**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM l0-K/A**

 

**(AmendmentNo. 1)**

 

**Annual Report Pursuant toSection 13 or15(d) of the Securities Exchange Act of 1934**

 

For the fiscal year ended**December 31, 2004**

 

Commission file number**0-50711**

 

### **Northern Growers, LLC**

(Exact name of registrant as specified in its charter)

 

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

 

**48416 144th StreetP.O. Box 356Big Stone City South Dakota 57216605-862-7902**

(Address of PrincipalExecutive Offices) (Zip Code)

 

**(605)862-7902**

(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:

**Class A Capital Units**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

ý  Yes     o  No

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405of this chapter) is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10—K.   ý

Indicateby check mark whether the registrant is an accelerated filer (as defined underthe Exchange Act of Rule 12b-2).

 

o  Yes     ý  No

 

As of June 30, 2004,the aggregate market value of the registrant’s Class A capital units held by non-affiliatesof the registrant was $23,850,000, computed using the last sales price of $4.00per Class A capital unit of the registrant’s capital units on June 30,2004, the last business day of the registrant’s most recently completed secondfiscal quarter.

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date. As of the date of this filing, there were 6,328,500Class A capital units of the registrant outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

PartIII of Form 10-K - Portions of the Proxy Statement for 2005 Annual Meeting ofMembers.

 

 

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**ExplanatoryFootnote Regarding Amendment No. 1**

 

Northern Growers, LLC  (“Northern Growers,” “we,” “our,” “us,”) isfiling this Amendment No. 1 to its Annual Report on Form 10-K for theyear ended December 31, 2004 (the “Amendment”) to reflect the restatementof its consolidated financial statements for the year ended December 31,2004.  On May 4, 2005, our auditcommittee concluded that the consolidated financial statements contained in ourAnnual Report on Form 10-K for the year ended December 31, 2004, which wasfiled with the Securities and Exchange Commission on March 31, 2005, hadmisclassified under our consolidated statement of operations a $1.4 millioncredit. Specifically, we misclassified as other income, rather than as areduction in cost of revenues, a $1.4 million settlement credit received byNorthern Lights Ethanol, LLC (“Northern Lights”), our majority-ownedsubsidiary.

 

The$1.4 million settlement credit was issued to Northern Lights in November 2004by Big Stone Plant, the adjacent powerplant that supplies steam to Northern Lights for its ethanol productionprocess. Big Stone Plant reported to Northern Lights in November 2004 that ametering instrument which it owned and controlled had mistakenly reported theamount of steam that had been transferred to Northern Lights in 2003 and 2004.This error caused Big Stone Plant to overcharge Northern Lights for steam used,resulting in an excess steam expense for Northern Lights of $1.4 million in2003 and 2004. The error was discovered only after Northern Lights initiallyquestioned Big Stone Plant in March 2003 on the volume of steam reportedlybeing used in the production process, compared to the volume required forproduction. Testing by Big Stone Plant at the time and through 2004 failed toreveal the metering error until November 2004. In an effort to resolve theovercharge, Big Stone Plant notified Northern Lights that a credit would beissued, which Northern Lights agreed to accept.

 

The restatement will notaffect our consolidated balance sheet, statements of cash flows, statements ofmembers’ equity or net income for the year ended December 31, 2004, as the $1.4million credit will be only reclassified from other income to a reduction ofcost of revenues.

 

A discussion of therestatement is set forth in Note 13 to the Consolidated Financial Statementsincluded in this Amendment. Changes also have been made to the following itemsin this Amendment as a result of the restatement:

 

**Part II**

 

•       Item 6     SelectedFinancial Data (page 3).

 

•       Item 7     Management’sDiscussion and Analysis of Financial Condition and Results of Operation(pages 4 to 11).

 

•       Item 8     FinancialStatements and Supplementary Data (pages F-1 to F-23).

 

•       Item 9A  Controlsand Procedures (pages 13 to 14).

 

Items filed in theoriginal Form 10-K that are not impacted by the restatement are notincluded in this Amendment.

 

**Part IV**

 

•       Item 15  Exhibits, Financial Statement Schedules (pages F-1 to F-23).

 

ThisAmendment does not reflect events that have occurred after March 31, 2005,the date upon which  the Annual Report onForm 10-K was originally filed with the Securities and ExchangeCommission. Accordingly, this Amendment should be read in conjunction with ourfilings with the Securities and Exchange Commission subsequent to the filing ofthe original Form 10-K on March 31, 2005.

 

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**Item 6.    SelectedFinancial Data.**

 

Thefollowing table sets forth selected financial data of Northern Growers, LLC andour predecessor cooperative for the periods indicated. The audited financialstatements included in Item 8 of this report have been audited by ourindependent registered public accounting firm, Eide Bailly LLP.

 
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002 (1)** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|--------------|------------|
| **Statement of Operations Data:**            |       |     |       |     |       |         |       |
| Revenue                                      |       | $        | 86,587,585 |     | $          | 70,857,262   |       | $ | 32,756,935 |   |
| Cost of Revenues                             |       | $        | 72,729,131 |     | $          | 58,920,917   |       | $ | 24,674,714 |   |
| Cost of Revenues—Settlement Credit (2)  |       | $        | (1,449,248 | )        | —     |         | —     |   |
| Gross Profit                                 |       | $        | 15,307,702 |     | $          | 11,936,345   |       | $ | 8,082,221 |   |
| General and Administrative Expense           |       | $        | 2,984,238  |     | $          | 2,739,136    |       | $ | 1,352,524 |   |
| Income from Operations                       |       | $        | 12,323,465 |     | $          | 9,197,209    |       | $ | 6,072,565 |   |
| Interest Expense                             |       | $        | 1,500,438  |     | $          | 1,847,108    |       | $ | 963,714 |   |
| Minority Interest in Subsidiary Income       |       | $        | (2,528,026 | )        | $          | (1,770,430   | )          | $ | (1,229,452 | ) |
| Net Income                                   |       | $        | 8,371,332  |     | $          | 5,611,068    |       | $ | 3,880,017 |   |
| Capital Units Outstanding                    |       | $        | 6,328,500  |     | $          | 6,328,500    |       | $ | 6,328,450 |   |
| Net Income per Capital Unit                  |       | $        | 1.32       |     | $          | 0.89         |       | $ | 0.61 |   |
| Cash Distributions declared per Capital Unit |       | $        | 0.95       |     | $          | 0.79         |       | $ | 0.00 |   |
|                                         |       |     |       |     |       |         |       |
| **Balance Sheet Data:**                      |       |     |       |     |       |         |       |
| Working Capital                              |       | $        | 560,046    |     | $          | 194,176      |       | $ | 5,718,766 |   |
| Net Property, Plant & Equipment          |       | $        | 40,885,963 |     | $          | 41,735,733   |       | $ | 43,016,408 |   |
| Total Assets                                 |       | $        | 54,678,507 |     | $          | 53,786,201   |       | $ | 59,031,879 |   |
| Long-Term Obligations                        |       | $        | 16,387,498 |     | $          | 20,053,377   |       | $ | 27,858,349 |   |
| Minority Interest                            |       | $        | 5,715,325  |     | $          | 5,014,499    |       | $ | 4,899,960 |   |
| Members Equity                               |       | $        | 19,446,001 |     | $          | 17,067,695   |       | $ | 16,280,448 |   |
| Book Value per Capital Unit                  |       | $        | 3.07       |     | $          | 2.70         |       | $ | 2.57 |   |

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(1)   The year 2002 represents only a partial year ofoperations, as the ethanol plant commenced production in late June 2002.The financial information in the table also includes audited financial data ofour predecessor cooperative prior to the effectiveness of the reorganizationinto a limited liability company on April 1, 2003.

 

(2)   See Note 11 to the Consolidated FinancialStatements.

 

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**Item7.  Management’s Discussion and Analysis of Financial Condition andResults of Operation.**

 

**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

Youshould read the following discussion along with the audited financialstatements and notes to the audited financial statements included elsewhere inthis report.  This report contains forward-looking statements, including,but not limited to, those under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and “Liquidity and CapitalResources,” involving future events, future business and other conditions, ourfuture performance, and expected operations.  These statements are basedon management’s beliefs and expectations and on information currently availableto management.  Forward-looking statements may include statements whichuse words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,”“predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” orthe negatives of these words, and all similar expressions.

 

Forward-lookingstatements involve numerous assumptions, risks and uncertainties. Northern Lights’ actual results or actual business or other conditions maydiffer materially from those contemplated by any forward-lookingstatements.  While we believe that these statements are accurate, thisbusiness is dependent upon general economic conditions and various conditionsspecific to the industry and future trends and these factors could cause actualresults to differ materially from the forward looking statements that have beenmade.  In particular,

 

•      The ethanol industry isincreasingly competitive, with additional plants in operation, underconstruction, or in the planning stages. With additional plants coming on line,the supply of ethanol will increase, which, if the demand does not growaccordingly or is unaided by government policies and programs like a federalRenewable Fuels Standard, could adversely impact the price of ethanol and NorthernLights’ operating results.

 

•      The ethanol industry and Northern Lights’ operating incomemay be adversely impacted by a decrease in or termination of government subsidies and other forms of financialincentives; a termination of government environmental and tax policies thatencourage the production and use of ethanol; or, the prevention of newgovernment policies and programs that encourage the use of ethanol.

 

•      The ethanolindustry and Northern Lights’ business are sensitive to corn and natural gasprices.  When corn and natural gas pricesincrease Northern Lights’ operating results may suffer. When corn and natural gas prices fluctuatesignificantly, Northern Lights’ cost of revenues and its operating results maybe adversely affected by the use of derivative instruments under its riskmanagement program.

 

•      The ethanol industry and Northern Lights may be subjectto additional regulation, such as environmental restrictions, or regulatoryaction, which could include fines, penalties, or injunctive relief as a resultof any potential excessive emissions, which could result in an increase incosts and capital expenditures.

 

•       Northern Lights is dependent upon Broin Management,LLC to manage the day-to-day activities of the plant, and upon Broin-related entitiesto purchase and market the ethanol and distiller’s grains produced at theplant, and for risk management services.  If any of these entities cease providingservices to Northern Lights, the plant’s operations will be adversely affected.

 

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We arenot under any duty to update the forward-looking statements contained in thisreport.  We cannot guarantee future results or performance or what futurebusiness conditions willbe like.  We caution you not to put undue reliance on anyforward-looking statements, which speak only as of the date of this report.

 

**Overview**

 

NorthernLights is engaged in the production of fuel-grade ethanol and distillersgrains.  Corn is supplied to NorthernLights’ plant from ourmembers who are primarily local agricultural producers, and from purchases ofcorn on the open market. After processing the corn into ethanol,ethanol is sold to Ethanol Products, LLC, a Broin affiliate, which subsequentlymarkets and sells the ethanol to gasoline blenders and refineries locatedthroughout the continental United States. The price that Northern Lights receives from the sale of ethanol toEthanol Products is based upon the price that Ethanol Products sets with itscustomers. Distiller’s grains are sold through Dakota Gold Marketing, anotherBroin affiliate, which markets and sells the product to local livestockfeeders.

 

NorthernLights’ operating income or loss is significantly tied to the price at whichethanol and distiller’s grains are sold. Historically, the price of ethanoltends to fluctuate in the same direction as the price of unleaded gasoline andother petroleum products. Surplus ethanol supplies also tend to put downwardprice pressure on ethanol.  In contrast,the price of distiller’s grains tends to fluctuate based on the price ofsubstitute livestock feed, such as corn and soybean meal. Surplus grainsupplies also tend to put downward price pressure on distiller’s grains.

 

Northern Lights Ethanol’s cost of revenues, whichincludes production expenses, is significantly affected by the cost of corn,natural gas and steam. In 2004, for instance, the cost of corn wasapproximately 65% of total cost of revenues, including the settlement credit,whereas the cost of natural gas and steam was approximately 14% of total costof revenues. Comparatively, in 2003, the cost of corn was approximately 58% ofcost of revenues, while the cost of natural gas and steam was approximately 13%of cost of revenues.   The cost of cornis affected primarily by supply and demand factors such as crop production,world carryout, exports, risk management and weather, much of which NorthernLights has no control. Natural gas prices generally fluctuate with the energycomplex. Over the last few years, natural gas prices have been higher thanhistorical averages, with management expecting this trend to continue due tohigher prices for crude oil and other alternative fuels.

 

The2004 year started with very strong earnings, only to see earnings fall in themiddle of the year, followed by a strong earnings recovery at the end of theyear. The principal cause for these fluctuations was the price volatility ofcorn, which proved to be significantly greater than in 2003. Earnings fellduring the spring when corn prices increased to near record highs. Fears of awet spring and a decrease in corn production were the principal causes for theincrease, although Northern Lights’ risk management program mitigated some ofthe increase. As the year progressed through the summer and early fall, cornprices actually declined due to a forecasted record corn crop. Unfortunately,when prices declined during this period, risk management had an adverse impacton cost of revenues and therefore earnings. During the fourth quarter, however, with a return of extremely low andstable prices for corn and a continuation of higher prices for ethanol,earnings made a full recovery.

 

While 2004 was marked by significant pricevolatility of corn, it was also marked by several positives. Earnings atNorthern Lights increased by approximately $2.7 million from 2003 due to strongethanol sales and a $1.4 million settlement credit received from Big StonePlant. Further, total ethanol production at the plant increased due toadditional improvements made to the plant. Total production was 47.4 milliongallons in 2004, compared to 43.6 million gallons in 2003 and, for the firstsix months of production, 20.5 million gallons in 2002.

