       |       |
| NET INCOME                                           |   | **$**          | **5,611,068**  |       | $          | 3,880,017 |   |
|                                                 |   |           |           |       |       |
| BASIC AND DILUTED EARNINGS PER UNIT                  |   | **$**          | **0.89**       |       | $          | 0.61 |   |
|                                                 |   |           |           |       |       |
| BASIC AND DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING |   | **6,328,500**  |           | 6,328,450  |       |
|                                                 |   |           |           |       |       |
| DISTRIBUTIONS PER UNIT DECLARED                      |   | **$**          | **0.76**       |       | $          | 0.03 |   |
|                                                 |   |           | ** **     |       | ** ** |
| DISTRIBUTIONS PER UNIT PAID                          |   | **$**          | **0.58**       |       | $          | **—** |   |

 

See Notes to Consolidated Financial Statements

 

F-4

----

 

### **NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OF CHANGES INMEMBERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2003 AND2002**

 
|                           |   | **Capital  Units** |       | **Amount** |           | **Additional  paid-in  Capital** |   | **Retained  Earnings** |       | **Total**  |          |
|--------------------------------|--------|--------------------|------------|------------|----------------|----------------------------------|--------|------------------------|------------|------------|---------------|
|                           |   |               |       |       |           |                             |   |                   |       |       |          |
| BALANCE, DECEMBER 31, 2001     |   | 6,328,450          |       | $          | 12,656,900     |                             | $      | 65,000                 |       | $          | (151,469      | ) | $ | 12,570,431 |   |
|                           |   |               |       |       |           |                             |   |                   |       |       |          |
| Net income                     |   | —             |       | —     |           | —                           |   | 3,880,017              |       | 3,880,017  |          |
| Distributions payable          |   | —             |       | —     |           | —                           |   | (170,000               | )          | (170,000   | )             |
|                           |   |               |       |       |           |                             |   |                   |       |       |          |
| BALANCE, DECEMBER 31, 2002     |   | 6,328,450          |       | 12,656,900 |           | 65,000                           |   | 3,558,548              |       | 16,280,448 |          |
|                           |   |               |       |       |           |                             |   |                   |       |       |          |
| Transfers and adjustments      |   | 50                 |       | 100        |           | (100                             | )      | —                 |       | —     |          |
| Net income                     |   | —             |       | —     |           | —                           |   | 5,611,068              |       | 5,611,068  |          |
| Distributions payable          |   | —             |       | —     |           | —                           |   | (1,343,224             | )          | (1,343,224 | )             |
| Distributions paid             |   | —             |       | —     |           | —                           |   | (3,480,597             | )          | (3,480,597 | )             |
|                           |   |               |       |       |           |                             |   |                   |       |       |          |
| **BALANCE, DECEMBER 31, 2003** |   | **6,328,500**      | ** ** | **$**      | **12,657,000** | ** **                       | **$**  | **64,900**             | ** ** | **$**      | **4,345,795** | ** ** | **$** | **17,067,695** | ** ** |

 

See Notes to Consolidated Financial Statements

 

F-5

----

 

