**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| x                                                                                                                                                                                                                          | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of  1934.** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                       |                                                                                               |
| **For the fiscal quarter ended  December 31, 2007**                                                                                                                                                                   |
|                                                                                                                                                                                                                       |                                                                                               |
| **OR**                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                       |                                                                                               |
| **o**                                                                                                                                                                                                                      | **Transition  report under Section 13 or 15(d) of the Exchange Act.**                    |
|                                                                                                                                                                                                                       |                                                                                               |
| **For the transition period  from               to               .** |

 

# **COMMISSION FILE NUMBER0001229899**

 

**LITTLE SIOUX CORN PROCESSORS, L.L.C.**

(Exact name of registrant as specified in its charter)

 

| **Iowa**                                                        | ** ** | **42-1510421**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**4808 F Avenue, Marcus, Iowa 51035**

(Address of principal executive offices)

 

**(712)376-2800**(Issuer’s telephone number)

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities 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 forthe past 90 days.
|   | x   Yes          o  No |
|--------|------------------------------------------------------------------------------------|

 

 Indicate by check mark whether the registrant isa large accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):
| Large Accelerated  Filer    o | Accelerated Filer   o              | Non-Accelerated  Filer   x  |
|----------------------------------------------|-----------------------------------------------------------------------------------------------------|--------------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).
|   |   ̈ Yes          x  No |
|--------|---------------------------------------------------------------------------------------------|

 

Indicate the number ofshares outstanding for each of the issuer’s classes of common equity as of thelatest practicable date:

 

As of February 14,2008, there were 164,115 units outstanding.

 

 

 

----

 

**INDEX**

 
| ** **                                                                                               | **Page No.** |
|----------------------------------------------------------------------------------------------------------|--------------|
|                                                                                                     |         |
| **PART I. FINANCIAL  INFORMATION**                                                                       | **3**        |
| ** **                                                                                               | ** **   |
| **ITEM 1. FINANCIAL  STATEMENTS.**                                                                       | **3**        |
| **ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS** | **12**       |
| **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                  | **21**       |
| **ITEM 4T. CONTROLS  AND PROCEDURES.**                                                                   | **23**       |
| ** **                                                                                               | ** **   |
| **PART II. OTHER  INFORMATION**                                                                          | **23**       |
| ** **                                                                                               | ** **   |
| **ITEM 1. LEGAL  PROCEEDINGS.**                                                                          | **23**       |
| **ITEM 1A. RISK FACTORS.**                                                                               | **24**       |
| **ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**                                | **24**       |
| **ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**                                                            | **24**       |
| **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**                                        | **25**       |
| **ITEM 5. OTHER  INFORMATION.**                                                                          | **25**       |
| **ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.**                                                           | **25**       |
| ** **                                                                                               | ** **   |
| **SIGNATURES**                                                                                           | **26**       |

 

 

2

----

 

 

**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS.**

** **

**LITTLE SIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

** **

Condensed Consolidated Balance Sheet

 
| ** **                                           | ** ** | **December 31,** | ** **  | **September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| **ASSETS**                                           | ** ** | **2007**              | ** **  | **2007**               | ** ** |
| ** **                                           | ** ** | **(Unaudited)**       | ** **  | ** **             | ** ** |
| **Current Assets**                                   | ** ** | ** **            | ** **  | ** **             | ** ** |
| Cash and equivalents                                 |       | $                     | 12,590,898  |                   | $          | 17,503,176 |   |
| Restricted cash                                      |       | 6,455,186             |        | 576,446                |       |
| Accounts receivable                                  |       | 830,982               |        | 691,615                |       |
| Accounts receivable - related party                  |       | 4,954,926             |        | 2,584,017              |       |
| Inventory                                            |       | 7,386,564             |        | 3,309,333              |       |
| Prepaid expenses                                     |       | 2,336,230             |        | 1,833,173              |       |
| Total current assets                                 |       | 34,554,786            |        | 26,497,760             |       |
|                                                 |       |                  |        |                   |       |
|                                                 |       |                  |        |                   |       |
| **Property and Equipment**                           | ** ** | ** **            | ** **  | ** **             | ** ** |
| Land and improvements                                |       | 2,929,516             |        | 2,929,516              |       |
| Plant buildings and equipment                        |       | 66,195,772            |        | 58,196,355             |       |
| Office buildings and equipment                       |       | 358,450               |        | 358,450                |       |
|                                                 |       | 69,483,738            |        | 61,484,321             |       |
| Less accumulated depreciation                        |       | 20,014,862            |        | 18,544,654             |       |
|                                                 |       | 49,468,876            |        | 42,939,667             |       |
| Construction in progress                             |       | 57,436,502            |        | 60,938,622             |       |
| Net property and equipment                           |       | 106,905,378           |        | 103,878,289            |       |
|                                                 |       |                  |        |                   |       |
|                                                 |       |                  |        |                   |       |
| **Other Assets**                                     | ** ** | ** **            | ** **  | ** **             | ** ** |
| Long-term investments                                |       | 162,290               |        | 157,717                |       |
| Land costs and other                                 |       | 4,646,636             |        | 4,646,636              |       |
| Deferred offering costs                              |       | 184,267               |        | 184,267                |       |
| Construction commitment cost                         |       | 500,000               |        | 500,000                |       |
| Deferred loan costs, net of accumulated amortization |       | 494,164               |        | 547,374                |       |
| Total other assets                                   |       | 5,987,357             |        | 6,035,994              |       |
| ** **                                           | ** ** | ** **            | ** **  | ** **             | ** ** |
| **Total Assets**                                     |       | $                     | 147,447,521 |                   | $          | 136,412,043 |   |

 

SeeNotes to Condensed Consolidated Financial Statements

 

 

3

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**LITTLE SIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

** **

Condensed Consolidated Balance Sheet

 
| ** **                                                      | ** ** | **December 31,** | ** **  | **September 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| **LIABILITIES AND MEMBERS’ EQUITY**                        | ** ** | **2007**              | ** **  | **2007**               | ** ** |
| ** **                                                      | ** ** | **(Unaudited)**       | ** **  | ** **             | ** ** |
| **Current Liabilities**                                         | ** ** | ** **            | ** **  | ** **             | ** ** |
| Current maturities of long-term debt                            |       | 14,417,239            |        | 13,259,228             |       |
| Accounts payable                                                |       | 4,481,635             |        | 7,967,325              |       |
| Accounts payable - related party                                |       | 3,157,444             |        | 1,414,774              |       |
| Accrued expenses                                                |       | 1,417,013             |        | 1,126,516              |       |
| Derivative instruments                                          |       | 454,999               |        | 220,584                |       |
| Total current liabilities                                       |       | 23,928,330            |        | 23,988,427             |       |
|                                                            |       |                  |        |                   |       |
| **Long-Term  Debt,**net of current maturities                   |       | 26,824,491            |        | 25,743,072             |       |
|                                                            |       |                  |        |                   |       |
| **Minority Interest**                                           |       | 38,696,998            |        | 34,697,010             |       |
|                                                            |       |                  |        |                   |       |
| **Members’ Equity, 164,115 units  issued and outstanding** |       | 57,997,702            |        | 51,983,534             |       |
|                                                            |       |                  |        |                   |       |
| **Total Liabilities and Members’ Equity**                  |       | $                     | 147,447,521 |                   | $          | 136,412,043 |   |
|                                                                 |            |                       |             |                        |            |  |  |

 

SeeNotes to Condensed Consolidated Financial Statements

 

 

4

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**LITTLE SIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

** **

Condensed Consolidated Statements of Operations

 
| ** **                                                  | ** ** | **Three Months Ended December 31** | ** ** | **Three Months Ended December 31** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                | ** ** | **2006**                                | ** ** |
| ** **                                                  | ** ** | **(Unaudited)**                         | ** ** | **(Unaudited)**                         | ** ** |
|                                                        |       |                                    |       |                                    |       |
| **Revenues - primarily related  party**                     |       | $                                       | 28,652,416 |                                    | $          | 33,605,049 |   |
|                                                        |       |                                    |       |                                    |       |
| **Cost of Goods Sold**                                      |       | 16,255,048                              |       | 12,043,691                              |       |
|                                                        |       |                                    |       |                                    |       |
| **Gross Margin**                                            |       | 12,397,368                              |       | 21,561,358                              |       |
|                                                        |       |                                    |       |                                    |       |
| **Selling, General, and  Administrative Expenses**          |       | 1,608,047                               |       | 781,823                                 |       |
| ** **                                                  | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| **Operating Income**                                        |       | 10,789,321                              |       | 20,779,535                              |       |
|                                                        |       |                                    |       |                                    |       |
| **Other Income (Expense)**                                  | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| Interest income                                             |       | 152,072                                 |       | 372,209                                 |       |
| Interest expense                                            |       | —                                  |       | (312,369                                | )          |
| Other expense, net                                          |       | (927,237                                | )          | (70,296                                 | )          |
| Total other expense, net                                    |       | (775,165                                | )          | (10,456                                 | )          |
|                                                        |       |                                    |       |                                    |       |
| **Net Income Before Minority  Interest**                    |       | 10,014,156                              |       | 20,769,079                              |       |
| ** **                                                  | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| **Minority Interest in Subsidiary  Income**                 |       | 3,999,988                               |       | 8,278,461                               |       |
| ** **                                                  | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| **Net Income**                                              |       | $                                       | 6,014,168  |                                    | $          | 12,490,618 |   |
| ** **                                                  | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| **Net Income Per Unit - Basic and  Diluted**                |       | $                                       | 36.65      |                                    | $          | 76.11 |   |
|                                                        |       |                                    |       |                                    |       |
| **Weighted Average Units  Outstanding - Basic and Diluted** |       | 164,115                                 |       | 164,115                                 |       |