 

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Management’soutlook for 2005 is relatively positive. The first quarter began withrelatively high ethanol prices and stable and low corn costs, which we expectto continue going into the second quarter and positively impact earnings duringthese quarters. There is less certainty, however, about earnings potentialduring the last two quarters.  As springapproaches, price volatility of corn may return to the markets, particularly inanticipation of a new corn crop. Unless there is a plentiful corn crop in 2005,like in 2004, the price of corn may increase and lead to an increase inproduction costs. Further, unless demand for ethanol continues to increase andnew markets for ethanol open up through passage of a federal Renewable FuelsStandard bill or other means, the price of ethanol may be adversely impacted bya potential surplus of ethanol. Approximately 700 million new gallons ofethanol are slated to enter the market by the end of 2005, some of which maynot be absorbed unless new markets in the United States are developed. Ifethanol prices decrease, Northern Lights’ earnings may suffer.

 

#### **Results of Operations**

#### ** **

NorthernLights started operations on July 5, 2002 and began operating at fullname-plate capacity in August, 2002.  Accordingly, there is no comparableincome and sales data for the year ended December 31, 2002.

 

**Comparison of years ended December 31, 2004 andDecember 31, 2003.**

 
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **              | ** ** | **$**                            | ** ** | **%  of  Revenue** | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                |       |                             |       |   |   |   |   |   |   |
| Ethanol                 |       | $                                | 68,501,969 |   | 79% |   | $ | 51,913,676 |   | 73% |   |
| Distiller’s Grains |       | $                                | 16,486,472 |   | 19% |   | $ | 13,643,646 |   | 19% |   |
| Incentive               |       | $                                | 1,599,144  |   | 2% |   | $ | 5,299,940 |   | 7% |   |
| Total                   |       | $                                | 86,587,585 |   | 100% |   | $ | 70,857,262 |   | 100% |   |

 

*Revenues*-Revenue increased $15.7, or 22%, to $86.6million for the year ended December 31, 2004 from $70.9 million for theyear ended December 31, 2003. Total revenues increased primarily because of anincrease in ethanol revenue.

 

Revenue from the sale ofethanol increased 32% from the year ended December 31, 2003 to the yearended December 30, 2004.  The increase was due primarily to a 24%increase in the average sales price per gallon of ethanol along with a 7%increase in the volume of ethanol sold. The price increase was mainly attributable to higher prices of unleadedgasoline and a strong demand for ethanol. The increase in volume sold was facilitated by an increase in productionvolumes, caused primarily from an improvement in plant efficiencies.

 

Revenuefrom the sale of distiller’s grains increased approximately 21% from the yearended December 31, 2003 to the year ended December 31, 2004. Theincrease was due primarily to a 17% increase in the volume of distiller’sgrains sold, resulting from an increase in production at the plant.

 

Total incentive revenues from federal and stategovernment incentive programs decreased by 70% from the year endedDecember 31, 2003 to the year ended December 31, 2004. Incentiverevenue consists of income received from federal and state governments inconnection with Northern Lights’ ethanol production. The incentive revenuefrom the United States Department of Agriculture’s Commodity Credit CorporationBioenergy Program decreased $3.2 million, or 77%, to $900,000 for the yearended December 31, 2004 from

 

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$4.1million for the year ended 2003. Thedecrease was due primarily to how the payments are structuredand made under the program. Payments are based principally on the increase ingallons of ethanol produced compared to the prior year’s production. Because2002 was Northern Lights’ first year of production, the plant had the largestincrease in production from the prior year. Between 2004 and 2003, the planthad a far smaller increase in production which, accordingly, led to lessincentive revenue being earned. Management anticipates receiving less underthis program in 2005 compared to 2004 because the plant is not expected toexperience a significant increase in production from last year to justify anincrease in payment, and Congress has reduced funding for the program from $150million to $100 million in 2005.

 

Incentive revenue from the state of South Dakotaincentive program decreased $518,000, or 44%, to $667,000 from the year endedDecember 31, 2003 to the year ended December 31, 2004. The decrease was due to an earlier than anticipated depletion offunds allocated to the program in the 2004 program year (July 1, 2003 toJune 30, 2004). While funds allocated to this program have increased inthe 2005 program year and are expected to increase in the 2006 program year, it is uncertainwhether the funds allocated to this program will be depleted before the end ofthese program years, muchof which is dependent upon the production levels of all plants operating inSouth Dakota during these periods.

 

*Cost of Revenues*-Total cost ofrevenues increased $12.4 million, or 21%, to $71.3 million for the year endedDecember 31, 2004 from $58.9 million for the year ended December 31,2003. The total cost of revenues for theyear ended December 31, 2004 includes the $1.4 million settlement creditreceived from the Big Stone Plant in November, 2004, discussed below, whichdecreased the cost of revenues and offset the overall cost of revenues’increase. Excluding the settlement credit, the cost of revenues increased $13.8million, or 23%, to $72.7 million for the year ended December 31, 2004. The $13.8million increase in the cost of revenues resulted primarily from a 34% increasein the overall cost of corn. The increase in the cost of corn was caused by anapproximately 11% increase in the market price of corn per bushel from the yearended December 31, 2003 to the year ended December 31, 2004 and therisk management program in 2004.

 

In terms of risk managementin 2004, the use of corn hedging instruments relative to the price fluctuationof corn in 2004 was a contributing factor for the increase in cost of corn.Gains and losses that result from a change in value of corn and natural gashedging instruments are recognized in cost of revenues as the changes occur.For the year ended December 31, 2004, cost of revenues includes losses of$3.5 million from the use of corn derivative instruments, up from a $100,000gain in 2003. These losses were caused by the fluctuations in the price of cornin 2004. At the end of 2003, Northern Lights increased its use of corn hedginginstruments and positions to protect against the market price forecasts forcorn. Those forecasts predicted higher prices for corn because of low worldcarryout prior to the growing season, decreased production, and drought. As theyear progressed, however, and it became apparent that corn production would bemuch higher than expected, the original market forecasts proved incorrect andthe market price of corn actually declined. When the market price declined, thevalue of the corn derivative instruments fell which led to an increase in costof revenues.

 

At least for the first halfof 2005, management does not anticipate the same or similar impact on cost ofrevenues from the risk management program. Because of the record corn crop in2004 and higher than anticipated world corn carryout, the market conditions forcorn are expected to be positive, namely lower prices for corn and less pricevolatility. For the second half of 2005, however, while management believes themarket will remain positive, conditions could alter the stability of the marketand use of hedging instruments, therefore increasing the potential for lossesunder the risk management program.

 

*Cost of Revenues-Settlement Credit*-In November 2004, Big Stone Plant, the plant which suppliessteam to the ethanol plant for the production process, issued to NorthernLights a $1.4 million credit. The credit was issued after Big Stone Plantdetermined that a metering instrument it owned and controlled had erroneouslyreported the volume of steam that had been transferred to Northern Lights in2003 and 2004. As a result of this

 

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error, Big Stone Plant overchargedNorthern Lights for the transfer and use of steam in 2003 and 2004.  Big Stone Plant’s realization of the meteringerror was the result of an informal dispute between Northern Lights and BigStone Plant when, in March 2003, Northern Lights questioned Big Stone Plantabout the reported volume of steam that had been used and transferred toNorthern Lights. Big Stone Plant, after conducting several tests and analyses,believed the volume reports were accurate until the fall of 2004, when itdiscovered that the metering instrument had been miscalibrated. In an effort toresolve the steam overcharge, Big Stone notified Northern Lights in November2004 that a $1.4 million settlement credit would be issued, which NorthernLights agreed to accept.

 

*General and Administrative Expenses*-General andadministrative expenses increased $250,000, or 9%,**to $2.98 million for the year ended December 31, 2004from $2.73 million for the year ended 2003. The increase in general and administrative expenses was primarily theresult of increased management fees and employee profit-sharing costs duringthe year, which are both based on the increased profitability of NorthernLights.

 

*Interest Expense-*Interest expense decreased$350,000, or 19%, to $1.5 million for the year ended December 31, 2004from $1.85 million for the year ended 2003. The decrease in interest expense was primarily due to a $3.7 millionreduction in outstanding debt from December 31, 2003 to December 31,2004.

 

*Minority Interest in Subsidiary-*Minority interest in subsidiary increased$750,000, or 43%, to $2.52 million for the year ended December 31, 2004from $1.77 million for the year ended 2003. The increase in minority interest was the result of an increase in netincome.

 

*Net Income-*Net income increased $2.8million to a net income of $8.4 million for the year ended December 31,2004 from a net income of $5.6 million for the year ended December 31,2003.  This change was caused primarily by, as discussed above, anincrease in ethanol revenues and the settlement credit received from the BigStone Plant.

 

**Liquidityand Capital Resources**

 

Thefollowing table shows the cash flows between the year ended December 31,2004 and the year ended December 31, 2003:

 

| ** **                               | ** ** | **Year Ended December 31** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **$**                           | ** ** | **$** | ** ** |
| Net cash from operating activities       |       | $                               | 11,122,960 |   | $ | 13,182,320 |   |
| Net cash (used for) investing activities |       | $                               | (2,050,295 | ) | $ | (1,128,154 | ) |
| Net cash (used for) financing activities |       | $                               | (8,437,658 | ) | $ | (13,766,313 | ) |

 

*Cash Flow From Operating Activities-*The decrease ofapproximately $2.1 million in net cash flow provided from operating activitiesbetween 2003 and 2004 was due to an increase in net income between periods,offset by a decrease in accounts receivable outstanding in 2004 and a change incorn payable.  Accounts receivabledecreased in 2003 because of substantial payments received from the incentiveprograms, compared to an increase in 2004 when incentive programs provided lesscash.  Corn payable increased in 2003because more agricultural producers at the end of 2003, compared to the end of2004, elected to defer payment to 2004 for delivering corn to the plant.

 

*Cash Flow From Investing Activities-*The increase ofapproximately $920,000 in net cash flow used for investing activities betweenperiods was attributed to an increase in capital improvement projects at theplant from $1.13 million in 2003 to $2.05 million in 2004.  The capital improvement projects in 2004consisted of

 

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generalimprovements to property, plant and equipment, including dryer and electricalsystems.

 

Managementanticipates making at least $1.1 million in capital expenditures on the plantin 2005. The largest capital expenditure will be for a rail expansion projectat the plant, costing $1.1 million and financed by US Bank. The projectconsists of adding an additional track line to improve the transportation ofethanol and distiller’s grains by railcar. Details of the US Bank financing are further discussed below under “Indebtedness.”

 

*Cash Flow From Financing Activities-*The decrease of approximately $5.3million in net cash used for financing activities between periods was dueprincipally to a $5.0 million payment on the variable-rate, revolving note in2003, and $770,000 of additional excess cash flow payments in 2003 on thefixed-rate note.  Principal paid on thefixed-rate note relative to required excess cash flow payments totaled$1,695,000 during 2003 and $925,708 during 2004.

 

Managementanticipates in the next 12 months having sufficient cash flows from operating activitiesand revolving debt to fund working capital and to cover operating andadministrative expenses, capital expenditures (other than the rail expansionproject), and debt service obligations.

 

**Indebtedness**

 

US Bank National Association of Sioux Falls, SouthDakota, is Northern Lights’ primary lender.  Prior to entering into arefinancing agreement on March 30, 2005, Northern Lights had four loansoutstanding with US Bank National Association: a $15 million fixed rate note, a $11.1 million variable-ratenon-revolving note, a $5 million variable-rate, revolving note, and a $1.2million note.  The fixed and variablenotes were obtained under a Loan Agreement dated July 11, 2001 andamendments dated January 1, 2003. The $1.2 million note was obtained separately on May 1, 2003.

 

The$15 million fixed-rate note bore 6.95% interest annually and required equalquarterly payments of approximately $521,000 with a balloon payment due onDecember 31, 2007.  There was a prepayment penalty if Northern Lightsprepaid the loan prior to its maturity by any means other than the mandatedprepayments calculated based on Northern Lights’ excess cash flow under theLoan Agreement.  Under the Loan Agreement, Northern Lights was required toprepay US Bank a portion of the principal of the loan by May 1 of eachyear in an amount equal to 15% of the excess cash flow but not more than 20% ofthe outstanding principal balance of the loan. The Loan Agreement definedexcess cash flow as the net income of Northern Lights before deductions fordepreciation and amortization less expenditures for fixed and capital assetsnot financed by debt, required principal payments including capitalized leaseobligations, and interest expense. Excess cash flow payments of $425,708 weremade for the year ended December 31, 2004 compared to payments of$1,695,000 for the year ended December 31, 2003.  In addition to theexcess cash flow payments, a total of $1,293,715 in principal payments was madeon the fixed rate note during the year ended December 31, 2004, comparedto principal payments of $1,129,142 during the year ended December 31,2003. The outstanding principal balance on this note was $9,956,435 as ofDecember 31, 2004.

 

The$11.1 million variable-rate, non-revolving note bore interest at 1.00% over USBank’s prime rate.  This note required quarterly payments of interest andamortized principal on the basis of a ten-year term.  This note was due onDecember 31, 2007.  As of December 31, 2004, Northern Lights’variable rate was 6.25%.  Principal payments of$1,236,072 were made on the variable-rate note duringthe year ended December 31, 2004, compared to principal payments of$1,152,732 made in the year ended December 31, 2003. The outstandingprincipal balance on this note was $8,711,196 as of December 31, 2004.

 

The $5million variable-rate, revolving note bore interest at 1.00% over US Bank’sprime rate, required quarterly interest-only payments, and was due onDecember 31, 2007.  The revolving feature permits Northern Lights tore-borrow in multiples of $100,000 on a revolving basis, the difference betweenthe unpaid principal

 

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amount on the note and $5million. Northern Lights paid an unused commitment fee of 0.5% per yearthat was assessed quarterly on any funds not borrowed under the note.  Asof December 31, 2004, the rate was 6.25%, compared to a rate of 5.0% as ofDecember 31, 2003. The unpaid principal balance was $0.00 as ofDecember 31, 2004 and as of December 31, 2003.