### **NORTHERN GROWERS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2003 AND2002**

 
|                                                                     |   | **2003**        |          | **2002**    |   |
|--------------------------------------------------------------------------|--------|-----------------|---------------|-------------|--------|
|                                                                     |   |            |          |        |   |
| OPERATING ACTIVITIES                                                     |   |            |          |        |   |
| Net income                                                               |   | **$**           | **5,611,068** |        | $      | 3,880,017 |   |
| Changes to net income not  affecting cash                                |   |            |          |        |   |
| Depreciation                                                             |   | **2,446,104**   |          | 1,172,473   |   |
| Amortization of loan fees                                                |   | **102,845**     |          | 50,342      |   |
| Minority interest in  subsidiary’s earnings                         |   | **1,770,430**   |          | 1,229,452   |   |
| Decrease (increase) in  current assets                                   |   |            |          |        |   |
| Accounts receivable                                                      |   |            |          |        |   |
| Related-party                                                            |   | **(885,816**    | **)**         | (2,705,136  | )      |
| Trade                                                                    |   | **114,766**     |          | (615,651    | )      |
| Other                                                                    |   | **3,329,166**   |          | (3,572,492  | )      |
| Inventory                                                                |   | **(297,461**    | **)**         | (3,731,921  | )      |
| Prepaid expenses                                                         |   | **(28,193**     | **)**         | (303,507    | )      |
| Investment in grain  contract                                            |   | **(77,527**     | **)**         | (107,095    | )      |
| Increase (decrease) in  current liabilities                              |   |            |          |        |   |
| Accounts payable                                                         |   |            |          |        |   |
| Trade                                                                    |   | **185,042**     |          | 1,097,542   |   |
| Corn                                                                     |   | **1,100,172**   |          | 3,078,878   |   |
| Related-party                                                            |   | **(240,643**    | **)**         | 444,863     |   |
| Accrued liabilities                                                      |   | **214,533**     | ** **    | 237,287     |   |
| Accrued interest                                                         |   | **(162,166**    | **)**         | 172,285     |   |
|                                                                     |   |            |          |        |   |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                               |   | **13,182,320**  |          | 327,337     |   |
|                                                                     |   |            |          |        |   |
| INVESTING ACTIVITIES                                                     |   |            |          |        |   |
| Purchase of property and  equipment                                      |   | **(1,128,154**  | **)**         | (22,346,709 | )      |
|                                                                     |   |            |          |        |   |
| NET CASH USED FOR  INVESTING ACTIVITIES                                  |   | **(1,128,154**  | **)**         | (22,346,709 | )      |
|                                                                     |   |            |          |        |   |
| FINANCING ACTIVITIES                                                     |   |            |          |        |   |
| Long-term notes payable  issued                                          |   | **1,500,000**   |          | 25,518,061  |   |
| Change in short-term notes  payable                                      |   | **(1,000,000**  | **)**         | 1,000,000   |   |
| Principal paid on  long-term notes payable                               |   | **(9,411,701**  | **)**         | —      |   |
| Distributions paid -  Northern Growers                                   |   | **(3,650,597**  | **)**         | —      |   |
| Distributions paid -  Minority member                                    |   | **(1,199,091**  | **)**         | —      |   |
| Financing costs paid                                                     |   | **(4,924**      | **)**         | (74,065     | )      |
|                                                                     |   |            |          |        |   |
| NET CASH (USED FOR)  PROVIDED BY FINANCING ACTIVITIES                    |   | **(13,766,313** | **)**         | 26,443,996  |   |
|                                                                     |   |            |          |        |   |
| NET (DECREASE) INCREASE IN  CASH                                         |   | **(1,712,147**  | **)**         | 4,424,624   |   |
|                                                                     |   |            |          |        |   |
| CASH AT BEGINNING OF  PERIOD                                             |   | **4,577,457**   |          | 152,833     |   |
|                                                                     |   |            |          |        |   |
| CASH AT END OF PERIOD                                                    |   | **$**           | **2,865,310** |        | $      | 4,577,457 |   |
|                                                                     |   |            |          |        |   |
| SUPPLEMENTAL DISCLOSURES  OF CASH FLOW INFORMATION                       |   |            |          |        |   |
| Cash paid for interest,  net of capitalized interest                     |   | **$**           | **1,762,557** |        | $      | 1,215,420 |   |
|                                                                     |   |            |          |        |   |
| SUPPLEMENTAL DISCLOSURES  OF NON-CASH INVESTING AND FINANCING ACTIVITIES |   |            |          |        |   |
| Accounts payable incurred  for construction costs                        |   | **$**           | **476,216**   |        | $      | 438,941 |   |
| Distributions payable                                                    |   | **$**           | **1,343,224** |        | $      | — |   |

 

See Notes to Consolidated Financial Statements

 

F-6

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### **NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2003 AND 2002**

 

**NOTE 1 -       NATUREOF OPERATIONS**

 

*PrincipalBusiness Activity*

 

Northern Growers, LLC or the Company, (formerly Northern GrowersCooperative or the Cooperative) is a South Dakota limited liability companylocated in Milbank, South Dakota. The Company was organized to pool investorsand provide a portion of the corn supply for a 40 million gallon (annualcapacity) ethanol plant owned by Northern Lights Ethanol, LLC (NorthernLights). Northern Lights was formed on February 14, 2001. On June 26,2002, the plant began grinding corn and on July 5, 2002, the ethanol plantcommenced its principal operations. Prior to July 5, 2002, the Company wasin the development stage. The Company sells ethanol and related products withinNorth America.

 

On April 1, 2002, Whetstone Ethanol, LLC (Whetstone) was formed. Theinitial member of Whetstone was the Cooperative. Whetstone was formed for thepurpose of acquiring the assets and liabilities of the Cooperative. On April10, 2002, the Board of Directors of the Cooperative approved a plan ofreorganization related to an exchange whereby Whetstone would acquire theassets and liabilities of the Cooperative. On March 27, 2003, the members ofthe Cooperative approved the plan of reorganization. The effective date of thereorganization was April l, 2003. The transaction was an exchange of interestswhereby the assets and liabilities of the Cooperative were transferred for capitalunits of Whetstone. For financial statements purposes, no gain or loss wasrecorded as a result of the exchange transaction.

