** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly report under Section 13 or 15(d) of the  Securities Exchange Act of 1934.**                                                                                                                               |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                       |
|       |       | **For the fiscal quarter ended December 31, 2005**                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                       |
|       |       | **OR**                                                                                                                                                                                                                     |
|       |       |                                                                                                                                                                                                                       |
| **o**      | ** ** | **Transition report under Section 13 or 15(d) of the  Exchange Act.**                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                       |
|       |       | **For the transition period  from               to               .** |

 

**COMMISSION FILE NUMBER 0001229899**

 

**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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 
|   | ý    Yes          o   No |
|--------|-----------------------------------------------------------------------------------------------------|

 

Indicate by check mark whether the registrant is a large acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large  Accelerated Filer        o | Accelerated  Filer  o              | Non-Accelerated  Filer         ý  |
|----------------------------------------------------------------------|------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 
|   |  o Yes          ý  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, 2006,there were 10,941 units outstanding.

 

 

----

** **

**INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION** | ** **                                                                                      |
|----------------|---------------------------|-------------------------------------------------------------------------------------------------|
|           |                      |                                                                                            |
| ** **     | **Item 1. **         | **Financial Statements**                                                                        | ** ** |
| ** **     | **Item 2.**               | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations** | ** ** |
| ** **     | **Item 3.**               | **Quantitative  and Qualitative Disclosures About Market Risk**                                 | ** ** |
| ** **     | **Item 4.**               | **Controls and  Procedures**                                                                    | ** ** |
|           |                      |                                                                                            |   |
| **PART II.**   | **OTHER INFORMATION**     | ** **                                                                                      |
|           |                      |                                                                                            |
| ** **     | **Item 1.**               | **Legal Proceedings**                                                                           | ** ** |
| ** **     | **Item 2.**               | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | ** ** |
| ** **     | **Item 3.**               | **Defaults  Upon Senior Securities**                                                            | ** ** |
| ** **     | **Item 4.**               | **Submission  of Matters to a Vote of Security Holders**                                        | ** ** |
| ** **     | **Item 5.**               | **Other Information**                                                                           | ** ** |
| ** **     | **Item 6.**               | **Exhibits and  Reports on Form 8-K**                                                           | ** ** |
|           |                      |                                                                                            |   |
| **SIGNATURES** | ** **                |
|                |                           |                                                                                                 |  |  |

 

----

**PART I.         FINANCIALINFORMATION**

 

**Item 1. Financial Statements.**

** **

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

 