 

NorthernLights is required to provide US Bank with audited annual and unauditedquarterly financial statements.  In addition, minimum debt servicecoverage ratios, minimum working capital, minimum tangible net worth, a maximumcapital expenditure limitation and other standard negative and affirmativecovenants are required. The calculation of minimum working capital includes theamount US Bank is allowed to loan Northern Lights under the $5 million variablerate, revolving note. If an event of default occurs, as defined in the LoanAgreement, US Bank may terminate the Loan Agreement and declare the entireamount immediately due and owing.  Events of default under the Agreementinclude failure to make payments when due or violation of one or more of theAgreement’s covenants. All of Northern Lights’ tangible and intangibleproperty, including its leasehold interest, easement rights, improvements,equipment, personal property, and contracts, serve as the collateral for thedebt financing secured by US Bank. Management believes that Northern Lights isin compliance with all covenants and restrictions under its existing LoanAgreement and other agreements with US Bank.

 

The$1.2 million loan with US Bank was obtained to finance the acquisition andinstallation of two regenerative thermal oxidizers. Northern Lights paidinterest on the outstanding balance at a fixed rate of 5.70% and final paymentis due on May 1, 2007. The note is secured by the regenerative thermaloxidizers and a lien on all payments that Northern Lights receives or isentitled to receive under the Bioenergy Program. Northern Lights made $281,964in principal payments for the year ended December 31, 2004, compared to$434,827 in principal payments for the year ended December 31, 2003. Of the $434,827 in principal payments in 2003, $300,000 was made in conjunctionwith a refinancing in 2003.  Theprincipal balance outstanding on this note was $783,209 as of December 31,2004.

 

OnMarch 30, 2005, Northern Lights and US Bank entered into an amended LoanAgreement. The purpose of the agreement was to refinance existing debt and tofinance the planned rail expansion project at the plant. EffectiveMarch 30th, there will be five loans and notes with US Bank: a $15.8million fixed rate note; a $3.9 million variable-rate, non-revolving note; a $5million variable-rate, revolving note; a $3.0 million variable rate, revolvingnote; and a $1.2 million note. The $15.8 million note and $3.9 million notewill retire the original $15.0 million and $11.1 million note and loans. Theterms and conditions of the Loan Agreement dated March 30, 2005 remain thesame as the original Loan Agreement, as discussed above, except for as statedbelow.

 

The$15.8 million fixed rate note bears an interest rate at 6.38%. This noterequires quarterly payments of interest and amortized principal of $537,500 onthe basis of a ten-year term, the first payment being due on June 30,2005. The loan is subject to maturity on March 31, 2012.

 

The$3.9 million variable rate, non-revolving note bears interest at US Bank’sprime rate (currently 5.75%). This note requires quarterly payments of interestand amortized principal on the basis of a ten-year term, the first paymentbeing due on June 30, 2005. The first payment of principal and interestwill be $153,600. Like the fixed rate note, the loan matures on March 31,2012.

 

The $5 million variable-rate, revolving note bearsinterest at US Bank’s prime rate and carries an unused commitment fee of0.375%, assessed quarterly.  This noterequires quarterly interest-only payments and is subject to a new maturity ofMarch 31, 2012.

 

The$1.2 million note for the thermal oxidizers now bears interest at a fixed rateof 4.7%, with slightly lower quarterly payments being due until maturity onApril 30, 2007.

 

10

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Aspart of the refinancing, Northern Lights obtained a new $3.0 million variablerate, revolving note. This note requires quarterly interest payments whendrawn, the first potential payment starting on June 30, 2005.  The maturity on this note is March 31,2008. The interest rate is equal to US Bank’s prime rate and carries an unusedcommitment fee of 0.375%, assessed quarterly. The note is tied to the borrowingbase and cannot be used until the existing $5 million variable rate, revolvingnote is fully drawn.

 

Aspart of the amended Loan Agreement, some covenants are changed. The amendmentincreases the minimum working capital requirement from $2 million to $4 million(including the amount US Bank is allowed to loan Northern Lights under the $5million variable rate, revolving loan); eliminates the 15% excess cash flowpayment; changes the fixed charge coverage ratio; and changes the number ofallowable distributions to members to more than one each year, provided allother covenants are complied with under the Loan Agreement.

 

Inaddition to Northern Lights’ long-term debt, the following table providesinformation regarding the consolidated contractual obligations of NorthernGrowers as of December 31, 2004:

 
| ** **                         | ** ** | **Total** | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|------------------------------------|------------|-----------|------------|-------------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------|------------|
|                               |       |      |       |                    |       |                     |       |                     |       |                  |       |
| Long-Term Debt Obligations         |       | $         | 19,450,840 |                    | $          | 3,063,342                |       | $                        | 16,387,498 |                  | $          | 0 |   | $ | 0 |   |
| Capital Lease Obligations          |       | $         | 0          |                    | $          | 0                        |       | $                        | 0          |                  | $          | 0 |   | $ | 0 |   |
| Operating Lease Obligations        |       | $         | 387,115    |                    | $          | 2,400                    |       | $                        | 5,040      |                  | $          | 5,040 |   | $ | 374,635 |   |
| Purchase Obligations               |       | $         | 1,796,604  |                    | $          | 403,674                  |       | $                        | 434,160    |                  | $          | 434,160 |   | $ | 524,610 |   |
| Total Contractual Cash Obligations |       | $         | 21,634,559 |                    | $          | 3,469,416                |       | $                        | 16,826,698 |                  | $          | 439,200 |   | $ | 899,245 |   |

 

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

##### ** **

We donot use or have any off-balance sheet financial arrangements.

 

**RecentAccounting Pronouncements**

 

TheFinancial Accounting Standards Board (FASB) has issued Statement No. 151,Inventory Costs, an amendment of ARB No. 43, Chapter 4, “Inventory Pricing”(SFAS No. 151). The Statement amends and clarifies accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage).  The statement requires suchcosts be recognized as current period charges. The statement also requires the allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacility.  Management has determined thatimplementation of this pronouncement will not have a material effect on thefinancial statements.

 

**CriticalAccounting Policies and Estimates**

 

Preparationof our financial statements require estimates and judgments to be made thataffect the amounts of assets, liabilities, revenues and expensesreported.  Such decisions include the selection of the appropriateaccounting principles to be applied and the assumptions on which to baseaccounting estimates.  Management continually evaluates these estimatesbased on historical experience and other assumptions we believe to bereasonable under the circumstances.

 

Thedifficulty in applying these policies arises from the assumptions, estimatesand judgments that have to be made currently about matters that are inherentlyuncertain, such as future economic conditions, operating

 

11

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results and valuations aswell as management intentions.  As the difficulty increases, the level ofprecision decreases, meaning that actual results can and probably will be differentfrom 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.

 

## ***Commitments and Contingencies. ***Contingencies, by their nature, relate touncertainties that require management to exercise judgment both in assessingthe likelihood that a liability has been incurred, as well as in estimating theamount of the potential expense.  In conformity with accounting principlesgenerally accepted in the United States, we accrue an expense when it isprobable that a liability has been incurred and the amount can be reasonablyestimated.

## ** **

## ***Inventory Valuation. ***Northern Lightsaccounts for its corn inventory at estimated net realizable market value. Corn is an agricultural commodity that is freely traded, has quoted marketprices, may be sold without significant further processing, and has predictableand insignificant costs of disposal.  Northern Lights derives itsestimates from local market prices determined by grain terminals in itsarea.  Changes in the market value of corn inventory is recognized as acomponent of cost of revenues.  Ethanol and distiller’s grains are statedat net realizable value.  Work-in-process and chemical inventory arestated at an average cost method.

## ** **

###### ***Revenue Recognition. ***Revenue from theproduction of ethanol and related products is recorded when title transfers tocustomers, net of allowances for estimated returns.  Generally, ethanoland related products are shipped FOB shipping point.  Interest income isrecognized when earned.

 

Revenuefrom federal and state incentive programs is recorded when we have produced orsold the ethanol and satisfied the reporting requirements under each applicableprogram.  When it is uncertain that we will receive full allocation andpayment due under the federal incentive program, we derive an estimate of theincentive revenue**for therelevant period based on various factors including the most recently usedpayment factor applied to the program.  The estimate is subject to changeas management 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.

 

## ***Long-Lived Assets. ***Depreciation and amortization ofour property, plant, and equipment is provided on the straight-line method bycharges to operations at rates based upon the expected useful lives ofindividual or groups of assets.  Economic circumstances or other factorsmay cause management’s estimates of expected useful lives to differ fromactual.

## ** **

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 is written down to its estimated fairmarket value based on the best information available.  Considerablemanagement judgment is necessary to estimate discounted future cash flows andmay differ from actual cash flows.

 

*Accounting for Derivative Instruments and HedgingActivities.  *Northern Lights enters into derivativeinstruments to hedge its exposure to price risk related to forecasted corn andnatural gas purchases, forward corn purchase contracts and forecasted ethanolsales.  It does not typically enter into derivative instruments other thanfor hedging purposes.  All derivative contracts are recognized on theDecember 31, 2004 and 2003 balance sheets at their fair market value.Currently, none of the derivative instruments are classified as cash-flowhedges for accounting purposes.

 

On thedate the derivative instrument is entered into, Northern Lights will designatethe derivative as either (1) a hedge of the fair value of a recognizedasset or liability or of an unrecognized firm commitment (fair

 

12

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value hedge), (2) ahedge of a forecasted transaction or of the variability of cash flows to bereceived or paid related to a recognized asset or liability (cash flow hedge)or (3) will not designate the derivative as a hedge.  Changes in thefair value of a derivative that is designated as and meets all the requiredcriteria for a fair value hedge, along with the gain or loss on the hedgedasset or liability that is attributable to the hedged risk, are recorded incurrent period earnings.  Changes in the fair value of a derivative thatis designated as and meets all the required criteria for a cash flow hedge arerecorded in accumulated other comprehensive income and reclassified intoearnings as the underlying hedged item affects earnings.  Changes in thefair value of a derivative that is not designated as a hedge are recorded incurrent period earnings.

 

**Item9A. Controls and Procedures.**

 

On May 4, 2005, our audit committee was advised bymanagement of an accounting error in our Form 10-K for the year ended December31, 2004. The error pertained to the misclassification in the consolidatedstatement of operations of a $1.4 million settlement credit received inNovember 2004.  Management misclassifiedthe $1.4 million settlement credit as other income, rather than as a reductionin cost of revenues.  The credit was issued to Northern Lights after Big Stone Plant,the adjacent power plant that supplies steam to Northern Lights for its ethanolproduction process, determined that a metering instrument it owned andcontrolled had erroneously reported the volume of steam that had beentransferred to Northern Lights in 2003 and 2004. This error caused Big StonePlant to overcharge Northern Lights for steam used, resulting in an excesssteam expense for Northern Lights of $1.4 million in 2003 and 2004.  Big Stone Plant notified Northern Lights ofthis error in November 2004 and of its desire to issue a credit to resolve theerror, which Northern Lights agreed to accept. The reclassification of the $1.4 million settlement credit to cost ofrevenues will not affect our consolidated balance sheet, statement of cashflow, statement of members’ equity or net income for the year ended December31, 2004.

 

Management initially decided to classify the $1.4million settlement credit as other income to make the disclosure of thesettlement credit as transparent as possible in the Form 10-K and in relianceon certain accounting information it believed was applicable. While managementbelieves it achieved the transparency objective by classifying the settlementcredit as other income, management now acknowledges that the application of andreliance on the accounting information for purposes of classifying thesettlement credit was incorrect. The settlement credit arose from a productionor steam expense overcharge in 2003 and 2004. Because cost of revenues includesall production expenses, including steam expense, the credit should have beenclassified under cost of revenues.

 

During management’s evaluation of our disclosurecontrols and procedures relating to the misclassification of the settlementcredit, management did not identify any deficiencies. The settlement credit wasnot made known to and accepted by management until November 2004, as the natureof the informal dispute between Northern Lights and Big Stone Plant betweenMarch 2003 and November 2004 precluded management from identifying the errormade by Big Stone Plant.  Upon acceptanceof the settlement credit, management disclosed the settlement credit to allappropriate parties, including our audit committee, disclosure committee,independent registered public accounting firm and legal counsel. Management andthese parties then entered into an analysis and discussion on how the creditwould affect our consolidated statement of operations and how it should bedisclosed and classified in the Form 10-K. Based on this analysis, managementdecided to classify the settlement credit as other income which, in retrospect,was an incorrect classification. Because management believes classification ofthe settlement credit went through all of the appropriate channels, parties

 

13

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andanalysis before being disclosed, was disclosed as other income primarily tomake the settlement credit as transparent as possible in the Form 10-K, and wasclassified as other income due to a misjudgment, our chief executive officer and management, afterevaluating the effectiveness of our “disclosure controls and procedures” (asdefined in Rule 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended), have concluded that our disclosure controls andprocedures, as currently constituted, are effective in ensuring that materialinformation required to be disclosed is included in the reports that we filewith the Securities and Exchange Commission.

 

During management’s evaluation of our internalcontrols relating to the misclassification of the settlement credit, however,management identified a deficiency. Management believes that it may lack certain  expertise and experience to account fornon-recurring transactions, like in the case of the settlement credit. As aresult of this deficiency, the following actions will be taken to preventfuture reoccurrences:

 

• Whenmanagement determines that it may lack the necessary experience and expertiseregarding the  accounting of certaintransactions that are likely to impact materially our consolidated financialstatements, management will attempt to seek the consultation of an independentcertified public accountant before making any final decision regarding theaccounting of such transaction.

 

• When theaudit committee determines that it may lack the necessary experience andexpertise regarding the accounting of certain transactions that are likely toimpact materially our consolidated financial statements, the audit committeewill attempt to seek the consultation of an independent certified publicaccountant before approving our audited or unaudited consolidated financialstatements.

 

Management and the audit committee intend to monitorthe implementation of the above and are prepared to take additional measureswhere necessary to strengthen internal controls and procedures. Other than theforegoing initiatives, since the date of the chief executive officer’s andmanagement’s evaluation, there have been no material changes in our internalcontrols over financial reporting, which have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

**PART IV**

 

**Item15.  Exhibits, Financial Statement Schedules.**

 

(a)   The following exhibits and financialstatements are filed as part of, or are incorporated by reference into, thisreport:

 

(1)           ConsolidatedFinancial Statements — Reference is made to the “Index to FinancialStatements” of Northern Growers, LLC located at page F-1 of this reportfor a list of the financial statements and schedules for the year endedDecember 31, 2004 included herein.