 

As a result of the exchange, the Cooperative was dissolved, withWhetstone’s capital units distributed to the members of the Cooperative at arate of one Whetstone capital unit for each share of equity common stock andall voting common stock of the Cooperative surrendered and retired. Inconnection with the reorganization, Whetstone changed its name to NorthernGrowers, LLC. A minimum of 5,000 capital units is required for ownership of theCompany. Such units are subject to certain transfer restrictions, includingapproval by the Board of Managers of the Company. The Company also retains theright to redeem the capital units at $.20 per unit in the event a memberattempts to dispose of the units in a manner not in conformity with theOperating Agreement, if a member becomes a holder of less than 5,000 units, ifa member breaches their member agreement or becomes a bankrupt member. TheOperating Agreement of the Company also includes provisions whereby cash flowin excess of $200,000 will be distributed to unit holders subject tolimitations imposed by a super majority vote of the Board of Managers orrestrictions imposed by loan covenants.

 

**NOTE 2 -       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Principlesof Consolidation*

 

The consolidated financial statementsinclude the accounts of the Company and its 77.16% owned subsidiary, NorthernLights. All significant inter-company transactions and balances have beeneliminated in consolidation*.*For purposes of these financialstatements and notes, the use of the term “the Company” will refer to theconsolidated accounts of Northern Growers and Northern Lights.

 

*Cashand Cash Equivalents*

 

Cash and cash equivalents consist of demand accounts and other accountsthat provide withdrawal privileges.

 

(Continued on next page)

 

F-7

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*Revenue Recognition*

 

Revenue from the production of ethanol and related products is recordedupon transfer of title to customers, net of allowances for estimated returns onrelated products. Generally, ethanol and related products are shipped FOBshipping point. Interest income is recognized as earned.

 

Revenue from federal and state incentive programs is recorded when theCompany has produced or sold the ethanol and satisfied the reportingrequirements under each applicable program. When it is uncertain that theCompany will receive full allocation and payment due under the federalincentive program, it derives an estimate of the incentive revenue for therelevant period based on various factors including the most recently usedpayment factor applied to the program. The estimate is subject to change asmanagement becomes aware of increases or decreases in the amount of fundingavailable under the federal incentive program or other factors that affectfunding or allocation of funds under such program.

 

*Shipping costs*

 

Freight charges incurred are reported as a component of cost ofrevenues.

 

*Receivables and Credit Policies*

 

Trade receivables are uncollateralized customer obligations due undernormal trade terms requiring payment within 30 days from the invoice date.Customer account balances with invoices dated over 30 days old are considereddelinquent. Interest is not charged on any delinquent accounts.

 

Trade receivables are stated at the amount billed to the customer.

 

Payments of trade receivables are allocated to the specific invoicesidentified on the customer’s remittance advice or, if unspecified, are appliedto the earliest unpaid invoices.

 

The carrying amount of trade receivables is reduced by a valuationallowance that reflects management’s best estimate of the amounts that will notbe collected. Management reviews all trade receivable balances that exceed 30days from the invoice date and based on an assessment of currentcreditworthiness, estimates the portion, if any, of the balance that will notbe collected. Management believes that all trade receivables are collectible;therefore there is no valuation allowance as of December 31, 2003 and 2002.

 

*Inventory*

 

Ethanol and related product inventory is stated at net realizablevalue. Corn inventory is stated at market value, which approximates netrealizable value (local market prices less cost of disposal), based on localmarket prices determined by grain terminals in the area of the plant. Other rawmaterials, spare parts and work-in-process inventory is stated at the lower ofcost or market on an average cost method.