 

SeeNotes to Condensed Consolidated Financial Statements

 

 

5

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**LITTLE SIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

** **

Condensed Consolidated Statements of Cash Flows

 
| ** **                                                                         | ** ** | **Three Months Ended December 31,** | ** ** | **Three Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                 | ** ** | **2006**                                 | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                          | ** ** | **(Unaudited)**                          | ** ** |
| **Operating Activities**                                                           | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| Net income                                                                         |       | $                                        | 6,014,168  |                                     | $          | 12,490,618 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                     |       |                                     |       |
| Depreciation and amortization                                                      |       | 1,500,043                                |       | 1,280,782                                |       |
| Minority interest in subsidiary’s income                                      |       | 3,999,988                                |       | 8,278,461                                |       |
| Change in fair value of derivative instruments                                     |       | (5,946,512                               | )          | (108,389                                 | )          |
| Other                                                                              |       | (4,573                                   | )          | —                                   |       |
| Change in operating assets and liabilities:                                        |       |                                     |       |                                     |       |
| Restricted cash                                                                    |       | (5,878,740                               | )          | —                                   |       |
| Accounts recievables                                                               |       | (2,510,276                               | )          | (1,726,815                               | )          |
| Inventory                                                                          |       | (4,077,231                               | )          | (92,761                                  | )          |
| Derivative instruments                                                             |       | 6,180,927                                |       | (2,395,820                               | )          |
| Prepaid expenses                                                                   |       | (503,057                                 | )          | (649,459                                 | )          |
| Accounts payable                                                                   |       | (103,945                                 | )          | 1,403,953                                |       |
| Accrued expenses                                                                   |       | 290,497                                  |       | 40,781                                   |       |
| Net cash provided by (used in) operating activities                                |       | (1,038,711                               | )          | 18,521,351                               |       |
|                                                                               |       |                                     |       |                                     |       |
| **Investing Activities**                                                           | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| Proceeds from investments                                                          |       | —                                   |       | 18,633,192                               |       |
| Payments for investments                                                           |       | —                                   |       | (10,995,664                              | )          |
| Capital expenditures                                                               |       | (6,112,997                               | )          | (12,398,859                              | )          |
| Payments for land options and other                                                |       | —                                   |       | (55,965                                  | )          |
| Net cash used in investing activities                                              |       | (6,112,997                               | )          | (4,817,296                               | )          |
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| **Financing Activities**                                                           | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| Payments of long-term debt                                                         |       | (860,197                                 | )          | (810,380                                 | )          |
| Proceeds from issuance of long-term debt                                           |       | 3,099,627                                |       | —                                   |       |
| Net cash provided by (used in) financing activities                                |       | 2,239,430                                |       | (810,380                                 | )          |
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| **Net increase (decrease) in cash  and equivalents**                               |       | (4,912,278                               | )          | 12,893,675                               |       |
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| **Cash and Equivalents** — Beginning  of Period                               |       | 17,503,176                               |       | 10,133,691                               |       |
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| **Cash and Equivalents** — End of  Period                                     |       | $                                        | 12,590,898 |                                     | $          | 23,027,366 |   |
|                                                                               | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| **Supplemental Cash Flow  Information**                                            | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| Interest expense paid                                                              |       | $                                        | —     |                                     | $          | 301,167 |   |
| Interest capitalized                                                               |       | 733,840                                  |       | —                                   |       |
| Total interest paid                                                                |       | $                                        | 733,840    |                                     | $          | 301,167 |   |
|                                                                               |       |                                     |       |                                     |       |
| **Supplemental Disclosure of  Noncash Investing and Financing Activities**         | ** ** | ** **                               | ** ** | ** **                               | ** ** |
| Capital expenditures in accounts payable                                           |       | $                                        | 2,849,609  |                                     | $          | — |   |

 

SeeNotes to Condensed Consolidated Financial Statements

 

 

6

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes to CondensedConsolidated Financial Statements (Unaudited)

 

December 31,2007

 

**Note 1:  Nature ofOperations**

 

The Company representsLittle Sioux Corn Processors, LLC (LLC) and its subsidiary LSCP, LLLP (LLLP). The Company operates a 52 million gallon ethanol plant, located nearMarcus, Iowa.  The plant commenced operations in April 2003.  In January 2008, the Company substantially completed the expansion from a52 million gallons per year (MGY) plant to a 92 MGY plant.  The Companysells its production of ethanol, distiller’s grains and solubles, modified wetdistillers grains with solubles, and corn oil in the Continental United States.

 

**Note 2:  Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

These condensedconsolidated financial statements and related notes should be read inconjunction with the consolidated financial statements and notes included inthe Company’s audited consolidated financial statements for the year ended September 30,2007, contained in the Company’s annual report of Form 10-K for 2007.

 

The condensedconsolidated interim financial statements are unaudited.  These statementsinclude all adjustments (consisting of normal recurring accruals) that weconsider necessary to present a fair statement of the results of operations,financial position, and cash flows.  The results reported in thesecondensed consolidated financial statements should not be regarded asnecessarily indicative of results that may be expected for the entire year.

 

**Principles of Consolidation**

 

The condensedconsolidated financial statements include the accounts of the LLC, its 60.15%owned subsidiary, LLLP and its wholly owned subsidiaries Akron Riverview CornProcessors, LLC and Twin Rivers Management Co., LLC.  All significant inter-company transactionsand balances have been eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of theseconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actual results could differ from thoseestimates.

 

**Revenue Recognition**

 

The Company generallysells ethanol and related products pursuant to marketing agreements. Revenues are recognized when the marketing company (the “customer”) has takentitle and assumed the risks and rewards of ownership, prices are fixed ordeterminable and collectability is reasonably assured.  The marketingagreement with ADM provides that an initial price per gallon of ethanol isestablished upon shipment.  ADM knows the final price of ethanol purchasedby the end of each day, and the Company can obtain directly from ADM, the finalprice on a daily basis.  However, the Company settles the final price withADM on a monthly basis as this is administratively easier, even though thedaily sales amounts have been determined.  The Company typically receivesthe related paperwork from ADM within five days of month end.  Therefore,the Company believes that all sales of ethanol during a month are recorded at aprice that is both fixed and determinable and that there are no ethanol sales,during any given month that should be considered contingent and recorded asdeferred revenue.  The Company’s products are generally shipped FOB shippingpoint.

 

Inaccordance with the Company’s agreements for the marketing and sale of ethanoland related products, marketing fees and commissions due to the marketers arededucted from the gross sales price at the time payment is remitted to theCompany.  However, because the Company isthe primary obligor in the sales arrangement with the customer, 

 

 

7

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes to CondensedConsolidated Financial Statements (Unaudited)

 

December 31,2007

 

thesemarketing fees and commissions are recorded in selling, general and administrative expenses in theaccompanying statements of operations.

 

TheCompany records incentives received from federal and state programs related tothe production of ethanol, as other income, when the Company has sold theethanol and completed all the requirements of the applicable incentive program.

 

**Derivative Instruments**

 

TheCompany accounts for derivatives in accordance with Statement of FinancialAccounting Standards (SFAS) No. 133, “Accounting for DerivativeInstruments and Hedging Activities”. SFAS No. 133 requires the recognitionof derivatives in the balance sheet and the measurement of these instruments atfair value.

 

In order for a derivativeto qualify as a hedge, specific criteria must be met and appropriatedocumentation maintained. Gains and losses from derivatives that are do notqualify as hedges, or are undesignated, must be recognized immediately inearnings. If the derivative does qualify as a hedge, depending on the nature ofthe hedge, changes in the fair value of the derivative will be either offsetagainst the change in fair value of the hedged assets, liabilities, or firmcommitments through earnings or recognized in other comprehensive income untilthe hedged item is recognized in earnings.  Changes in the fair value ofundesignated derivatives are recorded in the statement of operations along withitems being hedged.

 

Additionally,SFAS No. 133 requires a company to evaluate its contracts to determinewhether the contracts are derivatives. Certain contracts that literally meetthe definition of a derivative may be exempted 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, and therefore, arenot marked to market in our financial statements.

 

In order to reduce therisk caused by market fluctuations, the Company hedges its anticipated corn andnatural gas purchases, ethanol sales and interest rates by entering intooptions, futures contracts, and swap agreements. These contracts are used withthe intention to fix the purchase price of our anticipated requirements of cornand natural gas in production activities, the sales price of ethanol and limitexposure to increased interest rates. The fair value of these contracts isbased on quoted prices in active exchange-traded or over-the-counter markets.The fair value of the derivatives is continually subject to change due tochanging market conditions. The Company does not formally designate theseinstruments as hedges and, therefore, records in current earnings the changesin fair value of the underlying derivative instrument. The Company recordswithdrawals and payments against the trade equity of derivative instruments asa reduction or increase in the value of the derivative instruments.

 

**Research and Development**

 

TheCompany incurs research and development costs related to the development of newproducts. The Company incurred approximately $377,000 in research anddevelopment costs for the three months ended December 31, 2007. The Company didnot incur any research and development costs for the three months ended December31, 2006.

 

**Note 3:  Inventory**

 

Inventory is comprised ofthe following at:

 

| ** **      | ** ** | **December 31, 2007** | ** ** | **September 30, 2007*** | ** ** |
|-----------------|------------|----------------------------|------------|------------------------------|------------|
| Raw materials   |       | $                          | 4,505,523  |                         | $          | 1,487,691 |   |
| Supplies        |       | 1,138,384                  |       | 867,896                      |       |
| Work in process |       | 734,385                    |       | 344,601                      |       |
| Finished goods  |       | 1,008,272                  |       | 609,145                      |       |
| Totals          |       | $                          | 7,386,564  |                         | $          | 3,309,333 |   |

----

*Derived from audited consolidated financial statements.