 

(2)           Allsupplemental schedules are omitted because of the absence of conditions underwhich they are required or because the information is shown in the ConsolidatedFinancial Statements or notes thereto.

 

(3)           Theexhibits we have filed herewith or incorporated by reference herein are setforth on the attached Exhibit Index.

 

(b)   See Item 15(a)(3)

 

(c)   —

 

14

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SIGNATURES

 

Inaccordance 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: |  

May 26, 2005 |                  |  

/s/  Robert Narem |   |
|          |                 |                  | Robert Narem, Chief  Executive Officer |

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
|          |                 | NORTHERN GROWERS, LLC |
|---------------|----------------------|-----------------------|
|          |                 |                  |   |
|  

Date: |  

May 26, 2005 |                  |  

/s/ Robert Narem |   |
|          |                 |                  | Robert Narem, Chief  Executive Officer and  Chief Financial Officer, Manager  (Principal Executive  Officer) |
|          |                 |                  |   |
|          |                 |                  |   |   |
|  

Date: |  

May 26, 2005 |                  |  

/s/  Ronald Anderson |   |
|          |                 |                  | Ronald Anderson,  Manager |   |
|          |                 |                  |   |   |
|          |                 |                  |   |   |
|  

Date: |  

May 26, 2005 |                  |  

/s/  Glenn Berdan |   |
|          |                 |                  | Glenn Berdan, Manager |   |
|          |                 |                  |   |   |
|          |                 |                  |   |   |
|  

Date: |  

May 26, 2005 |                  |  

/s/  Dennis Flemming |   |
|          |                 |                  | Dennis Flemming,  Manager |   |
|          |                 |                  |   |   |
|          |                 |                  |   |   |
| Date:         | May 26, 2005         |                  |   |   |
|          |                 |                  | Lars Herseth, Manager |   |

 

15

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|  

Date:         |  

May 26, 2005         |   |  

/s/  Mark Lounsbery            |   |
|-----------------------|------------------------------|--------|----------------------------------------|--------|
|                  |                         |   | Mark Lounsbery, Manager                |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
|  

 

Date: |  

 

May 26, 2005 |   |  

 

                  |   |
|                  |                         |   | Robert Metz, Manager                   |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
|  

Date:         |  

May 26, 2005         |   |  

/s/  Jeff Olson                |   |
|                  |                         |   | Jeff Olson, Manager                    |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
|  

Date:         |  

May 26, 2005         |   |  

/s/  Ronald Olson              |   |
|                  |                         |   | Ronald Olson, Manager                  |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
|  

Date:         |  

May 26, 2005         |   |  

/s/  James Peterson            |   |
|                  |                         |   | James Peterson,  President, Manager    |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
|  

Date:         |  

May 26, 2005         |   |  

/s/  Delton Strasser           |   |
|                  |                         |   | Delton Strasser,  Secretary, Manager   |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
|  

Date:         |  

May 26, 2005         |   |  

/s/  Steve Street              |   |
|                  |                         |   | Steve Street, Vice  President, Manager |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
|  

Date:         |  

May 26, 2005         |   |  

/s/  Gregory Toben             |   |
|                  |                         |   | Gregory Toben, Manager                 |   |
|                  |                         |   |                                   |   |
|                  |                         |   |                                   |   |
| Date:                 | May 26, 2005                 |   | /s/  Bill Whipple                      |   |
|                  |                         |   | Bill Whipple, Manager                  |   |
|                  |  

                |   |                                   |   |
| Date:                 | May 26, 2005                 |   | /s/ Robert Wittnebel                   |   |
|                  |                         |   | Robert Wittnebel,  Manager             |   |

 

16

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**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.                   |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 3.1              |       | Articles  of Organization                                                                                              |       |                |       | Appendix  B to Issuer’s Prospectus filed with the Commission on March 17, 2003.                   |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 3.2              |       | Amendment  and Addendum to Operating Agreement dated July 16, 2003                                                |       |                |       | Exhibit 3.3  to the Issuer’s Form 10-KSB filed with the Commission on March 30,  2004.  |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 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.       |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.1             |       | 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.         |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.2             |       | Management  Agreement with Broin Management, LLC, dated November 2, 2000                                          |       |                |       | Exhibit 10.3  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.3             |       | Corn  Price Risk Management Agreement with Broin Management, LLC, dated  November 16, 2001                        |       |                |       | Exhibit 10.4  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.4             |       | Ethanol  Marketing and Services Agreement with Ethanol Products, LLC, dated  March 5, 2002                        |       |                |       | Exhibit 10.5  to the Issuer’s Form S-4/A filed with the Commission on January 8,  2003. |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.5             |       | DDGS  Marketing Agreement with Dakota Commodities (a/k/a Dakota Gold Marketing),  dated April 10, 2002            |       |                |       | Exhibit 10.6  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.     |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.6             |       | 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.     |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.7             |       | 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.     |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.8             |       | 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.     |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.9             |       | 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.    |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.10            |       | 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.    |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.11            |       | 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.    |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.12            |       | 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.    |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.13            |       | 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.    |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.14            |       | 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.     |
|             |       |                                                                                                                   |       |                |       |                                                                                                        |
| 10.15            |       | Service  Request Form and Extended Service Agreement with NorthWestern Public  Service, dated March 19, 2002 |       |                |       | Exhibit 10.17  to the Issuer’s Form S-4 filed with the Commission on July 26,  2002.    |

 

17

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| 10.16  |   | 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.          |
|--------|--------|----------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.17  |   | 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.      |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.18  |   | $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.      |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.19  |   | $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.      |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.20  |   | $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.      |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.21  |   | 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.      |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.22  |   | 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.        |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.23  |   | $1.2  million Promissory Note with US Bank, dated May 1, 2003                           |   |   |   | Exhibit 10.18  to the Registrant’s Form 10-QSB filed with the Commission on  August 14, 2003. |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.24  |   | Trading  Service Agreement with Alerus Securities Corporation dated February 2,  2004   |   |   |   | Exhibit 10.1  to the Registrant’s Form 10-Q filed with the Commission on May 17,  2004.       |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.25  |   | Amendment  to US Bank Loan Agreement dated June 22, 2004                                |   |   |   | Exhibit 10.1  to the Registrant’s Form 10-Q filed with the Commission on  August 16, 2004.    |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.26  |   | Second  Amendment to US Bank Loan Agreement dated March 30, 2005                        |   |   |   | Exhibit  10.26 to the Registrant’s Form 10-K filed with the Commission on March 31,  2005.                   |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.27  |   | $15.8  Million Promissory Note with US Bank dated March 30, 2005                        |   |   |   | Exhibit  10.27  to the Registrant’s Form 10-K  filed with the Commission on March 31, 2005              |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.28  |   | $3.9  Million Promissory Note with US Bank dated March 30, 2005                         |   |   |   | Exhibit10.28  to the Registrant’s Form 10-K filed with the Commission on March 31, 2005.                     |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 10.29  |   | $3.0  Million Promissory Note with US Bank dated March 30, 2005                         |   |   |   | Exhibit  10.29 to the Registrant’s Form 10-K filed with the Commission on March 31,  2005.                   |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 31     |   | Rule 13a-14/15d-14(a) Certifications                                               |   | X      |   |                                                                                                              |
|   |   |                                                                                         |   |   |   |                                                                                                              |
| 32     |   | Section 1350  Certification                                                             |   | X      |   |                                                                                                              |

 

18

----

**NORTHERNGROWERS, LLC**

 

Tableof Contents

 

----

 
|                                                        |                                           |
|-------------------------------------------------------------|------------------------------------------------|
|                                                        |                                           |
| **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** |                                           |
|                                                        |                                           |
| **CONSOLIDATED FINANCIAL STATEMENTS**                       |                                           |
|                                                        | Balance Sheets                                 |   |
|                                                        | Statements of  Operations                      |   |
|                                                        | Statements  of Changes in Members’ Equity |   |
|                                                        | Statements of  Cash Flows                      |   |
|                                                        | Notes to  Consolidated Financial Statements    |   |

 

19

----

 

## **REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

----

 

 

 

TheAudit Committee

**NorthernGrowers,****LLC**

BigStone City, South Dakota

 

 

Wehave audited the accompanying consolidated balance sheets of **Northern Growers,****LLC** as of December31, 2004 and 2003, and the related consolidated statements of operations,members’ equity and cash flows for each of the three years in the period endedDecember 31, 2004. These consolidated financial statements are theresponsibility of **Northern Growers'**management. Our responsibility is to express an opinion on these consolidatedfinancial statements based upon our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates bymanagement, as well as evaluating the overall financial statement presentation.We believe our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of **Northern Growers,****LLC** as of December31, 2004 and 2003, and the results of its operations and its cash flows foreach of the three years in the period ended December 31, 2004, in conformitywith accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the financialstatements, on April 1, 2003, Northern Growers Cooperative was dissolved and reorganizedas **Northern Growers,****LLC**.

 

Asdiscussed in Notes 11 and 13, **Northern Growers, LLC**has restated its consolidated statement of operations for the year endedDecember 31, 2004, to reflect a reclassification of a settlement credit.

 
| /s/  Eide Bailly LLP |   |
|----------------------|--------|

 

Minneapolis,Minnesota

January26, 2005, except for Note 12 and the last paragraph in Note 3, for which thedate is March 4, 2005, and Note 11 and Note 13, for which the date is May 23,2005.

 

F-1

----

 

**Northern Growers, LLC**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

** **

----

 
| ** **                        | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|-----------------------------------|------------|----------------|----------------|------------|------------|
|                              |       |           | ** **     |       |       |
| **ASSETS**                        |       |           | ** **     |       |       |
|                              |       |           | ** **     |       |       |
| CURRENT ASSETS                    |       |           | ** **     |       |       |
| Cash                              | ** ** | **$**          | **3,500,317**  | ** ** | $          | 2,865,310 |   |
| Accounts receivable               |       |           | ** **     |       |       |
| Trade related party               | ** ** | **3,675,195**  | ** **     | 3,590,952  |       |
| Trade                             | ** ** | **541,646**    | ** **     | 500,885    |       |
| Other                             | ** ** | **877,357**    | ** **     | 302,546    |       |
| Inventory                         | ** ** | **4,639,561**  | ** **     | 4,300,904  |       |
| Prepaid expenses                  | ** ** | **344,702**    | ** **     | 99,587     |       |
| Investment in commodity contracts | ** ** | **110,951**    | ** **     | 184,622    |       |
|                              |       |           | ** **     |       |       |
| Total current assets              | ** ** | **13,689,729** | ** **     | 11,844,806 |       |
|                              |       |           | ** **     |       |       |
| PROPERTY AND EQUIPMENT            |       |           | ** **     |       |       |
| Land improvements                 | ** ** | **4,003,657**  | ** **     | 3,520,698  |       |
| Equipment                         | ** ** | **34,905,067** | ** **     | 33,710,785 |       |
| Buildings                         | ** ** | **8,125,978**  | ** **     | 8,124,155  |       |
| ** **                        |       | **47,034,702** | ** **     | 45,355,638 |       |
| Less accumulated depreciation     | ** ** | **(6,148,738** | **)**          | (3,619,905 | )          |
|                              |       |           | ** **     |       |       |
| Net property and equipment        | ** ** | **40,885,964** | ** **     | 41,735,733 |       |
|                              |       |           | ** **     |       |       |
| OTHER ASSETS                      |       |           | ** **     |       |       |
| Financing costs                   | ** ** | **102,814**    | ** **     | 205,662    |       |
|                              |       |           | ** **     |       |       |
| Total other assets                | ** ** | **102,814**    | ** **     | 205,662    |       |
|                              |       |           | ** **     |       |       |
| ** **                        |       | **$**          | **54,678,507** | ** ** | $          | 53,786,201 |   |

 

SeeNotes to Consolidated Financial Statements

 

F-2

----

 

----

 
| ** **                                                                                              | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                                                                    |       |           | ** **     |       |       |
| **LIABILITIES AND MEMBERS' EQUITY**                                                                     |       |           | ** **     |       |       |
|                                                                                                    |       |           | ** **     |       |       |
| CURRENT LIABILITIES                                                                                     |       |           | ** **     |       |       |
| Accounts payable - trade                                                                                | ** ** | **$**          | **1,200,112**  | ** ** | $          | 1,339,505 |   |
| Accounts payable - corn                                                                                 | ** ** | **3,044,095**  | ** **     | 4,179,050  |       |
| Accounts payable - related party                                                                        | ** ** | **378,631**    | ** **     | 204,220    |       |
| Accounts payable - construction - related party                                                         | ** ** | **108,121**    | ** **     | 476,216    |       |
| Other accrued liabilities                                                                               | ** ** | **402,891**    | ** **     | 501,574    |       |
| Accrued interest                                                                                        | ** ** | **7,440**      | ** **     | 10,119     |       |
| Distribution payable - Northern Growers                                                                 | ** ** | **3,778,051**  | ** **     | 1,343,224  |       |
| Distribution payable - minority member                                                                  | ** ** | **1,142,000**  | ** **     | 456,800    |       |
| Notes payable - due upon demand                                                                         | ** ** | **5,000**      | ** **     | 5,000      |       |
| Current portion of note payable                                                                         | ** ** | **3,063,342**  | ** **     | 3,134,922  |       |
|                                                                                                    |       |           | ** **     |       |       |
| Total current liabilities                                                                               | ** ** | **13,129,683** | ** **     | 11,650,630 |       |
|                                                                                                    |       |           | ** **     |       |       |
| LONG-TERM NOTE PAYABLE                                                                                  | ** ** | **16,387,498** | ** **     | 20,053,377 |       |
|                                                                                                    |       |           | ** **     |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                           |       |           | ** **     |       |       |
|                                                                                                    |       |           | ** **     |       |       |
| MINORITY INTEREST                                                                                       | ** ** | **5,715,325**  | ** **     | 5,014,499  |       |
|                                                                                                    |       |           | ** **     |       |       |
| MEMBERS' EQUITY                                                                                         |       |           | ** **     |       |       |
| Capital units, $2.00 stated value, 12,000,000 units authorized; 6,328,500  units issued and outstanding |       | **12,657,000** | ** **     | 12,657,000 |       |
| Additional paid-in capital                                                                              | ** ** | **64,900**     | ** **     | 64,900     |       |
| Retained earnings                                                                                       | ** ** | **6,724,101**  | ** **     | 4,345,795  |       |
|                                                                                                    |       |           | ** **     |       |       |
| Total members' equity                                                                                   | ** ** | **19,446,001** | ** **     | 17,067,695 |       |
|                                                                                                    |       |           | ** **     |       |       |
| ** **                                                                                              |       | **$**          | **54,678,507** | ** ** | $          | 53,786,201 |   |