CondensedConsolidated Balance Sheet

 
| ** **                                                                                              | ** ** | **December  31  2005** | ** **       | **September  30  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------------|-------------------------|------------|
| ** **                                                                                              | ** ** | **(Unaudited)**        | ** **       | **(Audited)**           | ** ** |
| **ASSETS**                                                                                              |       |                   | ** **       |                    | ** ** |
| ** **                                                                                              |       |                   | ** **       |                    | ** ** |
| **Current  Assets**                                                                                     | ** ** | ** **             | ** **       | ** **              | ** ** |
| Cash and  equivalents                                                                                   |       | $                      | 22,164,793       |                    | $          | 14,135,954 |   |
| Short-term  investments                                                                                 |       | 5,000,000              |             | 6,987,420               |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $20,000                             |       | 1,495,966              |             | 2,518,278               |       |
| Other  receivables                                                                                      |       | 106,193                |             | 185,046                 |       |
| Inventory                                                                                               |       | 1,969,262              |             | 1,346,217               |       |
| Derivative  instruments                                                                                 |       | 1,965,976              |             | 566,609                 |       |
| Prepaid  expenses                                                                                       |       | 1,570,800              |             | 1,008,754               |       |
| Total  current assets                                                                                   |       | 34,272,990             |             | 26,748,278              |       |
|                                                                                                    |       |                   |             |                    |       |
| **Property  and Equipment**                                                                             |       |                   |             |                    |       |
| Land and  improvements                                                                                  |       | 2,769,067              |             | 2,762,708               |       |
| Buildings                                                                                               |       | 15,769,737             |             | 15,768,603              |       |
| Processing  equipment                                                                                   |       | 33,843,012             |             | 32,910,303              |       |
| Grain  handling equipment                                                                               |       | 5,285,068              |             | 5,264,448               |       |
| Rail and  other equipment                                                                               |       | 1,403,188              |             | 1,342,950               |       |
| Furniture  and fixtures                                                                                 |       | 196,726                |             | 195,298                 |       |
| Construction  in progress                                                                               |       | 238,046                |             | 713,898                 |       |
|                                                                                                    |       | 59,504,844             |             | 58,958,208              |       |
| Less  accumulated depreciation                                                                          |       | 10,007,744             |             | 8,829,771               |       |
| Net property  and equipment                                                                             |       | 49,497,100             |             | 50,128,437              |       |
|                                                                                                    |       |                   |             |                    |       |
| **Other  Assets**                                                                                       |       |                   |             |                    |       |
| Long-term  investments                                                                                  |       | 48,000                 |             | 48,000                  |       |
| Deferred  loan costs, net                                                                               |       | 213,508                |             | 237,641                 |       |
| Total other  assets                                                                                     |       | 261,508                |             | 285,641                 |       |
|                                                                                                    |       |                   |             |                    |       |
| **Total  Assets**                                                                                       |       | $                      |  84,031,598 |                    | $          |  77,162,356 |   |
| ** **                                                                                              |       |                   |             |                    |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                |       |                   | ** **       | ** **              |       |
| ** **                                                                                              |       |                   | ** **       | ** **              |       |
| **Current  Liabilities**                                                                                | ** ** | ** **             | ** **       | ** **              |       |
| Current  maturities of long-term debt                                                                   |       | 4,518,960              |             | 4,005,714               |       |
| Trade  accounts payable                                                                                 |       | 1,682,890              |             | 968,667                 |       |
| Accrued  liabilities                                                                                    |       | 5,648,506              |             | 5,669,935               |       |
| Total  current liabilities                                                                              |       | 11,850,356             |             | 10,644,316              |       |
|                                                                                                    |       |                   |             |                    |       |
| **Long-Term Debt,**net of current maturities                                                            |       | 14,762,025             |             | 16,092,315              |       |
|                                                                                                    |       |                   |             |                    |       |
| **Deferred  Compensation**                                                                              |       | 48,000                 |             | 48,000                  |       |
|                                                                                                    |       |                   |             |                    |       |
| **Commitments  and Contingencies**                                                                      |       |                   |             |                    |       |
|                                                                                                    |       |                   |             |                    |       |
| **Minority  Interest**                                                                                  |       | 22,996,586             |             | 20,209,574              |       |
|                                                                                                    |       |                   |             |                    |       |
| **Members’  Equity**                                                                               |       |                   |             |                    |       |
| Member  contributions, 10,941 units issued and outstanding at December 31, 2005 and  September 30, 2005 |       | 10,842,237             |             | 10,842,237              |       |
| Retained  earnings                                                                                      |       | 23,532,394             |             | 19,325,914              |       |
| Total  members’ equity                                                                             |       | 34,374,631             |             | 30,168,151              |       |
|                                                                                                    |       |                   |             |                    |       |
| **Total  Liabilities and Members’ Equity**                                                         |       | $                      |  84,031,598 |                    | $          |  77,162,356 |   |

 

Notes to Condensed ConsolidatedFinancial Statements are an integral part of this Statement.