 

 

8

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** **

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes to CondensedConsolidated Financial Statements (Unaudited)

 

December 31,2007

 

**Note 4: Derivative Instruments**

 

At December 31,2007, the Company recorded a liability for derivative instruments ofapproximately $455,000.  None of the positions open at December 31,2007 are designated as cash flow or fair value hedges.  The liability ofapproximately $455,000 in derivative instruments at December 31, 2007includes a liability for the interest rate swap of approximately $1,422,000described below and an asset for corn, natural gas, and ethanol options andfutures positions of approximately $967,000.  The gross value of corn,natural gas, and ethanol derivative instrument positions at December 31,2007 is approximately $4,463,000 less cash withdrawn against the equity ofthese positions of approximately $3,496,000 resulting in a net asset for thesepositions of approximately $967,000.

 

The Company has recordeda gain of approximately $10,998,000 and $11,092,000 in cost of goods sold forthe three months ended December 31, 2007 and 2006, respectively.  The Company offset revenues with losses ofapproximately $2,845,000 and $299,000 for the three months ended December 31,2007 and 2006, respectively.

 

In April 2007, theCompany entered into an interest rate swap to limit increased interest expenseon a portion of the construction loans upon conversion into term notes. Theinterest rate swap fixes the interest rate on $36,500,000 of debt at 7.68%beginning March 1, 2008 until March 1, 2013.  The Company hasincluded the liability for the interest rate swap of approximately $1,422,000with the derivative instruments above at December 31, 2007 and recognizeda loss of approximately $983,000 as an other expense for the three months endedDecember 31, 2007.

 

**Note 5:  Constructionin Progress**

 

The Company continues tomake payments for the expansion to a 92 MGY plant, which was substantiallycompleted in January 2008.  The Company anticipates the expansionwill cost approximately $75,000,000 with approximately $9,961,000 remaining at December 31,2007.  The Company capitalized interest of approximately $777,000,including accrued amounts, in the three months ended December 31, 2007.

 

**Note 6:  RevolvingPromissory Note**

 

Under the terms of thefinancing agreement with the lending institution, the Company has a revolvingpromissory note for up to $5,000,000, subject to borrowing base limitationsbased on the amended and restated debt agreement in April 2007. Therevolving promissory note incurs interest monthly at the one-month LIBOR plus2.80% and is payable in full in March 2008.  The Company pays acommitment fee of 0.25% on the unused portion of the revolving promissorynote.  There was no balance outstanding on the revolving promissory noteat December 31, 2007.  The revolving promissory note as well as theterm notes and construction loan are subject to protective covenants under acommon financing agreement requiring the Company to maintain various financialratios, including debt service coverage, minimum net worth and working capitalrequirements, and excess cash flow payments and secured by all business assets.

 

 

9

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes to CondensedConsolidated Financial Statements (Unaudited)

 

December 31,2007

 

**Note 7: Long-Term Debt**

 

Long-termdebt consists of the following:

 

| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **December 31, 2007** | ** ** | **September 31, 2007*** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Term note 2 has fixed  principal payments due quarterly with interest at the three month LIBOR plus  2.80%, which totaled 7.92% and 8.38% at December 31, 2007 and  September 30, 2007, respectively, payable in full on June 1,  2008.  As part of the financing agreement, the Company accepted a fixed  rate option on term note 2 by entering into an interest rate swap which  effectively fixes the interest rate on this term note at 5.79% until this  term note is repaid on June 1, 2008. The Company did not designate the  interest rate swap as a cash flow or fair value hedge. The value of the  interest rate swap is not significant.                                                                                                                                                           | ** ** | $                          | 9,443,566  |                         | $          | 9,824,449 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Term note 3 bears interest  at the three month LIBOR plus 2.80%, which totaled 7.92% and 8.38% at  December 31, 2007 and September 30, 2007, respectively.  Term  note 3 is payable in full on June 1, 2008.  The Company is required  to make quarterly payments of $506,588 applied first to accrued interest on  term note 4.  The remaining amount is applied to accrued interest on  term note 3 and then to principal until this note is paid in full or until  maturity.  After term note 3 is repaid, payments are applied first to  accrued interest and then to principal until this note is paid in full or  until maturity.  After term note 3 is repaid, payments are applied first  to accrued interest and then to principal on term note 4 until paid in full  or until maturity. |       | 3,000,852                  |       | 3,434,778                    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Term note 4 bears interest  at the one month LIBOR plus 2.80%.  Term note 4 is payable in full on  June 1, 2008. Term note 4 allows subsequent borrowings up to the  original $5,000,000 to the extent of principal payments made until maturity  and requires a commitment fee of .25% on any used portion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **—**                 |       | —                       |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                 |       |                         |       |
| Construction loan (see  below)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 28,519,412                 |       | 25,419,785                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Note payable to Iowa  Energy Center, due in monthly payments of $3,472 without interest, maturing  on January 29, 2009, secured by real estate, subordinated to term notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 45,138                     |       | 55,555                       |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Note payable to bank due  in monthly payments of $5,921 including interest at 6% maturing on  January 29, 2009, secured by real estate, subordinated to term notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 52,165                     |       | 63,709                       |       |
| Note payable to Iowa  Department of Economic Development, due in monthly installments of $1,167  without interest, payable in full on July 1, 2009, secured by all  equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 161,000                    |       | 164,500                      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Capital lease obligation,  due in monthly installments initially totaling $6,658 including implicit  interest at 3.67% through March 1, 2008, secured by leased equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 19,597                     |       | 39,524                       |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Totals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | $                          | 41,241,730 |                         | $          | 39,002,300 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Less amounts due within  one year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 14,417,239                 |       | 13,259,228                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                       |       |                         |       |
| Totals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | $                          | 26,824,491 |                         | $          | 25,743,072 |   |

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* Derived from audited consolidated financialstatements.

 

In April 2007, theCompany obtained a construction loan for approximately $73,000,000 for thepartial funding of the 40 MGY expansion to the Marcus, Iowa ethanol plant.  The construction loan bears interest at theone-month LIBOR plus 3.10%, which totaled 8.33% at December 31, 2007.  Upon the earlier of July 20, 2008 orcompletion of construction, the construction loan converts into three separatenotes for up to approximately $82,278,000. The first loan, known as the Swap Note, is for a maximum amount of$36,500,000.  The Swap Note will be duein quarterly principal payments initially totaling approximately $612,000,increasing to approximately $859,000, with a final balloon payment ofapproximately $22,725,000 on the fifth anniversary of the construction loantermination date.  Interest will accrueat the three-month LIBOR plus 2.60% due quarterly.  The Company entered into an interest rate 

 

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes to CondensedConsolidated Financial Statements (Unaudited)

 

December 31,2007

 

swap to limit increasedinterest expense on the Swap Note as described in Note 4.  The interest rate swap fixes the interestrate at 7.68% beginning March 1, 2008 until March 1, 2013.

 

The second loan, known asthe Variable Rate Note, is for up to approximately $35,778,000 which includesany remaining amounts outstanding on term note 3, less any amounts outstandingon term note 2.  The Variable Rate Notewill accrue interest at the three-month LIBOR plus 3.00%.  The third loan, known as the Long TermRevolving Note, is for up to $10,000,000. The Long Term Revolving Note will accrue interest at the three-monthLIBOR plus 3.00%.  The Variable Rate Noteand the Long Term Revolving Note require quarterly payments of approximately$1,362,000, which is applied first to accrued interest on the Long TermRevolving Note, then to accrued interest and principal on the Variable RateNote.  Once the Variable Rate Note hasbeen repaid, these payments will be applied to accrued interest and principalon the Long Term Revolving Note.  Boththe Variable Rate Note and the Long Term Revolving Note mature on the fifthanniversary of the construction termination date.  The Long Term Revolving Note allowssubsequent borrowings up to the original $10,000,000 until maturity.  The Long Term Revolving Note requires acommitment fee of 0.25% on any unused portion.

 

As of February 13,2008, the Company has borrowed approximately $44,442,000 as part of theconstruction loan.

 

The estimated maturitiesof long-term liabilities at December 31, 2007 are as follows:

 

| 2008                        |   | $          | 14,417,239 |   |
|-----------------------------|--------|------------|------------|--------|
| 2009                        |   | 2,783,235  |       |
| 2010                        |   | 2,854,941  |       |
| 2011                        |   | 3,092,418  |       |
| 2012                        |   | 3,349,649  |       |
| After 2012                  |   | 14,744,248 |       |
| Total long-term liabilities |   | $          | 41,241,730 |   |

 

**Note 8:  Members’ Equity**

 

In January 2008, the Board of Directorsdeclared a distribution of approximately $15,494,000 from LLLP to the partners,which was paid in February 2008. The LLC received approximately $9,321,000 of this distribution.  In February 2008, the LLC paid $56.10per unit to the LLC unit holders on record as of January 14, 2008.

 

**Note 9:  Related Party Transactions**

 

The Company has balancesand transactions in the normal course of business with various relatedparties.  Revenues from related parties,including ADM, are approximately $27,299,000 and $30,207,000 for the threemonths ended December 31 2007 and 2006, respectively.  The Company has incurred expenses fromrelated parties for corn purchases, distribution costs, and marketing fees ofapproximately $6,286,000 and $3,903,000 for the three months ended December 31,2007 and 2006, respectively.