 

F-3

----

 

**Northern Growers, LLC**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002**

 

----

 
| ** **                                           | ** ** | **2004**          | ** **     | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------|------------|-------------------|----------------|------------|------------|------------|------------|
| ** **                                           | ** ** | **(As Restated)** | ** **     | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                             |       |              | ** **     |       |       |       |       |
| Sales related party                                  | ** ** | **$**             | **68,501,969** | ** ** | $          | 51,913,676 |       | $ | 20,499,279 |   |
| Sales                                                | ** ** | **16,486,472**    | ** **     | 13,643,646 |       | 5,116,829  |       |
| Incentive                                            | ** ** | **1,599,144**     | ** **     | 5,299,940  |       | 7,140,827  |       |
| Total revenues                                       | ** ** | **86,587,585**    | ** **     | 70,857,262 |       | 32,756,935 |       |
|                                                 |       |              | ** **     |       |       |       |       |
| COST OF REVENUES                                     |       |              | ** **     |       |       |       |       |
| Cost of revenues                                     | ** ** | **72,729,131**    | ** **     | 58,920,917 |       | 24,674,714 |       |
| Settlement credit - see Note 11                      | ** ** | **(1,449,248**    | **)**          | —     |       | —     |       |
| Total cost of revenues                               | ** ** | **71,279,883**    | ** **     | 58,920,917 |       | 24,674,714 |       |
|                                                 |       |              | ** **     |       |       |       |       |
| GROSS PROFIT                                         | ** ** | **15,307,702**    | ** **     | 11,936,345 |       | 8,082,221  |       |
|                                                 |       |              | ** **     |       |       |       |       |
| EXPENSES                                             |       |              | ** **     |       |       |       |       |
| Startup expenses                                     | ** ** | **—**        | ** **     | —     |       | 657,132    |       |
| General and administrative                           | ** ** | **2,984,237**     | ** **     | 2,739,136  |       | 1,352,524  |       |
| Total operating expenses                             | ** ** | **2,984,237**     | ** **     | 2,739,136  |       | 2,009,656  |       |
|                                                 |       |              | ** **     |       |       |       |       |
| INCOME FROM OPERATIONS                               | ** ** | **12,323,465**    | ** **     | 9,197,209  |       | 6,072,565  |       |
|                                                 |       |              | ** **     |       |       |       |       |
| OTHER INCOME (EXPENSES)                              |       |              | ** **     |       |       |       |       |
| Interest income                                      | ** ** | **10,780**        | ** **     | 8,153      |       | —     |       |
| Interest expense                                     | ** ** | **(1,500,438**    | **)**          | (1,847,108 | )          | (963,714   | )          |
| Other                                                | ** ** | **65,551**        | ** **     | 23,244     |       | 618        |       |
| Total other income (expenses)                        | ** ** | **(1,424,107**    | **)**          | (1,815,711 | )          | (963,096   | )          |
|                                                 |       |              | ** **     |       |       |       |       |
| INCOME BEFORE MINORITY INTEREST                      | ** ** | **10,899,358**    | ** **     | 7,381,498  |       | 5,109,469  |       |
|                                                 |       |              | ** **     |       |       |       |       |
| MINORITY INTEREST IN SUBSIDIARY INCOME               | ** ** | **(2,528,026**    | **)**          | (1,770,430 | )          | (1,229,452 | )          |
|                                                 |       |              | ** **     |       |       |       |       |
| NET INCOME                                           | ** ** | **$**             | **8,371,332**  | ** ** | $          | 5,611,068  |       | $ | 3,880,017 |   |
|                                                 |       |              | ** **     |       |       |       |       |
| BASIC AND DILUTED EARNINGS PER UNIT                  | ** ** | **$**             | **1.32**       | ** ** | $          | 0.89       |       | $ | 0.61 |   |
|                                                 |       |              | ** **     |       |       |       |       |
| BASIC AND DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING |       | **6,328,500**     | ** **     | 6,328,500  |       | 6,328,450  |       |
|                                                 |       |              | ** **     |       |       |       |       |
| DISTRIBUTIONS PER UNIT DECLARED                      | ** ** | **$**             | **0.95**       | ** ** | $          | 0.76       |       | $ | — |   |
|                                                 |       |              | ** **     |       |       |       |       |
| DISTRIBUTIONS PER UNIT PAID                          | ** ** | **$**             | **0.56**       | ** ** | $          | 0.58       |       | $ | — |   |

 

SeeNotes to Consolidated Financial Statements

 

F-4

----

 

**Northern Growers, LLC**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN MEMBERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002**

 

----

 
| ** **                     | ** ** | ** **    | ** ** | ** ** | ** **     | **Additional** | ** ** | ** **   | ** ** | ** ** | ** **    |
|--------------------------------|------------|---------------|------------|------------|----------------|----------------|------------|--------------|------------|------------|---------------|
| ** **                     | ** ** | **Capital**   | ** ** | ** ** | ** **     | **Paid-in**    | ** ** | **Retained** | ** ** | ** ** | ** **    |
| ** **                     | ** ** | **Units**     | ** ** | **Amount** | ** **     | **Capital**    | ** ** | **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  |          |
| Distribution 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 |          |
| Transfers and adjustments      |       | —        |       | —     |           | —         |       | —       |       | —     |          |
| Net income                     |       | —        |       | —     |           | —         |       | 8,371,332    |       | 8,371,332  |          |
| Distributions payable          |       | —        |       | —     |           | —         |       | (3,778,051   | )          | (3,778,051 | )             |
| Distributions paid             |       | —        |       | —     |           | —         |       | (2,214,975   | )          | (2,214,975 | )             |
|                           |       |          |       |       |           |           |       |         |       |       |          |
| **BALANCE, DECEMBER 31, 2004** | ** ** | **6,328,500** | ** ** | **$**      | **12,657,000** | ** **     | **$**      | **64,900**   | ** ** | **$**      | **6,724,101** | ** ** | **$** | **19,446,001** | ** ** |

 

SeeNotes to Consolidated Financial Statements

 

F-5

----

 

**Northern Growers, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002**

 

----

 
| ** **                                           | ** ** | **2004**       | ** **    | **2003**    | ** ** | **2002**    | ** ** |
|------------------------------------------------------|------------|----------------|---------------|-------------|------------|-------------|------------|
| OPERATING ACTIVITIES                                 |       |           | ** **    |        |       |        |       |
| Net income                                           | ** ** | **$**          | **8,371,332** | ** **  | $          | 5,611,068   |       | $ | 3,880,017 |   |
| Changes to net income not affecting cash             |       |           | ** **    |        |       |        |       |
| Depreciation                                         | ** ** | **2,531,969**  | ** **    | 2,446,104   |       | 1,172,473   |       |
| Amortization of loan fees                            | ** ** | **102,848**    | ** **    | 102,845     |       | 50,342      |       |
| Minority interest in subsidiary's earnings           | ** ** | **2,528,026**  | ** **    | 1,770,430   |       | 1,229,452   |       |
| Decrease (increase) in current assets                |       |           | ** **    |        |       |        |       |
| Accounts receivable                                  |       |           | ** **    |        |       |        |       |
| Related party                                        | ** ** | **(84,243**    | **)**         | (885,816    | )          | (2,705,136  | )          |
| Trade                                                | ** ** | **(40,761**    | **)**         | 114,766     |       | (615,651    | )          |
| Other                                                | ** ** | **(574,811**   | **)**         | 3,329,166   |       | (3,572,492  | )          |
| Inventory                                            | ** ** | **(338,657**   | **)**         | (297,461    | )          | (3,731,921  | )          |
| Prepaid expenses                                     | ** ** | **(245,115**   | **)**         | (28,193     | )          | (303,507    | )          |
| Investment in grain contract                         | ** ** | **73,671**     | ** **    | (77,527     | )          | (107,095    | )          |
| Increase (decrease) in current liabilities           |       |           | ** **    |        |       |        |       |
| Accounts payable                                     |       |           | ** **    |        |       |        |       |
| Trade                                                | ** ** | **(139,393**   | **)**         | 185,042     |       | 1,097,542   |       |
| Corn                                                 | ** ** | **(1,134,955** | **)**         | 1,100,172   |       | 3,078,878   |       |
| Related party                                        | ** ** | **174,411**    | ** **    | (240,643    | )          | 444,863     |       |
| Accrued liabilities                                  | ** ** | **(98,683**    | **)**         | 214,533     |       | 237,287     |       |
| Accrued interest                                     | ** ** | **(2,679**     | **)**         | (162,166    | )          | 172,285     |       |
|                                                 |       |           | ** **    |        |       |        |       |
| NET CASH PROVIDED BY OPERATING ACTIVITIES            |       | **11,122,960** | ** **    | 13,182,320  |       | 327,337     |       |
|                                                 |       |           | ** **    |        |       |        |       |
| INVESTING ACTIVITIES                                 |       |           | ** **    |        |       |        |       |
| Purchase of property and equipment                   | ** ** | **(2,050,295** | **)**         | (1,128,154  | )          | (22,346,709 | )          |
|                                                 |       |           | ** **    |        |       |        |       |
| NET CASH USED FOR INVESTING ACTIVITIES               | ** ** | **(2,050,295** | **)**         | (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            | ** ** | **(3,737,459** | **)**         | (9,411,701  | )          | **—**  |       |
| Distributions paid - Northern Growers                | ** ** | **(3,558,199** | **)**         | (3,650,597  | )          | **—**  |       |
| Distributions paid - minority member                 | ** ** | **(1,142,000** | **)**         | (1,199,091  | )          | **—**  |       |
| Financing costs paid                                 | ** ** | **—**     | ** **    | (4,924      | )          | (74,065     | )          |
|                                                 |       |           | ** **    |        |       |        |       |
| NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES |       | **(8,437,658** | **)**         | (13,766,313 | )          | 26,443,996  |       |
|                                                 |       |           | ** **    |        |       |        |       |
| NET (DECREASE) INCREASE IN CASH                      | ** ** | **635,007**    | ** **    | (1,712,147  | )          | 4,424,624   |       |
|                                                 |       |           | ** **    |        |       |        |       |
| CASH AT BEGINNING OF PERIOD                          | ** ** | **2,865,310**  | ** **    | 4,577,457   |       | 152,833     |       |
|                                                 |       |           | ** **    |        |       |        |       |
| CASH AT END OF PERIOD                                | ** ** | **$**          | **3,500,317** | ** **  | $          | 2,865,310   |       | $ | 4,577,457 |   |

 

(continuedon next page)

 

F-6

----

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS — page 2**

 

----

 
| ** **                                                               | ** ** | **2004** | ** **    | **2003** | ** ** | **2002**  | ** ** |
|--------------------------------------------------------------------------|------------|----------|---------------|----------|------------|-----------|------------|
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                        |       |     |          |     |       |      |       |
| Cash paid for interest, net of capitalized interest                      | ** ** | **$**    | **1,400,270** |     | $          | 1,762,557 |       | $ | 1,215,420 |   |
| Cash paid for income taxes (refunded)                                    | ** ** | **$**    | **—**    |     | $          | —    |       | $ | (59,220 | ) |
|                                                                     |       |     |          |     |       |      |       |
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING  ACTIVITIES |       |     |          |     |       |      |       |
| Accounts payable incurred for construction costs                         | ** ** | **$**    | **108,121**   |     | $          | 476,216   |       | $ | 438,941 |   |
| Distributions payable                                                    | ** ** | **$**    | **3,778,051** |     | $          | 1,343,224 |       | $ | — |   |

 

SeeNotes to Consolidated Financial Statements

** **

F-7

----

 

**NORTHERN GROWERS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

----

** **

**NOTE 1 -       NATUREOF OPERATIONS**

 

*Principal Business Activity*

 

Northern Growers, LLC orthe Company (formerly Northern Growers Cooperative or the Cooperative), is aSouth Dakota limited liability company located near Big Stone City, SouthDakota. The Company was organized to pool investors and provide a portion ofthe corn supply for a 40 million gallon (annual capacity) ethanol plant ownedby Northern Lights Ethanol, LLC (Northern Lights). Northern Lights was formedon February 14, 2001. On June 26, 2002, the plant began grinding cornand on July 5, 2002, the ethanol plant commenced its principal operations.Prior to July 5, 2002, the Company was in the development stage. TheCompany sells ethanol and related products within North America.

 

On April 1, 2002,Whetstone Ethanol, LLC (Whetstone) was formed. The initial member of Whetstonewas the Cooperative. Whetstone was formed for the purpose of acquiring theassets and liabilities of the Cooperative. On April 10, 2002, the Board ofDirectors of the Cooperative approved a plan of reorganization related to anexchange whereby Whetstone would acquire the assets and liabilities of theCooperative. On March 27, 2003, the members of the Cooperative approved theplan of reorganization. The effective date of the reorganization was April l,2003. The transaction was an exchange of interests whereby the assets andliabilities of the Cooperative were transferred for capital units of Whetstone.For financial statements purposes, no gain or loss was recorded as a result ofthe exchange transaction.