 

(Continued on next page)

 

F-8

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Inventories at December 31, 2003 and 2002 are as follows:

 

|                  |   | **2003**      |          | **2002**  |   |
|-----------------------|--------|---------------|---------------|-----------|--------|
| Finished goods        |   | **$**         | **1,592,046** |      | $      | 1,579,153 |   |
| Raw materials         |   | **1,845,031** |          | 1,788,179 |   |
| Work-in-process       |   | **365,060**   |          | 364,589   |   |
| Spare parts inventory |   | **498,767**   |          | 271,522   |   |
|                  |   |          |          |      |   |
|                  |   | **$**         | **4,300,904** |      | $      | 4,003,443 |   |

 

*Investment in Grain Contracts,Derivative Instruments and Hedging Activities*

 

SFAS No. 133 requires a company to evaluate its contracts to determinewhether the contracts are derivatives. Certain contracts that literally meetthe definition of a derivative may be exempted from SFAS No. 133 as normalpurchases or normal sales. Normal purchases and normal sales are contracts thatprovide for the purchase or sale of something other than a financial instrumentor derivative instrument that will be delivered in quantities expected to beused or sold over a reasonable period in the normal course of business.Contracts that meet the requirements of normal are documented as normal andexempted from the accounting and reporting requirements of SFAS No. 133.

 

The Company enters into short-term cash grain, option and futurescontracts as a means of securing corn for the ethanol plant and managingexposure to changes in commodity prices. All derivatives are designated asnon-hedge derivatives. Although the contracts are effective economic hedges ofspecified risks, they are not designated as and accounted for as hedginginstruments.

 

As part of its trading activity, the Company uses futures and optioncontracts offered through regulated commodity exchanges to reduce risk and isexposed to risk of loss in the market value of inventories. To reduce thatrisk, the Company generally takes positions using cash and futures contractsand options.

 

Unrealized gains and losses related to derivative contracts areincluded as a component of cost of revenues in the accompanying consolidatedfinancial statements. Inventories are recorded at net realizable value so thatgains and losses on derivative contracts are offset by gains and losses oninventories and reflected in earnings currently. For the statement of cashflows, such contract transactions are classified as operating activities.

 

*Start-up Costs*

 

Start-up costs consist of amounts incurred during the development stagerelated to the operation and management of the Company which do not qualify asa capitalized cost.

 

*Financing Costs*

 

Financing costs are amortized over the term of the related debt usingthe interest method of amortization. Amortization of financing costs duringconstruction were capitalized as part of construction period interest.Accumulated amortization totaled $158,188 and $50,342 as of December 31, 2003and 2002, respectively.

 

(Continued on next page)

 

F-9

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*Minority Interest*

 

Amounts recorded as minority interest on the balance sheet relate tothe investment by Broin Investments I, LLC in Northern Lights, plus or minusany allocation of income or loss of Northern Lights. Earnings and losses ofNorthern Lights are allocated to its members in proportion to the member’scapital accounts.

 

*Use ofEstimates*

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires Management to make estimates andassumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

*Concentrationsof Credit Risk*

 

Cash balances are maintained in bank depositories and periodicallyexceed federally insured limits.

 

*Propertyand Equipment*

 

Property and equipment is stated at cost. Significant additions andbetterments are capitalized, while expenditures for maintenance, repairs andminor renewals are charged to operations when incurred. Depreciation on assetsplaced in service is computed using the straight-line method over estimateduseful lives as follows:

 

| Land improvements |   | 10-40 years |
|-------------------|--------|-------------|
| Equipment         |   | 3-20 years  |
| Buildings         |   | 10-40 years |

 

The Company reviews its property and equipment for impairment wheneverevents indicate that the carrying amount of the asset may not be recoverable.An impairment loss is recorded when the sum of the future cash flows is lessthan the carrying amount of the asset. An impairment loss is measured as theamount by which the carrying amount of the asset exceeds its fair value.

 

On June 10, 2002, the Company received a grant of $1,501,199 from theproceeds of tax increment financing bonds issued by Grant County, South Dakota.Under South Dakota law, proceeds from tax increment financing are not aliability of the entity, but are an obligation of the taxing district issuingthe bonds. The grant was provided to fund infrastructure improvements relatedto the construction of the ethanol plant and will be repaid by Grant Countyfrom the incremental increase in property taxes related to the improvements ofthe property. The total amount of the grant is recorded as a reduction of thevalue of the property and equipment.

 

# ***Environmental Liabilities***

 

The Company’s operations are subject to environmental laws andregulations adopted by various governmental authorities in the jurisdiction inwhich it operates. These laws require the Company to investigate and remediatethe effects of the release or disposal of materials at its locations.Accordingly, the Company has adopted policies, practices and procedures in theareas of pollution control, occupational health, and the production, handling,storage and use of hazardous materials to prevent material environmental orother damage, and to limit the financial liability which could result from suchevents. Environmental liabilities are recorded when liability is probable andthe costs can be reasonably estimated.