 

The Company incurredapproximately $1,690,000 related to construction in progress performed by Fagen, Inc.,who is an investor in LSCP, during the three months ended December 31,2007.

 

 

11

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**               **We prepared the followingdiscussion and analysis to help you better understand our financial condition,changes in our financial condition, and results of operations for thethree-month periodended December 31, 2007, compared to the same period of the prior fiscalyear.  This discussion should be read inconjunction with the consolidated financial statements and notes and theManagement’s Discussion and Analysis section for the fiscal year ended September 30,2007, included in the Company’s Annual Report on Form 10-K.

 

**DisclosureRegarding Forward-Looking Statements**

 

This report containshistorical information, as well as forward-looking statements.  These forward-looking statements include anystatements that involve known and unknown risks and relate to future events andour expectations regarding future performance or conditions.  Words such as “may,” “will,” “should,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,”“hope,” “predict,” “target,”“potential,” or “continue” or the negative of these terms or other similarexpressions are intended to identify forward-looking statements, but are notthe exclusive means of identifying such statements.  These forward-looking statements, and otherswe make from time to time, are subject to a number of risks and uncertainties.Many factors could cause actual results to differ materially from thoseprojected in forward-looking statements. While it is impossible to identify allsuch factors, factors that could cause actual results to differ materially fromthose estimated by us include, but are not limited to:

 

·                  Availability and costs of products andraw materials, particularly corn and natural gas;

·                  Projected growth, overcapacity orincreased competition in the ethanol market in which we operate;

·                  Fluctuations in the price and market forethanol and distillers grains;

·                  Changes in plant production capacity,variations in actual ethanol and distillers grains production from expectationsor technical difficulties in operating the plant;

·                  Changes in our development plans forexpanding, maintaining or contracting our presence in the market in which weoperate;

·                  Costs of construction for expansion andequipment;

·                  Changes in interest rates and theavailability of credit to support capital improvements, development, expansionand operations;

·                  Changes in or elimination of governmentallaws, tariffs, trade or other controls or enforcement practices;

·                  Fluctuations in US oil consumption andpetroleum prices;

·                  The availability and adequacy of our cashflow to meet our requirements; and

·                  Competition from alternative fuels andalternative fuel additives.

 

The cautionarystatements referred to in this section also should be considered in connectionwith any subsequent written or oral forward-looking statements that may beissued by us or persons acting on our behalf. We do not undertake any duty to update forward-looking statements afterthe date they are made or to conform them to actual results or to changes incircumstances or expectations. Furthermore, we cannot guarantee future results,events, levels of activity, performance, or achievements.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we referencein this report and have filed as exhibits, completely and with theunderstanding that our actual future results may be materially different fromwhat we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

 

**Overview**

 

Little Sioux CornProcessors, L.L.C. (the “Company”) is an Iowa limited liability company thatowns the sole general partnership interest of LSCP, LLLP, (the “Partnership”)an Iowa limited liability limited partnership.  As general partner, wecurrently manage the business and day-to-day operations of the Partnership’s 92million gallon per year (MGY) ethanol plant located near Marcus, Iowa innorthwest Iowa.  We currently own a60.15% ownership interest in the Partnership. The Partnership has two wholly owned subsidiaries, Akron Riverview CornProcessors, LLC (“Akron”) and Twin Rivers Management Co., LLC (“Twin Rivers”).  Akron is an Iowa limited

 

 

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liability company that isdeveloping a 100 MGY ethanol plant in Plymouth County, near Akron, Iowa,however, further development of this project is currently suspended.  Twin Rivers is an Iowa limited liabilitycompany that anticipates managing Akron’s ethanol plant.  The Company, itsPartnership, and the Partnership’s subsidiaries are collectively referred to inthis report as “LSCP,” “we,” or “us.”

 

We recentlycompleted the operational and processing components of a 40 million gallonexpansion project, which increased our production capacity from 52 milliongallons per year to 92 million gallons per year.  We received our certificate of substantialcompletion on the expansion on January 15, 2008 and started operating atthis increased capacity on January 19, 2008. We still have additional work on the expansion, such as increased railsiding, that will be completed in early fall 2008.

 

Our revenues are derived fromthe sale and distribution of our ethanol, distillers grains and corn oilthroughout the continental United States. In fiscal year 2007, we processed approximately 19.4 million bushels ofcorn into approximately 53.9 million gallons of ethanol, 266,000 tons ofdistillers grains and 7.3 million pounds of corn oil.  In fiscal year2008, we anticipate producing approximately 86.3 million gallons of ethanol,418,500 tons of distillers grains, and 12.2 million pounds of corn oil fromapproximately 30.8 million bushels of corn.  However, there is noguarantee that we will be able to operate at these production levels.

 

Corn is supplied to usprimarily from local agricultural producers and from purchases of corn on theopen market. After processing the corn, ethanol is sold to Archer DanielsMidland Co. (“ADM”), which subsequently markets and sells the ethanol togasoline blenders and refineries located throughout the continental UnitedStates.  On March 29, 2007 we entered into an Amended and RestatedEthanol Marketing Agreement with ADM for an initial term of four years, andunless the contract is terminated it will renew automatically for successiveadditional terms of one year each.  Therevenue we receive from the sale of ethanol to ADM is based upon the price thatADM receives from the sale to its customers, minus a marketing fee andcommission.  While we can obtain the final price for our ethanol from ADMon a daily basis, for administrative reasons, we settle the final price withADM on a monthly basis.

 

Some of our distillersgrains are sold directly to local farmers, and the remainder is sold throughour marketing agreement.  The marketingagreement is with CHS Inc., a Minnesota cooperative corporation (“CHS”), whichmarkets and sells the product to livestock feeders.  For our distillersgrains, we receive a percentage of the selling price actually received by CHSin marketing the distillers grains to its customers.

 

We directly market andsell our corn oil to regional wholesalers.  Presently, the end use of ourcorn oil is in the livestock industry.  In the long term, our corn oilcould be marketed for human consumption; however, the feasibility of marketpenetration as human food is unknown at this time, as corn oil extraction indry milling is relatively new and suitability for human consumption has not yetbeen determined.

 

We are subject toindustry-wide factors that affect our operating income and cost ofproduction.  Our operating results are largely driven by the prices atwhich we sell ethanol, distillers grain and corn oil and the costs related totheir production.  Historically, the price of ethanol tends to fluctuatein the same direction as the price of unleaded gasoline and other petroleumproducts.  Surplus ethanol supplies also tend to put downward pricepressure on ethanol.  In addition, the price of ethanol is generallyinfluenced by factors such as general economic conditions, the weather, andgovernment policies and programs.  The price of distillers grains isgenerally influenced by supply and demand, the price of substitute livestockfeed, such as corn and soybean meal, and other animal feed proteins. Surplus grain supplies also tend to put downward price pressure on distillersgrains.  In addition, our revenues are also impacted by such factors asour dependence on one or a few major customers who market and distribute ourproducts; the intensely competitive nature of our industry; possiblelegislation at the federal, state, and/or local level; and changes in federalethanol tax incentives.

 

Our two largestcosts of production are corn and natural gas.  The cost of corn isaffected primarily by factors over which we lack any control such as cropproduction, carryout, exports, government policies and programs, riskmanagement and weather.  Natural gas prices fluctuate with the energycomplex in general.  Over the last few years, natural gas prices havetrended higher than average and it appears prices will continue to trend higherdue to 

 

 

13

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the high price ofalternative fuels such as fuel oil.  Our costs of production are affectedby the cost of complying with the extensive environmental laws that regulateour industry.

 

**Resultsof Operations for the Three Months Ended December 31, 2007 and 2006**

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our consolidatedstatements of operations for the three months ended December 31, 2007 and2006:

 

| ** **                              | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Income Statement Data**     | ** ** | **Amount**                 | ** ** | **%**                      | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $                          | 28,652,416 |                       | 100.0      |   | $ | 33,605,049 |   | 100.0 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Cost of Goods Sold                      |       | 16,255,048                 |       | 56.7                       |       | 12,043,691 |   | 35.8 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Gross Profit                            |       | 12,397,368                 |       | 43.3                       |       | 21,561,358 |   | 64.2 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Operating Expenses                      |       | 1,608,047                  |       | 5.6                        |       | 781,823 |   | 2.3 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Operating Income                        |       | 10,789,321                 |       | 37.7                       |       | 20,779,535 |   | 61.8 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Other Expense, net                      |       | (775,165                   | )          | (2.7                       | )          | (10,456 | ) | 0.0 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Net Income Before Minority  Interest    |       | 10,014,156                 |       | 35.0                       |       | 20,769,079 |   | 61.8 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Minority Interest in  Subsidiary Income |       | 3,999,988                  |       | 14.0                       |       | 8,278,461 |   | 24.6 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Net Income                              |       | $                          | 6,014,168  |                       | 21.0       |   | $ | 12,490,618 |   | 37.2 |   |

 

*                Revenues.*The decrease in revenues from the threemonths ended December 31, 2007 compared to the three months ended December 31,2006 is due primarily to a decrease in the price per gallon we received for theethanol sold. The price per gallon we received for the three months ended December 31,2007 was approximately 13% lower than the price per gallon received for thethree months ended December 31, 2006 due to the soft ethanol market.  In addition, our losses from derivativeinstruments related to ethanol hedging increased to $2,845,000 for the threemonths ended December 31, 2007 from $299,000 for the three months ended December 31,2006. These loss amounts are recorded as a reduction of revenue.  Revenuefrom sales of our co-products increased by approximately 22% in the threemonths ended December 31, 2007 compared to the three months ended December 31,2006 due to higher prices and volumes of corn oil sales.