 

As a result of theexchange, the Cooperative was dissolved, with Whetstone’s capital unitsdistributed to the members of the Cooperative at a rate of one Whetstonecapital unit for each share of equity common stock and all voting common stockof the Cooperative surrendered and retired. In connection with thereorganization, Whetstone changed its name to Northern Growers, LLC. A minimumof 5,000 capital units is required for ownership of the Company. Such units aresubject to certain transfer restrictions, including approval by the Board ofManagers of the Company. The Company also retains the right to redeem thecapital units at $.20 per unit in the event a member attempts to dispose of theunits in a manner not in conformity with the Operating Agreement, if a memberbecomes a holder of less than 5,000 units, if a member breaches their member orcorn delivery agreement or becomes a bankrupt member. The Operating Agreementof the Company also includes provisions whereby cash flow in excess of $200,000will be distributed to unit holders subject to limitations imposed by a supermajority vote of the Board of Managers or restrictions imposed by loancovenants.

 

 

**NOTE 2 -       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of Consolidation*

 

The consolidatedfinancial statements include the accounts of the Company and its 77.16% ownedsubsidiary, Northern Lights. All significant inter-company transactions andbalances have been eliminated in consolidation*.*For purposes ofthese financial statements and notes, the use of the term “the Company” willrefer to the consolidated accounts of Northern Growers and Northern Lights.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist of demandaccounts and other accounts that provide withdrawal privileges.

 

F-8

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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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 incentiveprograms is recorded when the Company has produced or sold the ethanol andsatisfied the reporting requirements under each applicable program. When it isuncertain that the Company will receive full allocation and payment due underthe federal incentive program, it derives an estimate of the incentive revenuefor the relevant period based on various factors including the most recentlyused payment factor applied to the program. The estimate is subject to changeas management becomes aware of increases or decreases in the amount of fundingavailable under the incentive programs or other factors that affect funding orallocation of funds under such programs.

 

*ShippingCosts*

 

Freight charges incurred are reported as acomponent of cost of revenues.

 

*Receivablesand Credit Policies*

 

Trade receivables areuncollateralized customer obligations due under normal trade terms requiringpayment within 30 days from the invoice date. Customer account balances withinvoices dated over 30 days old are considered delinquent. Interest is notcharged on any delinquent accounts.

 

Trade receivables arestated at the amount billed to the customer.

 

Payments of tradereceivables are allocated to the specific invoices identified on the customer’sremittance advice or, if unspecified, are applied to the earliest unpaidinvoices.

 

The carrying amount of trade receivables isreduced by a valuation allowance that reflects management’s best estimate ofthe amounts that will not be collected. Management reviews all trade receivablebalances that exceed 30 days from the invoice date and based on an assessmentof current creditworthiness, estimates the portion, if any, of the balance thatwill not be collected. Management believes that all trade receivables arecollectible; therefore, there is no valuation allowance as of December 31, 2004and 2003.

 

*Inventory*

 

Ethanol andrelated product inventory is stated at net realizable value. Corn inventory isstated at market value, which approximates net realizable value (local marketprices less cost of disposal), based on local market prices determined by grainterminals in the area of the plant. Other raw materials, spare parts andwork-in-process inventory are stated at the lower of cost or market on anaverage cost method.

 

Inventories at December 31, 2004 and 2003 are as follows:

 

 

| ** **            | ** ** | **2004**      | ** **    | **2003**  | ** ** |
|-----------------------|------------|---------------|---------------|-----------|------------|
| Finished goods        | ** ** | **$**         | **2,112,405** |      | $          | 1,592,046 |   |
| Raw materials         | ** ** | **1,500,457** |          | 1,845,031 |       |
| Work-in-process       | ** ** | **399,049**   |          | 365,060   |       |
| Spare parts inventory | ** ** | **627,650**   |          | 498,767   |       |
| ** **            |       | **$**         | 4,639,561     |      | $          | 4,300,904 |   |

 

F-9

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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*Investmentin Grain Contracts, Derivative Instruments and Hedging Activities*

 

SFAS No. 133 requires acompany to evaluate its contracts to determine whether the contracts arederivatives. Certain contracts that literally meet the definition of aderivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

 

The Company enters intoshort-term cash grain, option and futures contracts as a means of securing cornfor the ethanol plant and managing exposure to changes in commodity prices. Allderivatives are designated as non-hedge derivatives. Although the contracts areeffective economic hedges of specified risks, they are not designated as andaccounted for as hedging instruments.

 

As part of its tradingactivity, the Company uses futures and option contracts offered through regulatedcommodity exchanges to reduce risk and is exposed to risk of loss in the marketvalue of inventories. To reduce that risk, the Company generally takespositions using cash and futures contracts and options.

 

Unrealized gains and lossesrelated to derivative contracts are included as a component of cost of revenuesin the accompanying consolidated financial statements. Inventories are recordedat net realizable value so that gains and losses on derivative contracts areoffset by gains and losses on inventories and reflected in earnings currently.For the statement of cash flows, such contract transactions are classified asoperating activities.

 

Wehave recorded an increase (decrease) to cost of revenues of $3,715,496,$(71,653) and $459,207 related to our derivative contracts for the year endedDecember 31, 2004, 2003 and 2002, respectively.

 

*FinancingCosts*

 

Financing costs are amortized over the term of the related debt usingthe interest method of amortization. Amortization of financing costs during constructionwas capitalized as part of construction period interest. Accumulatedamortization totaled $261,035 and $158,188 as of December 31, 2004 and 2003,respectively.

 

*MinorityInterest*

 

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 of Estimates*

 

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. Actualresults could differ from those estimates.

 

*Concentrations of Credit Risk*

 

Cash balances are maintained in bankdepositories and periodically exceed federally insured limits.

 

F-10

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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*Property and Equipment*

 

Property and equipment is stated at cost.Significant additions and betterments are capitalized, while expenditures formaintenance, repairs and minor renewals are charged to operations whenincurred. Depreciation on assets placed in service is computed using thestraight-line method over estimated useful lives as follows:

 

| Land improvements | 8-40 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 agrant of $1,501,199 from the proceeds of tax increment financing bonds issuedby Grant County, South Dakota. Under South Dakota law, proceeds from taxincrement financing are not a liability of the entity, but are an obligation ofthe taxing district issuing the bonds. The grant was provided to fundinfrastructure improvements related to the construction of the ethanol plantand will be repaid by Grant County from the incremental increase in propertytaxes related to the improvements of the property. The total amount of thegrant is recorded as a reduction of the value of the property and equipment.

 

# ***Environmental Liabilities***

 

The Company’s operations are subject toenvironmental laws and regulations adopted by various governmental authorities inthe jurisdiction in which it operates. These laws require the Company toinvestigate and remediate the effects of the release or disposal of materialsat its locations. Accordingly, the Company has adopted policies, practices andprocedures in the areas of pollution control, occupational health, and theproduction, handling, storage and use of hazardous materials to preventmaterial environmental or other damage, and to limit the financial liabilitywhich could result from such events. Environmental liabilities are recordedwhen the liability is probable and the costs can be reasonably estimated.

 

*Income Taxes*

 

Northern Growers, LLC, is not a taxpayingentity for federal and state income tax purposes and thus, no income taxexpense has been recorded in the statements. Income of the Company is taxed tothe members in their respective returns.

 

*Cost of Revenues*

 

The primary components of cost of revenuesfrom the production of ethanol and related products are corn expense, energyexpense (steam, natural gas and electricity), raw materials expense (chemicalsand denaturant), shipping costs on sales and depreciation on process equipment.

 

All shipping costs incurred with regard tothe sale of ethanol and related product inventory are included in the consolidatedstatements of operations as a component of gross revenues. Accordingly, thoseshipping costs are deducted and are all classified as a component of cost ofrevenues. Shipping costs in relation to sales are defined as the cost totransport products to the customers. Other shipping costs in the cost ofrevenues include inbound freight charges on inventory.

 

F-11

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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*General and Administrative Expenses*

 

The primary components of general andadministrative expenses are management fees, insurance expense and professionalfees (legal and audit).

 

*Reclassifications*

 

Certain reclassifications have been made tothe 2002 financial statements to conform to the presentation in 2003 and 2004.These reclassifications had no change in previously reported net income.

 

*Recently Issued AccountingPronouncements*

 

The Financial Accounting Standards Board(FASB) has issued Statement No. 151, Inventory Costs, an amendment of ARB No.43, Chapter 4. The Statement amends and clarifies accounting for abnormalamounts of idle facility expense, freight, handling costs and wasted material(spoilage). Management has determined that implementation of this pronouncementwill not have an effect on the Company’s financial statements.

 

 

**NOTE 3 -       NOTESPAYABLE**

 

*Short-TermNotes Payable*

 

The Company received advances of $5,000 fromvarious entities to help establish the Company. The notes are due on demand anddo not bear interest.

 

On June 5, 2002, Northern Lights entered intoa $1,000,000 promissory note with US Bank National Association, Sioux Falls,South Dakota (Bank), which matured on May 1, 2003.

 

On December 15,2002, Northern Lights entered into a $500,000 line of credit with the Bank,which matured on May 1, 2003.

 

The balance of the short-term notes payable as of December 31, 2004 and2003 are as follows:

 

| ** **                 | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------|------------|------------|------------|----------|------------|
| Non-interest bearing notes | ** ** | **$**      | **5,000**  |     | $          | 5,000 |   |
| US Bank promissory note    | ** ** | **—** |       | —   |       |
|                       |       | **$**      | 5,000      |     | $          | 5,000 |   |

 

*Long-Term Notes Payable*

 

Northern Lights had a $31,100,000 note withthe Bank for the construction and permanent financing of the plant. Duringconstruction and through the balance of 2002, interest was due on a quarterlybasis. Collateral for the note was the mortgage on the ethanol plant, with anet book value of approximately $40,885,000 as of December 31, 2004, andassignment of certain agreements related to the construction and operation ofthe plant.

 

F-12

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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On January 1, 2003, Northern Lights convertedits $31.1 million construction note to three promissory notes. The interestrate terms of the promissory notes are as follows:

 

•        Variablerate, non-revolving loan for $11.1 million, amortized over a 10 year period,with interest and principal due March 31, June 30, September 30 and December31. Interest is at prime plus 1% (6.25% at December 31, 2004). The loan has amaturity date of December 31, 2007.

 

•        Fixedrate loan for $15 million, amortized over a ten-year period, with interest andprincipal due March 31, June 30, September 30 and December 31. Interest isfixed at 6.95%. The loan has a maturity of December 31, 2007 and is subject toa prepayment penalty.

 

•        Variablerate, revolving loan for $5 million, interest only payments required on March31, June 30, September 30 and December 31. Interest is at prime plus 1% (6.25%at December 31, 2004). The loan has a maturity date of December 31, 2007.

 

Except as noted above, the covenants andother terms and conditions of the original note with the Bank remain applicableto these three new notes.

 

On May 1, 2003, Northern Lights entered intoa $1,200,000 promissory note with the Bank to refinance the then remainingunpaid and outstanding short-term notes payable balances of the $500,000 lineof credit and $1,000,000 promissory note. The note bears interest at 5.7%, ispayable in quarterly installments of principal and interest of $84,406beginning August 1, 2003, matures on May 1, 2007 and is subject to a prepaymentpenalty. The note is collateralized by the previous security agreement betweenthe Bank and Northern Lights.

 

Northern Lights is subject to certainrestrictive covenants establishing minimum reporting requirements, ratios,working capital and net worth requirements. At December 31, 2004, NorthernLights was in compliance with its covenants. Annually, beginning May 1, 2003,the financing arrangements with U.S. Bank include terms whereby Northern Lightsmakes an additional principal payment equal to 15% of Northern Light’s excesscash flow (as defined by the agreement), not to exceed 20% of the outstandingprincipal balance. The excess cash flow payment made on May 1, 2003, was$1,010,000 and was applied to the principal of the fixed rate loan with theoriginal principal balance of $15,000,000. In conjunction with Northern Light’sdividend distributions of September 22, 2003, February 10, 2004 andNovember 12, 2004, additional excess cash flow payments of $685,000, $335,664and $590,044, respectively, were made on the same fixed rate loan.

 

The balance of the long-term notes payable asof December 31, 2004 and 2003 follows:

 

| ** **                        | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|-----------------------------------|------------|----------------|----------------|------------|------------|
| Variable rate, non-revolving loan | ** ** | **$**          | **8,711,196**  |       | $          | 9,947,268 |   |
| Variable rate, revolving loan     | ** ** | **—**     |           | —     |       |
| Fixed rate loan                   | ** ** | **9,956,435**  |           | 12,175,858 |       |
| Promissory note                   | ** ** | **783,209**    |           | 1,065,173  |       |
| ** **                        |       | **19,450,840** |           | 23,188,299 |       |
| Less current portion              | ** ** | **(3,063,342** | )              | (3,134,922 | )          |
| ** **                        |       | **$**          | **16,387,498** |       | $          | 20,053,377 |   |

 

At December 31, 2004 and 2003, the Company had no outstanding borrowingsagainst the variable rate revolving loan.

 

F-13

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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Minimum principal payments, through the maturity of the notes, follow:

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2005                          |       | $          | 3,063,342  |   |
| 2006                          |       | 3,279,203  |       |
| 2007                          |       | 13,108,295 |       |
|                          |       | $          | 19,450,840 |   |

 

Minimum principal payments for the yearending December 31, 2005 do not include any related additional principal to theBank based on excess cash flow. U.S. Bank released the Company of any furtherexcess cash flow payments as of December 31, 2004. Minimum principal paymentsfor the year ending December 31, 2007 include balloon payments due at thematurity of the notes.

 

 

**NOTE 4 -       RELATEDPARTY TRANSACTIONS**

 

The Company and Broin Investments I, LLC, arethe members of Northern Lights. The Company invested $12,500,000 and BroinInvestments I, LLC invested $3,700,000 in Northern Lights Ethanol, LLC fortheir respective ownership interests of approximately 77% and 23%. Inaccordance with the Operating Agreement of Northern Lights, Broin InvestmentsI, LLC, has the right to elect two of seven members of the Board of Managers ofNorthern Lights.