 

(Continued on next page)

 

 

F-10

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*IncomeTaxes*

 

Northern Growers, LLC, is not a taxpaying entity for federal and stateincome tax purposes and thus no income tax expense has been recorded in thestatements. Income of the Company is taxed to the members in their respectivereturns.

 

*Reclassifications*

 

Certain reclassifications have been made to the 2002 financialstatements to conform with the presentation in 2003. These reclassificationshad no change in previously reported net income.

 

**NOTE 3 -       NOTESPAYABLE**

 

*Short-Term Notes Payable*

 

The Company received advances of $5,000 from various entities to helpestablish the Company. The notes are due on demand and do not bear interest.

 

On June 5, 2002, Northern Lights entered into a $1,000,000 promissorynote with U.S. Bank National Association, Sioux Falls, South Dakota (Bank),which matured on May 1, 2003.

 

On December 15, 2002, Northern Lights entered in a $500,000 line ofcredit with U.S. Bank National Association, which matured on May 1, 2003.

 

The balance of the short-term notes payable as of December 31, 2003 and2002 are as follows:

 

|                       |   | **2003**   |      | **2002**  |   |
|----------------------------|--------|------------|-----------|-----------|--------|
| Non-interest bearing notes |   | **$**      | **5,000** |      | $      | 5,000 |   |
| U.S. Bank promissory note  |   | **—** |      | 1,000,000 |   |
|                       |   | **$**      | **5,000** |      | $      | 1,005,000 |   |

 

*Long-TermNotes Payable*

 

Northern Lights had a $31,000,000 note with the Bank for theconstruction and permanent financing of the plant. During construction andthrough the balance of 2002, interest was due on a quarterly basis. Collateralfor the note was the mortgage on the ethanol plant, with a net book value ofapproximately $41,700,000 as of December 31, 2003, and assignment of certainagreements related to the construction and operation of the plant.

 

On January 1, 2003, Northern Lights converted its $31.1 millionconstruction note to three promissory notes. The terms of the promissory notesare as follows:

 

Variable rate, non-revolving loan for $11.1 million,amortized over a 10 year period, with interest and principal due March 31, June30, September 30 and December 31. Interest is at prime plus 1% (5% at December31, 2003). The loan has a maturity date of December 31, 2007.

 

Fixed rate loan for $15 million, amortized over a 10year period, with interest and principal due March 31, June 30, September 30and December 31. Interest is fixed at 6.95%. The loan has a maturity ofDecember 31, 2007, and is subject to a prepayment penalty.

 

(Continued on next page)

 

F-11

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Variable rate, revolving loan for $5 million, interestonly payments required on March 31, June 30, September 30, and December 31.Interest is at prime plus 1% (5% at December 31, 2003). The loan has a maturitydate of December 31, 2007.

 

Except as noted above, the covenants and other terms and conditions ofthe original note with the Bank remain applicable to these three new notes.

 

On May 1, 2003, Northern Lights entered into a $1,200,000 promissorynote with the Bank to refinance the then remaining unpaid and outstandingshort-term notes payable balances of the $500,000 line of credit and $1,000,000promissory note. The note bears interest at 5.7%, is payable in quarterlyinstallments of principal and interest of $84,406 beginning August 1, 2003,matures on May 1, 2007, and is subject to a prepayment penalty. The note iscollateralized by the previous security agreement between the Bank and NorthernLights.

 

Northern Lights is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital and networth requirements. At December 31, 2003, Northern Lights was in compliancewith its covenants. Annually, beginning May 1, 2003, the financing arrangementswith US Bank include terms whereby Northern Lights makes an additionalprincipal payment equal to 15% of Northern Lights’ excess cash flow (as definedby the agreement), not to exceed 20% of the outstanding principal balance. Theexcess cash flow payment made on May 1, 2003, was $1,010,000 and was paid onthe principal of the fixed rate loan with the original principal balance of$15,000,000. In conjunction with Northern Lights’ dividend distribution onSeptember 22, 2003, an additional excess cash flow payment of$685,000 was made on the same fixed rate loan.

 

The balance of the long-term notes payable as of December 31, 2003 and2002 follows:

 
|                              |   | **2003**       |           | **2002**   |   |
|-----------------------------------|--------|----------------|----------------|------------|--------|
| Construction note payable         |   | **$**          | **—**     |       | $      | 31,100,000 |   |
| Variable rate, non-revolving loan |   | **9,947,268**  |           | —     |   |
| Variable rate, revolving loan     |   | **—**     |           | —     |   |
| Fixed rate loan                   |   | **12,175,858** |           | —     |   |
| Promissory note                   |   | **1,065,173**  |           | —     |   |
|                              |   | **23,188,299** |           | 31,100,000 |   |
| Less Current Portion              |   | **(3,134,922** | **)**          | (3,241,651 | )      |
|                              |   | **$**          | **20,053,377** |       | $      | 27,858,349 |   |

 

At December 31, 2003 and 2002, the Company had no outstandingborrowings against the variable rate revolving loan.