 

A greater supply ofethanol on the market from additional plants and plant expansions couldcontinue to reduce the price we are able to charge for our ethanol, especiallyif supply outpaces demand. As of February 2008, the Renewable FuelsAssociation (“RFA”) reports that there were 140 ethanol plants in operationnationwide with the capacity to produce 7.89 billion gallons annually, withapproximately 61 ethanol plants under construction and 7 planned expansions,expanding total ethanol production capacity by an additional 5.54 billiongallons. Through November 2007, the last reported date by the RFA, ethanoldemand in the United States was nearly 5.0 billion gallons.  Accordingly, the price of ethanol maycontinue to trend downward if supply exceeds demand, which would negativelyimpact our earnings.

 

The Renewable FuelsStandard (“RFS”) requires that in each year, a certain amount of renewablefuels be utilized in the United States. The RFS was increased in December 2007.  Currently, the RFS requires the use of 9billion gallons of renewable fuels in 2008, increasing to 36 billion gallons in2022, however only 15 billion gallons is allowed to be fulfilled fromcorn-based ethanol.  The new RFS also hasa provision that requires the use of “advanced” renewable fuels.  These advanced renewable fuels includeethanol that is not made from corn, such as cellulosic ethanol.  Cellulosic ethanol is ethanol that isproduced from cellulose, which is the main component of plant cell walls and isthe most common organic compound on earth. Cellulose is found in wood chips, corn stalks, 

 

 

14

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rice straw, amongst othercommon plants.  The RFS is a nationalprogram that does not require that any renewable fuels be used in anyparticular area or state, allowing refiners to use renewable fuel blends inthose areas where it is most cost-effective. While the expanded RFS can be met by several different types ofrenewable fuels, including biodiesel, the increase in the RFS will likelyincrease demand for ethanol.  As thedemand for ethanol increases, we expect the ethanol industry to increaseethanol supply to meet this increased demand.

 

With respect toco-products, we are exploring new ways to market and utilize our corn oil andwe believe this will result in the continued increase of our sales for ourco-products.

 

*                Cost of Goods Sold.*Our cost of goods sold as a percentage ofrevenues were 56.7% and 35.8% for the three months ended December 31, 2007and 2006, respectively. The 35.0% increase in our cost of goods sold fromperiod to period is primarily due to the increased cost of corn purchased. Theper bushel cost of corn purchased increased approximately 30% in the quarterended December 31, 2007 as compared to the quarter ended December 31,2006.

 

Corn costs significantlyimpact our cost of goods sold. For the three months ended December 31,2007, we paid an average of $3.55 per bushel of corn. For the three monthsended December 31, 2006, we paid an average of $2.73 per bushel of corn.This increase in the price we paid per bushel had a large effect on our cost ofgoods sold.  Gains from hedging for thethree months ended December 31, 2007 were approximately $10,989,000compared to $10,935,000 for the three months ended December 31, 2006.  Gains from hedging for the three months endedDecember 31, 2007 offset some, but not all, of our increase in costs ofgoods sold. We expect the price of cornto remain at current price levels well into 2008.  As of January 11, 2008, United StatesDepartment of Agriculture (“USDA”) estimated the 2007 corncrop at 13.1 billion bushels, which is approximately 20 percent larger than the2006 corn crop.  Despite the large 2007corn crop, corn prices remained high throughout 2007. Additionally, due to increased exposureof ethanol, corn is now being viewed as an “energy commodity” as opposed tostrictly a “grain commodity,” contributing to the upward pressure on cornprices.  The USDA’s February 12, 2008 Feed Outlook Report, projectsU.S. corn prices for the season average to be at $3.75 to $4.25 per bushel.

 

Natural gas has recentlybeen available only at prices exceeding historical averages.  Historically,natural gas prices in the $5/mmbtu range were considered high. For the threemonths ended December 31, 2007, we paid a weighted average of $7.57 permmbtu.  For the three months ended December 31,2006, we paid a weighted average of $8.62 per mmbtu. While the price we paid forthe three months ended December 31, 2007 is down from the price paid for thethree months ended December 31, 2006, the price is still a large component ofour cost of goods sold and we anticipate the price we pay for natural gas willcontinue to be volatile from period to period.

 

*                Operating Expenses.*Our operating expenses as a percentage ofrevenues were 5.6% and 2.3% for the three months ended December 31, 2007and 2006, respectively.  This increase resulted from an increase inprofessional, consulting and legal fees associated with compliance with theSarbanes-Oxley Act of 2002, higher ethanol marketing fees, and fees associatedwith exploring new ways to market and utilize our corn oil.

 

*                Operating Income.*Our income from operations for the threemonths ended December 31, 2007 totaled approximately $10,789,000 comparedto $20,780,000 for the three months ended December 31, 2006. This was aresult of the substantial decrease in gross profit, which resulted largely fromincreased corn costs, combined with higher operating expenses, as discussedabove, for the three months ended December 31, 2007.

 

*                Other Expense*.  Our other expense totaledapproximately $775,000 for the three months ended December 31, 2007compared to approximately $10,000 for the same period in 2006. Theincrease in expense is primarily due to the decrease in value of the interestrate swap obtained as part of the construction loan for the expansion of theplant.

 

**Changesin Financial Condition for the Three Months Ended December 31, 2007**

 

Total assets wereapproximately $147,448,000 at December 31, 2007 compared to approximately$136,412,000 at September 30, 2007. Current assets totaled approximately$34,555,000 at December 31, 2007 up from approximately $26,498,000 at September 30,2007. The change resulted from an increase in all our categories of assets,most significantly from increases in: 1) our accounts receivable with ADM whichtotaled approximately $4,955,000 

 

 

15

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at December 31, 2007up from approximately $2,584,000 at September 30, 2007; and 2) ourinventory which was totaled approximately $7,387,000 at December 31, 2007and approximately $3,309,000 at September 30, 2007.  We have substantially more raw materials onhand at December 31, 2007 then we did at September 30, 2007, becauseof our expansion to 92 MGY.

 

Total current liabilitiestotaled approximately $23,928,000 at December 31, 2007 compared to theapproximate $23,988,000 at September 30, 2007.  This slight decrease resulted from a decreasein accounts payable offset by an increase in current maturities of long-termdebt.  Long-term debt, net of current maturities, totaled approximately$14,417,000 at December 31, 2007 up from approximately $13,259,000 at September 30,2007. This increase occurred as a result of our regularly scheduled loanpayments.

 

**Strategies: Expansion**

 

***Marcus PlantExpansion***

 

Duringfiscal year 2006, we commenced a plant expansion to increase the ethanolproduction capacity of our plant by 40 million gallons to 92 million gallonsannually. We expect that the total cost of the expansion project will beapproximately $75,000,000.  This is aslight increase from our original cost estimate of $73,000,000.  The increase was due to our purchase of anoil separation unit.  We did not,however, increase our construction loan discussed below to include thisadditional $2,000,000 expense. If the total expansion cost is under budget,then we can use the construction loan funds for the oil separation unit. If thetotal expansion cost does reach the estimated $75,000,000, then the additional$2,000,000 will be covered by our cash funds. The grain storage and processparts of the expansion are complete.  We received our certificate of substantialcompletion on the construction on January 15, 2008 and commenced operatingat the 92 million gallon capacity shortly thereafter. Final land grading andrail siding work will be completed in early fall 2008.

 

 Weexpect to finance the 40 million per year expansion using both a portion of ourcash and additional debt to finance the required capital expenditures.  Wedo not expect to seek additional equity from our members to fund thisexpansion.  On April 5, 2007, we entered into an Amended and RestatedConstruction Loan Agreement (the “Amended Agreement”) with First National Bankof Omaha, N.A. (“FNBO”).  Under the Amended Agreement, FNBO has agreed toloan us up to $73,000,000 (the “Construction Loan”) for the purpose ofpartially funding the construction of the 40 million gallon per year expansionof our facility and the subsequent replacement of the Construction Loan with anamount of up to $82,278,227 (the “Term Loan”), together with a $5,000,000operating line of credit and letter of credit facility (the “Operating Loan”)and swap contracts.  For additional information regarding our expansiondebt financing commitment, see “**Item 2 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations — Indebtedness, *ExpansionDebt Financing***.”

 

Managementanticipates that the plant will continue to operate at or above name-platecapacity of 92 MGY.  Although tangential work on the expansion project,such as rail siding, road work and landscaping, will continue until the projectis fully complete in early fall 2008, we do not anticipate that this work willsubstantially interfere with our production capacity.  This tangentialexpansion work will be completed while the current facility remains inproduction.  However, in the future, the plant may be shut down from timeto time to incorporate expansion improvements.

 

Weexpect to have sufficient cash from cash flow generated by continuingoperations, additional debt financing secured to fund plant expansion, currentlines of credit through our revolving promissory note, and cash reserves tocover the costs of expansion as well as our usual operating costs over the next12 months, which consist primarily of corn supply, natural gas supply,staffing, office, audit, legal, compliance, working capital costs and debtservice obligations.

 

Weexpect our total operating costs to increase from the expansion because of theincrease in our production capacity.  We expect to offset the increase inoperating costs by increased ethanol revenues, however, a variety of marketfactors can affect both operating costs and revenues.  These factorsinclude:

 

.                 Changes in the availability and price of corn;

 

.                 Changes in the environmental regulations that apply to our plantoperations;

 

 

16

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·                  Increasedcompetition in the ethanol and oil industries;

 

·                  Changes ininterest rates or the availability of credit;

 

·                  Changes in ourbusiness strategy, capital improvements or development plans;

 

·                  Changes inplant production capacity or technical difficulties in operating the plant;

 

·                 Changes ingeneral economic conditions or the occurrence of certain events causing aneconomic impact in the agriculture, oil or automobile industries;

 

·                  Changes in theavailability and price of natural gas and the market for distillers grains; and

 

·                  Changes infederal and/or state laws (including the elimination of any federal and/orstate ethanol tax incentives).