 

Northern Lights has a construction contractwith Broin and Associates, Inc. (see Note 6). Amounts due to Broin andAssociates, Inc. related to the construction contract as of December 31, 2004and 2003 were $0 and $476,216 respectively. Payments on the constructioncontract through December 31, 2004, 2003 and 2002 were $47,615,981, $47,139,765and $46,110,022, respectively.

 

During 2003, the Company entered into anagreement with Dakota Gold Marketing for the use of railcars to transport DDGS.The agreement provides for a flat rate per car, per shipment and can beterminated with 90 days notice by either party.

 

Additional agreements with related parties are included in Note 6.

** **

 

**NOTE 5 -       FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

The Company believes the carrying amount ofcash and cash equivalents approximates fair value due to the short maturity ofthese instruments.

 

The Company believes the carrying amount oflong-term note payable obligations approximates fair value. For theconstruction and permanent financing, fair value approximates the carryingamount due to the variable interest rate feature of the debt.

 

The Company believes the carrying amount ofshort-term notes payable approximates their value due to the short maturity ofthese instruments. The Company believes the fair value of agreements for thepurchase of utilities approximates the carrying value based on the variableterms of the agreements that follow local market rates.

 

F-14

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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

 

Substantially all of the Company’s facilitiesare subject to federal, state and local regulations relating to the dischargeof materials into the environment. Management believes that the currentpractices and procedures for the control and disposition of such wastes complywith the applicable federal, state and local requirements.

 

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

 

Agreements with Broin Investments I, LLC, theminority member of Northern Lights, or parties related to the minority memberthrough common ownership, are as follows:

 

ConstructionContract — The Company had a construction contract withBroin and Associates, Inc., an affiliate of the minority member of NorthernLights. The contract, with change orders, totals $47,615,981, all of which iscomplete as of December 31, 2004.

 

EthanolMarketing Contract — 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 five-year terms unless terminated threemonths prior to expiration.

 

ManagementAgreement — The Company has an agreement with BroinManagement, LLC for the management and operation of the ethanol plant. Inexchange for these services, Broin Management receives an annual fee plus anincentive bonus of 5% of net income. The annual fee is adjusted each year forchanges in the consumer price index. The fees and bonus paid to BroinManagement include the salary and benefits of the general manager and technicalmanager and certain other services related to operation of the ethanol plant.  The agreement was executed on November 2,2000 and payments began during February 2002, approximately six months prior tothe projected start of plant operations. The term of this agreement continuesuntil July 1, 2005, three years from the date the plant began processing cornand is renewable for successive three-year terms unless terminated 90 daysprior to expiration of the agreement.

 

The Company has entered into an agreementwith Broin Management, LLC for hedge and price risk management services relatedto corn requirements of the plant. The agreement expires in April 2005 and isrenewable for successive one-year terms unless terminated 30 days prior toexpiration.

 

DDGS Marketing Agreement —****The Companyhas an agreement with Dakota Gold Marketing, a related party through ownershipby entities related to the minority member, to provide marketing andadministrative services for the sale of DDGS. The agreement commenced on May10, 2002. The agreement provides for an agency relationship in that Dakota GoldMarketing does not take title to the DDGS but acts as a broker on behalf ofNorthern Lights. The agreement has a term of five years from commencement, andis renewable for five-year terms unless terminated by either party with 90 daysnotice.

 

Software Maintenance — In July 2002, the Company entered into an agreementwith Broin and Associates, Inc. for new revisions to the plant’s software. Theagreement has a term of three years, beginning June 1, 2002.

 

F-15

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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On December 16, 2002, the Company enteredinto an agreement with Broin and Associates, Inc. for the purchase of certainsoftware and data management services. The initial fee for purchase of thesoftware is $40,000 payable upon execution of the agreement. The fee for themaintenance service ($20,000) shall be adjusted by the Consumer Price Index onan annual basis. The agreement has a term of two years, and it automaticallyrenews for successive two-year terms unless terminated 60 days prior toexpiration.

 

Revenues and expenses related to agreements withrelated parties for the years ended December 31, 2004 and 2003 are as follows:

 

| ** **                            | ** ** | **2004**    | ** **     | **2003** | ** ** |
|---------------------------------------|------------|-------------|----------------|----------|------------|
|                                  |       |        |           |     |       |
| Ethanol gross revenues                | ** ** | **$**       | **68,501,969** |     | $          | 51,913,676 |   |
| Management fees expense               | ** ** | **995,458** |           | 791,659  |       |
| Marketing fees expense - all products | ** ** | **691,832** |           | 603,186  |       |
|                                       |            |             |                |          |            |  |  |

 

Agreements with unrelated parties are asfollows:

 

Property Lease — The Company entered into a ninety-nine-year propertylease (an operating lease) with Big Stone-Grant Industrial Development andTransportation, LLC. Rent is $2,400 for each of the first five years. The rentwill be adjusted on January 1, 2006 and every five years thereafter. The rentwill be increased 5% over the immediately preceding five-year period.

 

Steam — The Company has an agreement with the Big StonePlant Co-Owners (the Big Stone Plant); Otter Tail Corporation, Montana-DakotaUtilities Co. and Northwestern Public Service, for steam in a specified amountfor use in its ethanol manufacturing process at a base rate, adjusted annuallyfor changes in the cost of energy. The agreement commenced on June 1, 2002 andhas a term of ten years, renewable for two five-year periods, after which theagreement is renewable from year to year. Either party may terminate theagreement by providing notice one year prior to a renewal or expiration date.

 

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

 
| ** **       | ** ** | ** **     | ** ** | ** **     | ** ** | **Unconditional** | ** ** | ** ** | ** ** |
|------------------|------------|----------------|------------|----------------|------------|-------------------|------------|------------|------------|
| **Years Ending** | ** ** | **Lease**      | ** ** | **Management** | ** ** | **Purchase**      | ** ** | ** ** | ** ** |
| **December 31,** | ** ** | **Agreements** | ** ** | **Agreements** | ** ** | **Agreements**    | ** ** | **Total**  | ** ** |
| 2005             |       | $              | 2,400      |           | $          | 186,594           |       | $          | 217,080    |   | $ | 406,074 |   |
| 2006             |       | 2,520          |       | —         |       | 217,080           |       | 219,600    |       |
| 2007             |       | 2,520          |       | —         |       | 217,080           |       | 219,600    |       |
| 2008             |       | 2,520          |       | —         |       | 217,080           |       | 219,600    |       |
| 2009             |       | 2,520          |       | —         |       | 217,080           |       | 219,600    |       |
| 2010-2100        |       | 374,635        |       | —         |       | 524,610           |       | 899,245    |       |
|             |       | $              | 387,115    |           | $          | 186,594           |       | $          | 1,610,010  |   | $ | 2,183,719 |   |

 

Waterand Fuel Oil — The Company has an agreement with the Big StonePlant with a rate schedule for a specified quantity of water and fuel oil forten years, commencing January 1, 2002. The agreement is renewable for twofive-year periods, after which the agreement renews for one-year periods.Either party may terminate the agreement with notice provided one year prior toa renewal or expiration date. No minimum purchase quantities are provided inthe agreement, and the prices for these items are at local market prices.

 

F-16

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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The Company also has anagreement with the City of Big Stone City, South Dakota, with a rate schedulefor water and sewer services for ten 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 theproperty lease, steam, water and fuel oil agreements for the years endedDecember 31, 2004, 2003 and 2002 were $3,937,132, $3,392,378 and $303,802,respectively.

 

Please see Note 11 forfurther details on the steam agreement with the Big Stone Plant.

 

Each holder of capital unitshas entered into a member agreement with the Company. For each capital unitowned, one bushel of corn is required to be delivered annually. The price paidfor the corn is the average corn price for the applicable four-month period(trimester) based on several local grain elevators’ cash corn price, or a negotiatedprice set before delivery of the bushels. Based on the number of capital unitsoutstanding, 6,328,500 bushels of corn is scheduled to be delivered annually bythe Company’s unit holders. This represents approximately 41% of the cornrequired for the operation of the plant at its 40,000,000 gallon name-platecapacity. Due to an amendment to the operating agreement, some unit holders areeligible to opt-out of their corn delivery requirement, subject to an annualapproval of the opt-out requirements. Purchases of corn from corn deliveryagreements and cash contracts from the Company’s unit holders totaledapproximately $33,300,000 and $28,100,000 for the years ending December 31,2004 and 2003, respectively, of which $2,139,294 and $3,382,203 was recorded asa liability at December 31, 2004 and 2003, respectively.

 

The Company receives anincentive payment from the United States Department of Agriculture (USDA) forthe use of corn to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on incremental production of ethanolcompared to the prior year. The USDA has set the annual maximum not to exceed$7,500,000 for each eligible producer. The incentive is calculated on the USDAfiscal year of October 1 to September 30. Revenue of $1,303, $1,064,644 and$7,500,000 has been earned for the USDA program years ended September 30, 2005,2004 and 2003, respectively. Incentive revenue of $932,477, $4,115,170 and$6,742,263 was recorded for the years ended December 31, 2004, 2003 and 2002,respectively, for this program.

 

The Company also receives anincentive payment from the State of South Dakota to produce ethanol. Inaccordance with the terms of this arrangement, revenue is recorded based onethanol sold. The State of South Dakota has set a maximum of up to $1,000,000per year for this program per qualifying producer. The Company has earned$583,334, $666,667 and $1,000,000 for the program years ended June 30, 2005,2004 and 2003, respectively. Incentive revenue of $666,667, $1,184,770 and$398,564 was recorded for the years ended December 31, 2004, 2003 and 2002,respectively, for this program.

 

Legal Proceedings — The Companyis involved 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.

 

Capital Unit Trading - EffectiveMarch 8, 2004, trading of the Company’s Class A units began on AlerusSecurities Corporation’s (Alerus) Alternative Trading System. Members andnon-members were able to begin trading of capital units on March 8, 2004.

 

F-17

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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**NOTE 7 -       DISTRIBUTIONS**

 

During April 2003, Northern Lightsdistributed $1,750,000 of cash to its members. The Company receivedapproximately $1,350,000, and the minority member received approximately$400,000. In conjunction with this cash distribution, the Company declared adistribution of $1,831,020 and paid a distribution to its members ofapproximately $1,100,000.

 

During September 2003, Northern Lightsdistributed $3,500,000 of cash to its members. The Company receivedapproximately $2,700,000, and the minority member received approximately$800,000. In conjunction with this cash distribution, the Company declared adistribution of $1,819,575 and paid a distribution to its members ofapproximately $2,550,000.

 

During January 2004, the Northern LightsBoard of Managers approved a $2,000,000 distribution, which it paid on February10, 2004. The Company received approximately $1,543,000 and the minority memberreceived approximately $457,000. In conjunction with this cash distribution,the Company paid a distribution to its members of approximately $1,343,000. Theabove distributions are recorded as a liability as of December 31, 2003.

 

During November 2004, the Northern LightsBoard of Managers approved a $3,000,000 distribution, which it paid on November12, 2004. The Company received approximately $2,315,000 and the minority memberreceived approximately $685,000. In conjunction with this cash distribution,the Company paid a distribution to its members of approximately $2,215,000.

 

During January 2005, the Northern LightsBoard of Managers approved a $5,000,000 distribution, which it paid on February1, 2005. The Company received approximately $3,858,000 and the minority memberreceived approximately $1,142,000. In conjunction with this cash distribution,the Company paid a distribution to its members of approximately $3,778,000. Theabove distributions are recorded as a liability as of December 31, 2004.

 

 

**NOTE 8 -       INCOMETAXES**

 

As of December 31, 2004and 2003 the book basis of assets exceeded their tax basis by approximately$12,100,000 and $8,050,000, respectively. There were no significant differencesbetween the book basis and tax basis of liabilities as of December 31, 2004 or2003.

 

 

**NOTE 9 -       401(K)PLAN**

 

On February 1, 2003, the Company set up a401(k) plan for substantially all employees who work more than 1,000 hours peryear. Employees can make voluntary contributions up to federally designatedlimits. The Company matches employee voluntary contributions at a 50% level upto an effective maximum of 2% of gross employee pay. Eligible employees arealways fully vested in their account balances resulting from employee voluntarycontributions. The Company 401(k) expense for the years ended December 31, 2004and 2003 was $21,762 and $20,985, respectively.