 

(Continued on next page)

 

F-12

----

 

Minimum principal payments through the maturity of the notes:

 

| **Years Ending December 31,** |   | **Amount** |       |
|-------------------------------|--------|------------|------------|
|                          |   |       |       |
| 2004                          |   | $          | 3,134,922  |   |
| 2005                          |   | 2,996,406  |       |
| 2006                          |   | 3,207,490  |       |
| 2007                          |   | 13,849,481 |       |
|                          |   | $          | 23,188,299 |   |

 

Minimum principal payments for the year ending December 31, 2004include approximately $335,000 related to the calculation of additionalprincipal to the Bank based on excess cash flow. Minimum principal payments forthe year ending December 31, 2007 include balloon payments due at the maturityof the notes.

 

**NOTE 4 -       RELATEDPARTY TRANSACTIONS**

 

The Company and Broin Investments I, LLC, are the members of NorthernLights. The Company invested $12,500,000 and Broin Investments I, LLC invested$3,700,000 in Northern Lights Ethanol, LLC for their respective ownershipinterests of approximately 77% and 23%. In accordance with the operatingagreement of Northern Lights, Broin Investments I, LLC, has the right to electtwo of seven members of the Board of Managers of Northern Lights.

 

Northern Lights has a construction contract with Broin and Associates,Inc. (see Note 6). Amounts due to Broin and Associates, Inc. related to theconstruction contract as of December 31, 2003 and 2002 were $476,216 and$438,941 respectively. Payments on the construction contract through December31, 2003 and 2002 were $47,139,765 and $46,110,022, respectively.

 

During 2003, the Company entered into an agreement with Dakota GoldMarketing for the use of railcars to transport DDGS. The agreement provides fora flat rate per car, per shipment and can be terminated with 90 days notice byeither party.

 

Additional agreements with related parties are included in Note 6.

 

**NOTE 5 -       FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

The Company believes the carrying amount of cash and cash equivalentsapproximates fair value due to the short maturity of these instruments.

 

The Company believes the carrying amount of long-term note payableobligations approximates fair value. For the construction and permanentfinancing, fair value approximates the carrying amount due to the variableinterest rate feature of the debt.

 

The Company believes the carrying amount of short-term notes payableapproximates their value due to the short maturity of these instruments.

 

(Continued on next page)

 

F-13

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The Company believes the fair value of agreements for the purchase ofutilities approximates the carrying value based on the variable terms of theagreements that follow local market rates.

 

**NOTE 6 -       COMMITMENTS,CONTINGENCIES AND AGREEMENTS**

 

Substantially all of the Company’s facilities are subject to federal,state and local regulations relating to the discharge of materials into theenvironment. Management believes that the current practices and procedures forthe control and disposition of such wastes comply with the applicable federaland state requirements.

 

The Company has entered into contracts and agreements regarding theconstruction, operation and management of the ethanol plant.

 

Agreements with Broin Investments I, LLC, the minority member ofNorthern Lights, or parties related to the minority member through commonownership, are as follows:

 

Construction Contract– The Company has entered into a construction contract with Broin andAssociates, Inc., an affiliate of the minority member of Northern Lights. Thecontract, with change orders, totals approximately $47,615,000, all of whichare substantially complete as of December 31, 2003.

 

Ethanol MarketingContract – The Company has an agreement with EthanolProducts, LLC, a joint venture of ethanol producers, for the sale, marketing,billing and receipt of payment and other administrative services for allethanol produced by the plant. The agreement expires on July 5, 2007, and isautomatically renewed for successive 5-year terms unless terminated 3 monthsprior to expiration.

 

Management Agreement– The Company has entered into an agreement with Broin Management, LLC for themanagement and operation of the ethanol plant. In exchange for these services,Broin Management receives an annual fee plus an incentive bonus of 5% of netincome. The annual fee is adjusted each year for changes in the consumer priceindex. The fees and bonus paid to Broin Management include the salary andbenefits of the general manager and technical manager and certain otherservices related to operation of the ethanol plant The agreement was executedon November 2, 2000 and payments began during February 2002, approximately sixmonths prior to the projected start of plant operations. The term of thisagreement shall continue until July 1, 2005, three years from the date theplant began processing corn, and is renewable for successive three-year termsunless terminated 90 days prior to expiration of the agreement.