 

***Development ofAkron Ethanol Plant***

 

In addition to expansion of the plant, we executed a subscriptionagreement to purchase 27,500 Class A units in Akron, our wholly ownedsubsidiary.  Akron is an Iowa limited liability company organized for thepurpose of developing and constructing a 100 million gallon per year ethanolplant in Plymouth County near Akron, Iowa.  On August 28, 2007 wedecided to suspend development of the Akron project, due to unfavorable marketconditions.  We did, however, enter intoan amended and extended letter of intent with Fagen, Inc. on November 9,2007 to extend the termination date to June 1, 2008. There is no assurancethat our involvement with the Akron plant, or the project, will besuccessful.  The market conditions willbe continually evaluated to determine the feasibility of restarting the Akronproject.

 

**Distribution**

 

Subsequent to the end ofthe period covered by this report, our board of directors approved a cashdistribution of $15,494,454 to the Partnership’s partners of record as of January 14,2008.  As a holder of 60.15% of the units of the Partnership, the Companywill receive a cash distribution of $9,320,518.  On January 14, 2008,the Company’s board of directors approved a cash distribution of $56.10 permembership unit or a total of $9,206,851 to its unit holders of record as of January 14,2008.

 

**Liquidityand Capital Resources**

 

The followingtable shows cash flows for the three months ended December 31, 2007 and2006:

 

| ** **                                            | ** ** | **2007** | ** **     | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|----------------|----------|------------|
| Net cash provided by (used  in) operating activities  |       | $        | (1,038,711     | )        | $          | 18,521,351 |   |
| Net cash used in investing  activities                |       | $        | (6,112,997     | )        | $          | (4,817,296 | ) |
| Net cash provided by (used  for) financing activities |       | $        | 2,239,430      |     | $          | (810,380 | ) |
| **Net increase (decrease) in cash  and equivalents**  | ** ** | **$**    | **(4,912,278** | **)**    | **$**      | **12,893,675** | ** ** |

 

*                Operating Cash Flows.*Cash used in operating activities wasapproximately $1,039,000 for the three months ended December 31, 2007, whichwas a decrease of approximately $19,560,000 from cash provided by operatingactivities of approximately $18,521,000 for the three months ended December 31,2006. This decrease resulted from the decrease in net income for the fiscal quarterended December 31, 2007.  In addition, more cash was required tobuild inventories and accounts payable as the plant’s raw material needsincreased due to the expansion.  In addition, more cash was restrictedrelated to our derivative positions.  Ourcapital needs are being adequately met through cash from our operatingactivities and our current credit facilities.

 

*InvestingCash Flows**.*Cash used in investing activities was approximately $6,113,000 for the threemonths ended December 31, 2007, compared to approximately $4,817,000 for the threemonths ended December 31, 2006. This increase in cash used resulted from anincrease in funds needed to be expended for our current expansion construction.

 

 

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*                Financing Cash Flows*. Cash provided by financing activitieswas approximately $2,239,000 for the three months ended December 31, 2007,compared to outflows of approximately $810,000 for the three months endedDecember 31, 2006.  Cash was increased byapproximately $3,100,000 from a draw against the construction note in the threemonths ended December 31, 2007.  We used cash to pay down our debt byapproximately $860,000 in the three months ended December 31, 2007 compared toapproximately $810,000 in the three months ended December 31, 2006.

 

**               ****Indebtedness**

 

### ***Short-Term Debt Sources***. We maintain a line of credit withFirst National Bank of Omaha through March 2008 to finance short-termworking capital requirements. Under the line of credit, we may borrow up to$5,000,000 under a revolving promissory note. The interest payable on therevolving promissory note is due monthly at the one-month LIBOR plus 2.80%. Wepay a commitment fee of 0.125% on the unused portion of the line. There was nooutstanding balance as of December 31, 2007. The maximum available creditunder this note is based on receivable and inventory balances. Our currentreceivable and inventory balances are not sufficient to allow us to use themaximum amount of the operating line of credit. The operating line of credit issubject to protective covenants requiring us to maintain various financialratios and is secured by all of our business assets.

 

                We have short-term debt financing consisting of aconstruction note for up to $73,000,000 for the partial funding of the 40 MMGYexpansion to the Marcus facility.  The principal balance on this note was$28,519,412 as of December 31, 2007 and will convert into term notes atthe completion of the construction.  Interest on the construction note isat the one-month LIBOR plus 3.10%, which totaled 8.325% as of December 31,2007.

 

*Long-TermDebt Sources*.We have long-term debt financing consisting of three term notes held by FirstNational Bank of Omaha and referred to as Term Notes 2, 3, and 4. At December 31,2007, the principal balance on Term Note 2 was $9,443,566. Term Note 2 ispayable in quarterly installments. Interest on Term Note 2 is at thethree-month LIBOR plus 2.80%, which totaled 7.92% as of December 31, 2007.Term Note 2 is payable in full on June 1, 2008. In order to achieve afixed interest rate on Term Note 2, we entered into an interest rate swap whichhelps protect our exposure to increases in interest rates and the swapeffectively fixes the interest rate on Term Note 2 at 5.79% until June 1,2008.

 

At December 31,2007, the principal balance on Term Note 3 was $3,000,852. Term Note 3 ispayable in quarterly installments. Interest on Term Note 3 is at thethree-month LIBOR plus 2.80%, which totaled 7.92% as of December 31, 2007.Term Note 3 is payable in full on June 1, 2008. As part of the financingagreement, we have agreed to pay an annual servicing fee of $50,000.  However, under our commitment letter withFirst National Bank of Omaha for our expansion debt financing, this annualservicing fee will be reduced to $30,000.

 

At December 31,2007, there was no principal balance on Term Note 4.  Interest on TermNote 4 is at the one-month LIBOR plus 2.80%. Term Note 4 is payable in full on June 1,2008. Term Note 4 allows borrowings up to the original principal of $5,000,000to the extent of principal payments made until maturity.

 

At December 31,2007 the aggregate indebtedness represented by Term Notes #2, #3, #4, and theConstruction Loan was $40,963,830.

 

We have a capitallease obligation in the amount of $19,597 on which we pay monthly installmentstotaling $6,658, with an implicit interest rate of 3.67%. This obligation issecured by the leased equipment and runs through March 1, 2008.

 

We have a note inthe amount of $45,138 payable to the Iowa Energy Center on which we pay monthlyinstallments of $3,472 without interest. This note is secured by real estate,but is subordinated to the term notes. It matures on January 29, 2009.

 

Wehave a note with Farmers State Bank of Marcus, Iowa in the amount of $52,165 onwhich we pay monthly installments of $5,921, including interest at 6%. Thisnote is secured by real estate, but is subordinated to the term notes. Itmatures on January 29, 2009.

 

 

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Wehave a note totaling $161,000 payable to the Iowa Department of EconomicDevelopment on which we pay monthly installments of $1,167 without interest.This note is secured by all equipment and matures on July 1, 2009.

 

*Expansion Debt Financing**.*On April 5, 2007, we entered into anAmended and Restated Construction Loan Agreement (the “Amended Agreement”) withFirst National Bank of Omaha, N.A. (“FNBO”).  Under the Amended Agreement,FNBO has agreed to loan us up to $73,000,000 (the “Construction Loan”) for thepurpose of partially funding the construction of the 40 million gallon per yearexpansion of our facility and the subsequent replacement of the ConstructionLoan with an amount of up to $82,278,227 (the “Term Loan”), together with a$5,000,000 operating line of credit and letter of credit facility (the “OperatingLoan”) and swap contracts.  The principal balance on this note wasapproximately $28,519,000 as of December 31, 2007.  In addition, we borrowed an additionalapproximately $15,923,000 under the Construction Loan on February 13,2008, which brought the total balance to approximately $44,442,000.  Inorder to achieve a fixed interest rate on portions of our expansion debt, weentered into an interest rate swap which helps protect our exposure toincreases in interest rates. The swap fixes the interest rate on $36,500,000 ofdebt related to the expansion financing at 7.68% for the period of March 1,2008 to March 1, 2013. The note will convert into term notes at thecompletion of construction.  Interest on the construction notes is at theone-month LIBOR plus 3.10%, which totaled 8.33% as of December 31, 2007.

 

Under the AmendedAgreement, the existing swap note and a business credit card loan are subjectto the same terms and conditions, including interest rate, interest period,repayment terms, as our previous credit facility with FNBO.  In addition,through the Construction Loan termination date, the existing variable rate noteand the existing long term revolving note will continue to be subject to thesame terms and conditions, including interest rate, interest period, repaymentterms, as our existing credit facility; provided, however, interest shallaccrue on the existing variable rate note and the existing long term revolvingnote at a variable rate equal to the applicable LIBOR Rate set forth in suchnotes, plus (a) 2.80% prior to acceleration or maturity, and (b) anadditional 6.00% after maturity, whether by acceleration or otherwise.  Onthe construction loan termination date, the existing variable rate note and theexisting long term revolving note will be converted with the construction loaninto the term loan described below.