 

F-18

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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**NOTE 10 -     QUARTERLYFINANCIAL DATA (UNAUDITED)**

 

Summary quarterly results are as follows:

 
| ** **                                        | ** ** | **First**      | ** **     | **Second**     | ** ** | **Third**      | ** ** | **Fourth**     | ** **     |
|---------------------------------------------------|------------|----------------|----------------|----------------|------------|----------------|------------|----------------|----------------|
| ** **                                        | ** ** | **Quarter**    | ** **     | **Quarter**    | ** ** | **Quarter**    | ** ** | **Quarter**    | ** **     |
| **Year Ended December 31, 2004**                  | ** ** | ** **     | ** **     | ** **     | ** ** | ** **     | ** ** | ** **     | ** **     |
| **Total revenues**                                | ** ** | **$**          | **21,707,883** | ** **     | **$**      | **20,958,695** | ** ** | **$**          | **22,296,905** | ** ** | **$** | **21,624,102** | ** ** |
| **Gross profit**                                  | ** ** | **5,942,562**  | ** **     | **(1,922,844** | **)**      | **2,327,681**  | ** ** | **8,960,303**  | ** **     |
| **Operating income (loss)**                       | ** ** | **5,084,220**  | ** **     | **(2,344,298** | **)**      | **1,669,817**  | ** ** | **7,913,726**  | ** **     |
| **Income (loss) before minority interest**        | ** ** | **4,711,367**  | ** **     | **(2,700,009** | **)**      | **1,307,893**  | ** ** | **7,580,106**  | ** **     |
| **Minority interest in subsidiary (income) loss** | ** ** | **(1,092,583** | **)**          | **607,565**    | ** ** | **(305,533**   | **)**      | **(1,737,475** | **)**          |
| **Net income (loss)**                             | ** ** | **3,618,784**  | ** **     | **(2,092,444** | **)**      | **1,002,360**  | ** ** | **5,842,631**  | ** **     |
| **Basic earnings (loss) per unit**                | ** ** | **0.57**       | ** **     | **(0.33**      | **)**      | **0.16**       | ** ** | **0.92**       | ** **     |
| ** **                                        | ** ** | ** **     | ** **     | ** **     | ** ** | ** **     | ** ** | ** **     | ** **     |
| Year Ended December 31, 2003                      |       |           |           |           |       |           |       |           |           |
| Total revenues                                    |       | $              | 19,123,755     |           | $          | 17,241,715     |       | $              | 16,110,060     |   | $ | 18,381,732 |   |
| Gross profit                                      |       | 4,427,581      |           | 1,584,621      |       | 1,822,589      |       | 4,101,554      |           |
| Operating income                                  |       | 3,693,484      |           | 1,010,312      |       | 1,125,256      |       | 3,368,157      |           |
| Income before minority interest                   |       | 3,198,000      |           | 530,879        |       | 675,948        |       | 2,976,671      |           |
| Minority interest in subsidiary (income)          |       | (761,395       | )              | (133,773       | )          | (186,367       | )          | (688,895       | )              |
| Net income                                        |       | 2,436,605      |           | 397,106        |       | 489,581        |       | 2,287,776      |           |
| Basic earnings per unit                           |       | 0.39           |           | 0.06           |       | 0.08           |       | 0.36           |           |
|                                              |       |           |           |           |       |           |       |           |           |
| Year Ended December 31, 2002                      |       |           |           |           |       |           |       |           |           |
| Total revenues                                    |       | $              | —         |           | $          | —         |       | $              | 13,708,731     |   | $ | 19,048,204 |   |
| Gross profit                                      |       | —         |           | —         |       | 3,743,136      |       | 4,339,085      |           |
| Operating income (loss)                           |       | (114,835       | )              | (542,297       | )          | 2,990,122      |       | 3,739,575      |           |
| Income (loss) before minority interest            |       | (114,835       | )              | (542,251       | )          | 2,510,269      |       | 3,256,286      |           |
| Minority interest in subsidiary (income) loss     |       | 18,017         |           | 104,911        |       | (584,405       | )          | (767,975       | )              |
| Net income (loss)                                 |       | (96,818        | )              | (417,654       | )          | 1,906,178      |       | 2,488,311      |           |
| Basic earnings (loss) per unit                    |       | (0.02          | )              | (0.06          | )          | 0.30           |       | 0.39           |           |

 

The above quarterly financial data isunaudited, but in the opinion of management, all adjustments necessary for afair presentation of the selected data for these interim periods presented havebeen included.

 

See Note 13 for further details on the effectof the settlement credit from the Big Stone Plant in relation to the quarterlyfinancial data.

 

F-19

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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**NOTE 11 -     COST OFREVENUES — SETTLEMENT CREDIT**

 

In November 2004, Northern Lights received acredit from Big Stone Plant for approximately $1,450,000. Big Stone Plant islocated adjacent to Northern Lights’ ethanol plant and supplies steam toNorthern Lights for its ethanol production process. This credit was issuedafter an informal dispute between Northern Lights and Big Stone Plant regardingthe reported volume of steam supplied from Big Stone Plant to Northern Lights.In March 2003, Northern Lights questioned Big Stone Plant about the reportedvolume of steam supplied from the Big Stone Plant to Northern Lights. NorthernLights believed the reported volume of steam supplied to the ethanol plant wasexcessive, compared to the volume of steam required for the ethanol productionprocess. After testing and analysis by Big Stone Plant, Big Stone Plantconcluded the reported volume of steam was accurate. After further testing andanalysis in 2004, however, Big Stone Plant determined that the reported volumeof steam was erroneous due to an error created by a metering instrument whichwas miscalibrated. As a result of this error, Big Stone Plant overchargedNorthern Lights for the use of steam in 2003 and 2004. In November 2004, in an effortto resolve the dispute, Big Stone Plant notified Northern Lights that asettlement credit would be issued, which Northern Lights agreed to accept. AtDecember 31, 2004, approximately $708,000 was outstanding from Big Stone Plantin relation to the settlement credit, and was recorded on the consolidatedbalance sheet as a component of other accounts receivable. See Note 13 forfurther details on the settlement credit in relation to the restatement offinancial statements.

 

 

**NOTE 12 -     SUBSEQUENTEVENTS**

 

On March 30, 2005, Northern Lights enteredinto an amended Loan Agreement with the Bank. The purpose of the Agreement wasto refinance existing debt and to finance the planned $1 million rail expansionproject at the plant. Effective March 30, 2005 there will be five loans andnotes with the Bank: a $15.8 million fixed rate note; a $3.9 millionvariable-rate, non-revolving note; a $5 million variable-rate, revolving note;a $3.0 million variable rate, revolving note and a $1.2 million note. The $15.8 million note and $3.9 million note will retire the original$15 million and $11.1 million note and loans. The terms and conditions ofthe Loan Agreement dated March 30, 2005 remain the same as the original LoanAgreement, except as noted below.

 

The $15.8 million fixed rate note bears aninterest rate at 6.38% percent. This note requires quarterly payments of interestand amortized principal of $537,500 on the basis of a ten-year term, the firstpayment being due on June 30, 2005. The loan is subject to maturity onMarch 31, 2012.

 

The $3.9 million variable rate, non-revolvingnote bears interest at the Bank’s prime rate. This note requires quarterlypayments of interest and amortized principal on the basis of a ten-year term,the first payment being due on June 30, 2005. The first payment of principaland interest will be $153,600. Like the fixed rate note, the note matures onMarch 31, 2012.

 

The $5 million variable-rate, revolving notebears interest at the Bank’s prime rate and carries an unused commitment fee of0.375%, assessed quarterly. This note requires quarterly interest-only paymentsand matures on March 31, 2012.

 

The $1.2 million note for the thermaloxidizers bears interest at a fixed rate of 4.7%, with slightly lower quarterlypayments being due until maturity in April, 2007.

 

F-20

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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As part of the refinancing, Northern Lightsobtained a new $3.0 million variable rate, revolving note. This note requiresquarterly interest payments when drawn, the first potential payment starting onJune 30, 2005 if money is drawn. The maturity of this note is March 31, 2008.The interest rate is equal to the Bank’s prime rate and carries an unusedcommitment fee of 0.375%, assessed quarterly. The note is tied to the borrowingbase and cannot be used until the existing $5 million variable rate, revolvingnote is fully drawn.

 

Some of the covenants under the amended LoanAgreement are now modified. The amendment increases minimum working capitalrequirement from $2 million to $4 million; eliminates the excess cash flowpayment; changes the fixed charge coverage ratio; and changes the number ofallowable distributions to members to more than one each year, provided allother covenants are complied with under the loan.

 

 

**NOTE 13 -     RESTATEMENTOF FINANCIAL STATEMENTS**

 

The Company has restated its consolidatedfinancial statements for the year ended December 31, 2004, to correct anaccounting misclassification error under its consolidated statement ofoperations and to reflect the corresponding changes described below.

 

In November 2004, Northern Lights received acredit from the Big Stone Plant for approximately $1,450,000. This credit wasissued after an informal dispute between Northern Lights and Big Stone Plantregarding the reported volume of steam supplied from Big Stone Plant toNorthern Lights. In March 2003, Northern Lights questioned Big Stone Plantabout the reported volume of steam supplied from the Big Stone Plant toNorthern Lights. Northern Lights believed the reported volume of steam suppliedto the ethanol plant was excessive, compared to the volume of steam requiredfor the ethanol production process. After testing and analysis by Big StonePlant, Big Stone Plant concluded the reported volume of steam was accurate.After further testing and analysis in 2004, however, Big Stone Plant determinedthat the reported volume of steam was erroneous due to an error created by ametering instrument which was miscalibrated. As a result of this error, BigStone Plant overcharged Northern Lights for the use of steam in 2003 and 2004.In November 2004, in an effort to resolve the dispute, Big Stone Plant notifiedNorthern Lights that a settlement credit would be issued, which Northern Lightsagreed to accept. Because of the nature and timing of the resolution betweenNorthern Lights and Big Stone Plant, the Company determined that the entire$1,450,000 credit should be recorded in the 2004 consolidated statement ofoperations.

 

Initially, the credit was recorded assettlement income in the other income (expense) section of the consolidatedstatement of operations in order to make the disclosure of the settlementcredit as transparent as possible and in reliance on certain accountinginformation management believed was applicable. On May 4, 2005, however, theCompany’s audit committee was advised by management that an accounting errorwas made because the settlement credit was misclassified. Managementmisclassified the credit as other income, rather than as a reduction in cost ofrevenues. Because cost of revenues includes all production expenses, includingsteam expense, and the overcharge from Big Stone Plant adversely affectedNorthern Lights’ steam expenses in 2003 and 2004, the credit should have beenclassified as a reduction in cost of revenues. The restatement of ourconsolidated financial statements is made to correct for the misclassificationand to reclassify the $1,450,000 settlement credit as a reduction in cost ofrevenues.

 

F-21

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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The reclassification of the settlement credithad no effect on the consolidated balance sheet, statement of changes inmembers’ equity, or statement of cash flows. The originally reported andrestated statement of operations for the year ended December 31, 2004 is shownbelow:

 
| ** **                                           | ** ** | **Year Ended**             | ** ** | **Year Ended**        | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **December 31, 2004**      | ** ** | **December 31, 2004** | ** ** |
| ** **                                           | ** ** | **As Originally Reported** | ** ** | **As Restated**       | ** ** |
| REVENUES                                             |       |                       |       |                  |       |
| Sales related party                                  |       | $                          | 68,501,969 |                  | $          | 68,501,969 |   |
| Sales                                                |       | 16,486,472                 |       | 16,486,472            |       |
| Incentive                                            |       | 1,599,144                  |       | 1,599,144             |       |
| Total revenues                                       |       | 86,587,585                 |       | 86,587,585            |       |
|                                                 |       |                       |       |                  |       |
| COST OF REVENUES                                     |       |                       |       |                  |       |
| Cost of revenues                                     |       | 72,729,131                 |       | 72,729,131            |       |
| Settlement credit - see Note 11                      |       | —                     |       | (1,449,248            | )          |
| Total cost of revenues                               |       | 72,729,131                 |       | 71,279,883            |       |
|                                                 |       |                       |       |                  |       |
| GROSS PROFIT                                         |       | 13,858,454                 |       | 15,307,702            |       |
|                                                 |       |                       |       |                  |       |
| EXPENSES                                             |       |                       |       |                  |       |
| Startup expenses                                     |       | —                     |       | —                |       |
| General and administrative                           |       | 2,984,237                  |       | 2,984,237             |       |
| Total operating expenses                             |       | 2,984,237                  |       | 2,984,237             |       |
|                                                 |       |                       |       |                  |       |
| INCOME FROM OPERATIONS                               |       | 10,874,217                 |       | 12,323,465            |       |
|                                                 |       |                       |       |                  |       |
| OTHER INCOME (EXPENSES)                              |       |                       |       |                  |       |
| Interest income                                      |       | 10,780                     |       | 10,780                |       |
| Interest expense                                     |       | (1,500,438                 | )          | (1,500,438            | )          |
| Settlement income - see Note 11                      |       | 1,449,248                  |       | —                |       |
| Other                                                |       | 65,551                     |       | 65,551                |       |
| Total other income (expenses)                        |       | 25,141                     |       | (1,424,107            | )          |
|                                                 |       |                       |       |                  |       |
| INCOME BEFORE MINORITY INTEREST                      |       | 10,899,358                 |       | 10,899,358            |       |
|                                                 |       |                       |       |                  |       |
| MINORITY INTEREST IN SUBSIDIARY INCOME               |       | (2,528,026                 | )          | (2,528,026            | )          |
|                                                 |       |                       |       |                  |       |
| NET INCOME                                           |       | $                          | 8,371,332  |                  | $          | 8,371,332 |   |
|                                                 |       |                       |       |                  |       |
| BASIC AND DILUTED EARNINGS PER UNIT                  |       | $                          | 1.32       |                  | $          | 1.32 |   |
|                                                 |       |                       |       |                  |       |
| BASIC AND DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING |       | 6,328,500                  |       | 6,328,500             |       |
|                                                 |       |                       |       |                  |       |
| DISTRIBUTIONS PER UNIT DECLARED                      |       | $                          | 0.95       |                  | $          | 0.95 |   |
|                                                 |       |                       |       |                  |       |
| DISTRIBUTIONS PER UNIT PAID                          |       | $                          | 0.56       |                  | $          | 0.56 |   |

 

F-22

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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Since the settlement credit was recorded inthe fourth quarter of 2004, only that quarter is affected by the restatementregarding Note 10 — Quarterly Financial Data (Unaudited). That comparison isset forth below.

 
| **Year Ended December 31, 2004**              | ** ** | **Fourth Quarter 2004**    | ** ** | **Fourth Quarter 2004** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **As Originally Reported** | ** ** | **As Restated**         | ** ** |
| ** **                                    | ** ** | ** **                 | ** ** | ** **              | ** ** |
| Total revenues                                |       | $                          | 21,624,102 |                    | $          | 21,624,102 |   |
| Gross profit                                  |       | 7,511,055                  |       | 8,960,303               |       |
| Operating income (loss)                       |       | 6,464,477                  |       | 7,913,726               |       |
| Income (loss) before minority interest        |       | 7,580,106                  |       | 7,580,106               |       |
| Minority interest in subsidiary (income) loss |       | (1,737,475                 | )          | (1,737,475              | )          |
| Net income (loss)                             |       | 5,842,631                  |       | 5,842,631               |       |
| Basic earnings (loss) per unit                |       | 0.92                       |       | 0.92                    |       |
|                                               |            |                            |            |                         |            |  |  |

 

F-23

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