 

The Company has entered into an agreement with BroinManagement, LLC for hedge and price risk management services related to cornrequirements of the plant. The agreement expires in April 2004 and is renewablefor successive one-year terms unless terminated 30 days prior to expiration.

 

DDGS Marketing Agreement–****TheCompany entered into an agreement with Dakota Gold Marketing, a related partythrough ownership by entities related to the minority member, to providemarketing and administrative services for the sale of DDGS. The agreementcommenced on May 10, 2002. The agreement provides for an agency relationship inthat Dakota Commodities does not take title to the DDGS but acts as a broker onbehalf of Northern Lights. The agreement has a term of 5 years fromcommencement, and is renewable for 5-year terms unless terminated by eitherparty with 90 days notice.

 

(Continued on next page)

 

F-14

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Software Maintenance– In July 2002, the Company entered into an agreement with Broin andAssociates, Inc. for new revisions to the plant’s software. The agreement has aterm of three years, beginning June 1, 2002.

 

On December 16, 2002, the Company entered into anagreement with Broin and Associates, Inc. for the purchase of certain softwareand data management services. The initial fee for purchase of the software is$40,000 payable upon execution of the agreement. The fee for the maintenanceservice ($20,000) shall be adjusted by the Consumer Price Index on an annualbasis. The agreement has a term of two years, and it automatically renews forsuccessive two-year terms unless terminated sixty days prior to expiration.

 

Revenues and expense related to agreements withrelated parties for the years ended December 31 are as follows:

 
|                                  |   | **Years Ended December 31,** |           |
|---------------------------------------|--------|------------------------------|----------------|
|                                  |   | **2003**                     |           | **2002** |   |
| Ethanol gross revenues                |   | **$**                        | **51,913,676** |   | $ | 20,499,279 |   |
| Management fees expense               |   | **791,659**                  |           | 684,099 |   |
| Marketing fees expense - all products |   | **603,186**                  |           | 238,298 |   |
|                                       |        |                              |                |  |  |  |  |

 

Agreements with unrelated parties are as follows:

 

Property Lease– The Company entered into a 99-year property lease (an operating lease) withBig Stone-Grant Industrial Development and Transportation, LLC. Rent is $2,400for each of the first five years. The rent will be adjusted on January 1, 2006and every five years thereafter. The rent will be increased five percent overthe immediately preceding five-year period.

 

Steam –The Company has an agreement with Ottertail Corporation for steam in aspecified amount for use in its ethanol manufacturing process at a base rate,adjusted annually for changes in the cost of energy. The agreement commenced onJune 1, 2002 and has a term of 10 years, renewable for two five-year periods,after which the agreement is renewable from year to year. Either party mayterminate the agreement by providing notice one year prior to a renewal orexpiration date.

 

Minimum payments related to the above agreements are summarized in thefollowing table:

 
| **Years Ending December 31,** |   | **Lease  Agreements** |    | **Management  Agreements** |   | **Unconditional  Purchase  Agreements** |   | **Total** |      |
|-------------------------------|--------|-----------------------|---------|----------------------------|--------|-----------------------------------------|--------|-----------|-----------|
| 2004                          |   | $                     | 2,400   |                       | $      | 347,167                                 |   | $         | 217,080   |   | $ | 566,647 |   |
| 2005                          |   | 2,400                 |    | 165,250                    |   | 217,080                                 |   | 384,730   |      |
| 2006                          |   | 2,520                 |    | —                     |   | 217,080                                 |   | 219,600   |      |
| 2007                          |   | 2,520                 |    | —                     |   | 217,080                                 |   | 219,600   |      |
| 2008                          |   | 2,520                 |    | —                     |   | 217,080                                 |   | 219,600   |      |
| 2009-2100                     |   | 377,155               |    | —                     |   | 741,690                                 |   | 1,118,845 |      |
|                          |   | $                     | 389,515 |                       | $      | 512,417                                 |   | $         | 1,827,090 |   | $ | 2,729,022 |   |

 

(Continued on next page)

 

F-15

----

 

Water and Fuel Oil– The Company has an agreement with Ottertail Power Company with a rateschedule for a specified quantity of water and fuel oil for 10 years,commencing January 1, 2002. The agreement is renewable for two 5-year periods,after which the agreement renews for one-year periods. Either party mayterminate the agreement with notice provided one year prior to a renewal orexpiration date. No minimum purchase quantities are provided in the agreement,and the prices for these items are at local market prices.