 

The AmendedAgreement also provides for refinancing of our existing operating note. Under the refinanced operating loan (the “Operating Loan”) FNBO will loan us anamount up to $5,000,000, which shall provide both operating line of creditfinancing and FNBO will issue letters of credit at our request.  Theaggregate amount of any letter of credit at the time of issuance shall notexceed $1,000,000 and unless otherwise agreed to by FNBO, no letter of creditshall have an expiration date more than one (1) year from the date ofissuance. We may borrow, repay and re-borrow under the Operating Loan, withoutpenalty or premium, either the full amount of the Long Term Revolving Loan orany lesser sum.

 

During theconstruction period interest on the Construction Loan will be payable on aquarterly basis on the outstanding principal amount at a variable rate equal tothe one-month LIBOR Rate, in effect from time to time, plus (a) 3.10%prior to acceleration or maturity, and (b) an additional 6.00% aftermaturity, whether by acceleration or otherwise.  On the Construction Loantermination date, the Construction Loan will be converted into the Term Loanand replaced by the following term notes:

 

(a)          The Swap Note. A loan in the maximum amount of $36,500,000. Interest on the Swap Note shall accrue at a variable rate equal to thethree-month LIBOR Rate, in effect from time to time, plus (a) 2.60% priorto acceleration or maturity, and (b) an additional 600 basis points aftermaturity, whether by acceleration or otherwise.  The Swap Note will matureand terminate on the fifth anniversary of the Construction Loan terminationdate.

 

(b)          The Variable Rate Note.  A loan in the maximum amount of$35,778,227 representing the principal balance of the Construction Note plusthe entire principal amount and all accrued and unpaid interest under theexisting variable rate note, if any, less the Swap Note and less $5,000,000 ofthe Long Term Revolving Loan.  Interest on the Variable Rate Note shallaccrue at a variable rate equal to the three-month LIBOR Rate, in effect fromtime to time, plus (a) 3.00% prior to acceleration or maturity, and (b) anadditional 6.00% after maturity, whether by acceleration or otherwise. TheVariable Rate Note will mature and terminate on the fifth anniversary of theConstruction Loan termination date.

 

 

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(c)          The Long Term Revolving Note.  A loan in the maximum amount of$10,000,000 representing the entire principal amount and all accrued and unpaidinterest under the existing long term revolving note, if any, and $5,000,000converted from the Construction Loan on the Construction Loan terminationdate.  Interest on the Long Term Revolving Note shall accrue at a variablerate equal to the three-month LIBOR Rate, in effect from time to time, plus (a) 3.00%prior to acceleration or maturity, and (b) an additional 6.00% aftermaturity, whether by acceleration or otherwise.  We may borrow, repay andre-borrow under the Long Term Revolving Loan, without penalty or premium,either the full amount of the Long Term Revolving Loan or any lesser sum untiltermination of the Long Term Revolving Note. The Long Term Revolving Note willmature and terminate on the fifth anniversary of the Construction Loantermination date.

 

We are obligatedto repay the Term Loan as follows:

 

(a)                                  We will make quarterly principal paymentson the Swap Note ranging from approximately $612,000 to $859,000 plus accruedinterest commencing on the first day of the first quarter immediately followingthe Construction Loan termination date. A final balloon payment ofapproximately $23,000,000 will be due on the termination date of the Swap Note.

 

(b)                                 We will make quarterly payments of$1,362,429 beginning the first day of the first quarter immediately followingthe Construction Loan termination date which shall be allocated asfollows:  (i) first to accrued and unpaid interest on the Long TermRevolving Note, (ii) next to accrued and unpaid interest on the VariableRate Note, and (iii) next to principal on the Variable Rate Note.

 

(c)                                  After the Variable Rate Note has beenfully paid, such quarterly payments shall be allocated first to accrued andunpaid interest on the Long Term Revolving Note, and then to principal on theLong Term Revolving Note, with reductions in the availability thereof .

 

(d)                                 At the end of each fiscal year, we mustapply an amount equal to 25% of our excess cash flow but not to exceed$5,000,000 to the term notes.  Excess cash flow is determined as EBITDAless capital expenditures, taxes and allowable distributions, required paymentsto FNBO and subordinated debt.

 

(e)                                  Notwithstanding the foregoing, all unpaidprincipal and accrued and unpaid interest for all Term Notes shall be due andpayable on their respective termination dates, if not sooner paid.

 

In connection withthe Amended Agreement, we executed a mortgage in favor of FNBO creating a firstlien on our real estate and plant and a security interest in all personalproperty located on our property.  In addition, we assigned, in favor ofFNBO, all rents and leases to our property, the design/build contract, our marketingcontracts, risk management services contract and lease agreement.

 

As a condition toFNBO making loans under the Amended Agreement, we were required to collaterallyassign to FNBO all of our right, title and interest in and to any and allmembership or other equity interest in Akron in exchange for its consent to ourmaking an equity contribution in the aggregate amount of approximately$20,000,000 to Akron.  In addition, we will also be subject to certainfinancial loan covenants consisting of minimum working capital, minimum debtcoverage, and minimum tangible net worth.  After the construction phase,we will only be allowed to make annual capital expenditures up to $1,000,000annually without prior approval.  We will also be prohibited from making distributionsto our members of greater than 40% of the net income for such fiscal year ifour leverage ratio (combined total liabilities to net worth) is greater than orequal to 1.0:1.0.  If our leverage ratio is less than 1.0:1.0, we may makedistributions up to 65% of our net income.  We must be in compliance withall financial ratio requirements and loan covenants before and after anydistributions to our members.  Our failure to comply with the protectiveloan covenants or maintain the required financial ratios may cause accelerationof the outstanding principal balances on the revolving promissory note andterms notes and/or the imposition of fees, charges or penalties.  Anyacceleration of the debt financing or imposition of significant fees, chargesor penalties may restrict or limit our access to the capital resourcesnecessary to continue plant operations.

 

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                Upon an occurrence of an event of default or an eventwhich will lead to our default, FNBO may upon notice terminate its commitmentto loan funds and declare the entire unpaid principal balance of the loans,plus accrued interest, immediately due and payable.   An event ofdefault includes, but is not limited to, our failure to make payments when due,insolvency, any material adverse change in our financial condition or ourbreach of any of the covenants, representations or warranties we have given inconnection with the transaction.

 

**Critical Accounting Policies andEstimates**

 

This discussion andanalysis of financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  Note 2 to our condensedconsolidated financial statements contain summaries of our accounting policies,many of which require management to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  On an on-going basis, management evaluates itsestimates and judgments, including those related to accrued expenses, financingoperations, and contingencies and litigation.  Management bases itsestimates and judgments on historical experience and on various other factorsthat it believes to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources.  Actualresults may differ from these estimates under different assumptions orconditions.  We do not currently deem any of our accounting estimatesdescribed in the notes to our consolidated financial statements to be critical.

 

**Off-BalanceSheet Arrangements.**

 

We currently have no off-balance sheet arrangements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK.**

 

We are exposed to the impact of market fluctuations associated withinterest rates and commodity prices as discussed below. We have no exposure toforeign currency risk as all of our business is conducted in U.S. Dollars. Weuse derivative financial instruments as part of an overall strategy to managemarket risk. We use cash, futures and option contracts to hedge changes to thecommodity prices of corn and natural gas. We do not enter into these derivativefinancial instruments for trading or speculative purposes, nor do we designatethese contracts as hedges for accounting purposes pursuant to the requirementsof SFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*.

 

**InterestRate Risk**

 

Weare exposed to market risk from changes in interest rates. Exposure to interestrate risk results primarily from holding a revolving promissory note, aconstruction note and three term notes which bear variable interestrates.  Specifically, we have $40,963,830 outstandingin variable rate debt as of December 31, 2007. The specifics of each noteare discussed in greater detail in “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Indebtedness**.”

 

Inorder to achieve a fixed interest rate on portions of our debt, we entered intointerest rate swaps which help protect our exposure to increases in interest ratesand the swaps fix the interest rate on Term Note 2 at 5.79% until June 1,2008, and fixes the interest rate on $36,500,000 of debt, related to theexpansion financing, at 7.68% for the period of March 1, 2008 to March 1,2013.  When the three-month LIBOR plus the applicable premium exceeds thefixed rate of 5.79% or 7.68%, we receive payments for the difference betweenthe market rate and the swap rate.  Conversely, when the three-month LIBORplus the applicable premium is below 5.79% or 7.68%, we make payments for thedifference between the market rate and the swap rate.  While our exposureis now greatly reduced, there can be no assurance that the interest rate swapagreements will provide us with protection in all scenarios.  For example,if interest rates were to fall below 5.79% or 7.68%, as applicable, we wouldstill be obligated pay interest at the fixed rate.

 

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**Commodity Price Risk**

 

We are also exposed to market risk from changes incommodity prices. Exposure to commodity price risk results from our dependenceon corn and natural gas in the ethanol production process. We seek to minimizethe risks from fluctuations in the prices of corn and natural gas through theuse of derivative instruments. In practice, as markets move, we actively manageour risk and adjust hedging strategies as appropriate. Although we believe ourhedge positions accomplish an economic hedge against our future purchases, theyare not designated as such for hedge accounting purposes, which would match thegain or loss on our hedge positions to the specific commodity purchase beinghedged. We are marking to market our hedge positions, which means as thecurrent market price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of goods sold.

 

Theimmediate recognition of hedging gains and losses can cause net income to bevolatile from quarter to quarter due to the timing of the change in value ofthe derivative instruments relative to the cost and use of the commodity beinghedged. At December 31,2007 and September 30, 2007, the fair value of our derivative instrumentsfor corn, natural gas, and gasoline is an asset in the amount of approximately$4,463,000 and a liability in the amount of approximately $9,426,000,respectively. There are severalvariables that could affect the extent to which our derivative instruments areimpacted by price fluctuations in the cost of corn or natural gas. However, itis likely that commodity cash prices will have the greatest impact on thederivatives instruments with delivery dates nearest the current cash price.