 

The Company also has anagreement with the City of Big Stone City, South Dakota, with a rate schedulefor water and sewer services for 10 years, commencing January 1, 2002. Theagreement is renewable for two 5-year periods, after which the agreement renewsfor one-year periods. Either party may terminate the agreement with noticeprovided one year prior to a renewal or expiration date. In addition to chargesbased on usage, the agreement requires a monthly fee of $1,500. No minimumpurchase quantities are provided in the agreement, and the prices for theseservices are at local market prices.

 

Expenses related to the property lease, steam, waterand fuel oil agreements for the years ended December 31, 2003 and 2002were $3,392,378 and $303,802, respectively.

 

Each holder of capital units has entered into a member agreement withthe Company. For each capital unit owned, one bushel of corn is required to bedelivered annually. The price paid for the corn is the average corn price forthe applicable 4-month period (trimester) based on several local grainelevators’ cash corn price. Based on the number of capital units outstanding,6,328,500 bushels of corn will be delivered annually by the Company’s unit holders.This represents approximately 41% of the corn required for the operation of theplant at its 40,000,000 gallon expected capacity. Purchases of corn from corndelivery agreements and cash contracts from the Company’s unit holders totaledapproximately $28,100,000 and $12,900,000 for the years endingDecember 31, 2003 and 2002, of which $3,382,203 and $2,890,810 wasrecorded as a liability at December 31, 2003 and 2002.

 

The Company receives an incentive payment from the United StatesDepartment of Agriculture (USDA) for the use of corn to produce ethanol. Inaccordance with the terms of this arrangement, revenue is recorded based onincremental production of ethanol compared to the prior year. The USDA has setthe annual maximum not to exceed $7,500,000 for each eligible producer. Theincentive is calculated on the USDA fiscal year of October 1 to September 30.Revenue of $133,153 and $2,890,810 has been earned for the USDA program yearsended September 30, 2004 and 2003, respectively. Incentive revenue of $4,115,170and $6,742,263 was recorded for the year ended December 31, 2003 and 2002,respectively, for this program.

 

The Company also receives an incentive payment from the State of SouthDakota to produce ethanol. In accordance with the terms of this arrangement,revenue is recorded based on ethanol sold. The State of South Dakota has set amaximum of up to $1,000,000 per year for this program per qualifying producer.Northern Lights Ethanol has earned $583,334 and $1,000,000 for the program yearended June 30, 2004 and 2003, respectively. Incentive revenue of $1,184,770 and$398,564 was recorded for the year ended December 31, 2003 and 2002,respectively, for this program.

 

Legal Proceedings – The Company isinvolved in various legal actions arising in the normal course of business.Management is of the opinion that their outcome will not have a significanteffect on the Company’s consolidated financial statements.

 

(Continued on next page)

 

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**NOTE 7 -       DISTRIBUTIONS**

 

During April 2003, Northern Lights distributed $1,750,000 of cash toits members. The Company received approximately $1,350,000, and the minoritymember received approximately $400,000. In conjunction with this cashdistribution, the Company declared a distribution of $1,831,020 and paid adistribution to its members of approximately $1,100,000.

 

During September 2003, Northern Lights distributed $3,500,000 of cashto its members. The Company received approximately $2,700,000, and the minoritymember received approximately $800,000. In conjunction with this cashdistribution, the Company declared a distribution of $1,819,575 and paid adistribution to its members of approximately $2,550,000.

 

During January 2004, the Northern Lights Board of Managers approved a$2,000,000 distribution, which it paid on February 10, 2004. The Companyreceived approximately $1,543,000 and the minority member receivedapproximately $457,000. In conjunction with this cash distribution, the Companypaid a distribution to its members of approximately $1,343,000. The abovedistributions are recorded as a liability as of December 31, 2003.

 

**NOTE 8 -       INCOMETAXES**

 

As of December 31, 2003 and 2002 the book basis of assets exceededtheir tax basis by approximately $7,600,000 and $2,900,000, respectively. Therewere no significant differences between the book basis and tax basis ofliabilities as of December 31, 2003 or 2002.

 

**NOTE 9 -       SUBSEQUENTEVENTS**

 

Effective March 8, 2004, Alerus Securities Corporation (Alerus) will commencetrading of Class A units of the Company. Members and non-members would be ableto begin trading of capital units effective March 8, 2004.

 

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