 

Tomanage our corn price risk, our hedging strategy is designed to establish aprice ceiling and floor for our corn purchases. We have taken a net longposition on our exchange traded futures and options contracts, which allows usto offset increases or decreases in the market price of corn. The upper limitof loss on our futures contracts is the difference between the contract priceand the cash market price of corn at the time of the execution of the contract.The upper limit of loss on our exchange traded and over-the-counter optioncontracts is limited to the amount of the premium we paid for the option.

 

Weestimate that our expected corn usage will be approximately 31 million bushelsper year for the production of 92 million gallons of ethanol. We have priceprotection in place for a portion of our expected corn usage for fiscal year2008 using forward contracts, CBOT futures and options and Over-the-Counteroption contracts. As corn prices move in reaction to market trends andinformation, our income statement will be affected, depending on the impactsuch market movements have on the value of our derivative instruments. As wemove forward, additional price protection may be required to solidify ourmargins in the current and future fiscal years. Depending on market movements,crop prospects and weather, these price protection positions may causeimmediate adverse effects, but are expected to produce long-term positivegrowth for us.

 

Tomanage our natural gas price risk, we entered into a natural gas purchaseagreement with our supplier to supply us with natural gas. This purchaseagreement fixes the price at which we purchase natural gas. We estimate we havepurchased a portion of our fiscal year 2008 natural gas requirements utilizingboth cash, futures and options contracts. We may also purchase additionalnatural gas requirements for our fiscal year 2008 as we attempt to furtherreduce our susceptibility to price increases. We have entered into gasolinederivative instruments to hedge the variability of ethanol prices. While notperfectly correlated, we have found that ethanol and gasoline prices tend tomove in tandem. Therefore, the gasoline contracts we have entered into areintended to offset cash decreases in the price of ethanol we receive.

 

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A sensitivity analysis has been prepared to estimateour exposure to corn, gasoline and natural gas price risk. The table presentsthe net fair value of our derivative instruments as of December 31, 2007and September 30, 2007 and the potential loss in fair value resulting froma hypothetical 10% adverse change in such prices. The fair value of the positionsis a summation of the fair values calculated by valuing each net position atquoted market prices as of the applicable date. The results of this analysis,which may differ from actual results, are as follows:

 
|                    | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse Change —  Market Risk** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------|------------|
| December 31, 2007  |       | $                   | 4,463,000  |                                                                                    | ($         | 446,300) |   |
| September 30, 2007 |       | $                   | 9,426,000  |                                                                                    | ($         | 942,600) |   |

 

**ITEM 4T.  CONTROLS AND PROCEDURES.**

 

Our management, with the participation of our Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of our “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of such period, our disclosure controls and procedures were not effectivebecause of the material weakness discussed below.

 

There were adjustments to our financial statements and other factorsduring the period covered by this report which impacted our closing process anddelayed the preparation of our consolidated financial statements, including allrequired disclosures, in a timely manner. The adjustments to our original trialbalance impacted a number of balance sheet and income accounts.  These deficiencies constituted a materialweakness in our financial close process.

 

**CHANGES IN INTERNAL CONTROLS OVER FINANCIALREPORTING**

 

We are in the process of upgrading our systems,implementing additional financial and management controls, and reportingsystems and procedures.  We are currentlyundergoing a comprehensive effort in preparation for compliance with Section 404of the Sarbanes-Oxley Act of 2002. This effort, under the direction of seniormanagement, includes documentation, and testing of our general computercontrols and business processes. We are currently in the process of formalizingan internal audit plan that includes performing a risk assessment, establishinga reporting methodology and testing internal controls and procedures overfinancial reporting.

 

In connection with the material weakness describedabove, our auditors recommended that we continue to create and refine a structurein which critical accounting policies and estimates are identified, andtogether with other complex areas, are subject to multiple reviews byaccounting personnel. Our auditors further recommended that we enhance and testour period-end financial close process.

 

Except as described above, there has been no change in our internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that occurred in the fiscal quarter ended December 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS.**

 

From time to time in the ordinary course of business,we or the Partnership may be named as a defendant in legal proceedings relatedto various issues, including without limitation, workers’ compensation claims,tort claims, or contractual disputes.  Weare not currently involved in any material legal proceedings, directly orindirectly, and we are not aware of any claims pending or threatened against us or any of the directors thatcould result in the commencement of legal proceedings.

 

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**ITEM 1A. RISK FACTORS**

 

***Increases in the price of corn would reduce our profitability.**** *Our results of operations and financialcondition are significantly affected by the cost and supply of corn. Changes inthe price and supply of corn are subject to and determined by market forcesover which we have no control.  The price at which we purchase corn hasrisen substantially in the last year and we expect the price to continue toincrease.  Increases in demand for corn from both the world foodstuffmarkets and from increased production of ethanol have pushed up the price ofcorn.  We expect demand for corn from the ethanol industry to continue toexpand.

 

We expect theprice we pay for corn to continue increasing if the demand for corn continuesto increase.   Since our revenues depend on the spread between the sellingprice of our ethanol and the price we pay for corn, increases in corn pricesnegatively affect our ability to generate a profit.

 

***Our revenues will be greatly affected by the price at whichwe can sell our ethanol and distillers grains.*** These prices can be volatile as a resultof a number of factors. These factors include the overall supply and demand,the price of gasoline, level of government support, and the availability andprice of competing products. For instance, the price of ethanol tends toincrease as the price of gasoline increases, and the price of ethanol tends todecrease as the price of gasoline decreases. Any lowering of gasoline priceswill likely also lead to lower prices for ethanol, which may decrease ourethanol sales and reduce revenues.

 

Increasedproduction of ethanol may lead to lower prices. The increased production ofethanol could have other adverse effects. For example, the increased productioncould lead to increased supplies of co-products from the production of ethanol,such as distillers grains. Those increased supplies could outpace demand, whichwould lead to lower prices for those co-products. Also, the increasedproduction of ethanol could result in increased demand for corn. This couldresult in higher prices for corn and lowered corn production, thus loweringprofits.  There can be no assurance as to the price of ethanol ordistillers grains in the future. Any downward changes in the price of ethanoland/or distillers grains may result in less revenue which would decrease ourincome and profitability.

 

***Our involvement with the development of an ethanol plant inAkron, Iowa may not be successful.***We have executed a subscription agreement to purchase27,500 Class A units in Akron.  Development of the Akron project iscurrently suspended due to unfavorable market conditions and our investment inthe project may be lost of if the Akron plant is not completed. The failure tosuccessfully evaluate and otherwise adequately address the risks associatedwith development of the Akron project could have a material adverse effect onour business, results of operations and financial condition.

 

***We give no assurances that we will be able to implement ourexpansion strategy as planned or at all.**** *We recently began operating at 92 milliongallons per year capacity, after substantial completion of the operational andprocess portions of our expansion project.  The cost of the expansion isexpected to be approximately $75,000,000, which will be financed using both aportion of our cash and additional debt to fully capitalize theexpansion.  The use of cash to finance these expenditures could impact ourability to make future distributions to our members.

 

There is no assurancethat the expansion will increase our operating income.  Our expansionprojections are based upon our historical operating costs and historicalrevenues and there is no guarantee or assurance that our past financialperformance can accurately predict future results especially in connection withexpansion.  In addition, the expansion may cost more and may presentadditional challenges and risks that negatively impact our future financialperformance.

 

**ITEM 2.  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

None.

 

**ITEM 3.  DEFAULTS UPONSENIOR SECURITIES.**

 

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                None.

 

**ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS.**

 

                None.

 

**ITEM 5.**  **OTHER INFORMATION.**

 

                None.

 

**ITEM 6.  EXHIBITS ANDREPORTS ON FORM 8-K.**

 

The following exhibitsare filed as part of this report.

 
| **Exhibit   No.** | ** ** | **Description**                                 | ** ** | **Method of  Filing** |
|------------------------|------------|-------------------------------------------------|------------|-----------------------|
| 31.1                   |       | Certificate  pursuant to 17 CFR 240.13a-14(a)   |       | *                     |
|                   |       |                                            |       |                  |
| 31.2                   |       | Certificate  pursuant to 17 CFR 240.13a-14(a).  |       | *                     |
|                   |       |                                            |       |                  |
| 32.1                   |       | Certificate  pursuant to 18 U.S.C. § 1350. |       | *                     |
|                   |       |                                            |       |                  |
| 32.2                   |       | Certificate  pursuant to 18 U.S.C. § 1350. |       | *                     |

----

(*)           Filed herewith.

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 

 
|   |                   |   |   | LITTLE  SIOUX CORN PROCESSORS, L.L.C.  |
|--------|------------------------|--------|--------|----------------------------------------|
|   |                   |   |   |                                   |   |   |   |
|   |                   |   |   |                                   |   |   |   |
| Date:  | February 19, 2008 |   |   | /s/ Stephen Roe                        |   |
|   |                   |   |   | Stephen Roe                            |   |
|   |                   |   |   | President and Chief  Executive Officer |
|   |                   |   |   |                                   |   |   |   |
|   |                   |   |   |                                   |   |   |   |
|   |                   |   |   |                                   |   |   |   |
| Date:  | February 19, 2008 |   |   | /s/ Gary Grotjohn                      |   |
|   |                   |   |   | Gary Grotjohn                          |   |
|   |                   |   |   | Chief Financial Officer                |   |
|        |                        |        |        |                                        |  |  |  |  |  |  |  |

 

 

 

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