 

2

----

 

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

** **

CondensedConsolidated Statement of Operations

 
| ** **                                                  | ** ** | **Three  Months Ended  December 31  2005** | ** **       | **Three  Months Ended  December 31  2004** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **(Unaudited)**                            | ** **       | **(Unaudited)**                            | ** ** |
|                                                        |       |                                       |             |                                       |       |
| **Revenues**                                                |       | $                                          |  23,141,931 |                                       | $          |  22,975,735 |   |
|                                                        |       |                                       |             |                                       |       |
| **Cost of Goods Sold**                                      |       | 14,328,756                                 |             | 16,300,232                                 |       |
|                                                        |       |                                       |             |                                       |       |
| **Gross Profit**                                            |       | 8,813,175                                  |             | 6,675,503                                  |       |
|                                                        |       |                                       |             |                                       |       |
| **Operating Expenses**                                      |       | 1,717,462                                  |             | 1,463,964                                  |       |
|                                                        |       |                                       |             |                                       |       |
| **Operating Income**                                        |       | 7,095,713                                  |             | 5,211,539                                  |       |
|                                                        |       |                                       |             |                                       |       |
| **Other Income (Expense)**                                  |       |                                       |             |                                       |       |
| Interest income                                             |       | 144,782                                    |             | 11,984                                     |       |
| Interest expense                                            |       | (300,887                                   | )                | (270,575                                   | )          |
| CCC Bio-Energy income                                       |       | 25,565                                     |             | 17,300                                     |       |
| Grants and other income                                     |       | 28,319                                     |             | 23,316                                     |       |
| Total other expense, net                                    |       | (102,221                                   | )                | (217,975                                   | )          |
|                                                        |       |                                       |             |                                       |       |
| **Net Income Before Minority Interest**                     |       | 6,993,492                                  |             | 4,993,564                                  |       |
|                                                        |       |                                       |             |                                       |       |
| **Minority Interest in Subsidiary Income**                  |       | 2,787,012                                  |             | 1,992,348                                  |       |
|                                                        |       |                                       |             |                                       |       |
| **Net Income**                                              |       | $                                          |  4,206,480  |                                       | $          |  3,001,216 |   |
|                                                        |       |                                       |             |                                       |       |
| **Weighted Average Units Outstanding - Basic  and Diluted** |       | 10,941                                     |             | 10,941                                     |       |
|                                                        |       |                                       |             |                                       |       |
| **Net Income Per Unit - Basic and Diluted**                 |       | $                                          |  384.47     |                                       | $          |  274.31 |   |

 

Notes to Condensed ConsolidatedFinancial Statements are an integral part of this Statement.

 

3

----

 

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

 

CondensedConsolidated Statement of Cash Flows

 
| ** **                                                        | ** ** | **Three  Months Ended  December 31  2005** | ** **        | **Three  Months Ended  December 31  2004** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|-------------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **(Unaudited)**                            | ** **        | **(Unaudited)**                            | ** ** |
| **Cash Flows from Operating Activities**                          |       |                                       |              |                                       |       |
| Net income                                                        |       | $                                          |  4,206,480   |                                       | $          |  3,001,216 |   |
| Adjustments to reconcile net income to net  cash from operations: |       |                                       |              |                                       |       |
| Depreciation and amortization                                     |       | 1,202,106                                  |              | 916,427                                    |       |
| Minority interest in subsidiary’s income                     |       | 2,787,012                                  |              | 1,992,348                                  |       |
| Change in assets and liabilities:                                 |       |                                       |              |                                       |       |
| Receivables                                                       |       | 1,101,165                                  |              | (278,134                                   | )          |
| Restricted cash                                                   |       | —                                     |              | 146,021                                    |       |
| Inventory                                                         |       | (623,045                                   | )                 | 190,647                                    |       |
| Derivative instruments                                            |       | (1,399,367                                 | )                 | 1,856,718                                  |       |
| Prepaid expenses                                                  |       | (562,046                                   | )                 | (295,989                                   | )          |
| Accounts payable                                                  |       | 714,223                                    |              | 282,171                                    |       |
| Accrued liabilities                                               |       | (21,429                                    | )                 | 560,248                                    |       |
| Net cash provided by operating activities                         |       | 7,405,099                                  |              | 8,371,673                                  |       |
|                                                              |       |                                       |              |                                       |       |
| **Cash Flows from Investing Activities**                          |       |                                       |              |                                       |       |
| Proceeds from investments                                         |       | 1,987,420                                  |              | —                                     |       |
| Capital expenditures                                              |       | (546,636                                   | )                 | (574,425                                   | )          |
| Net cash provided by (used in) investing  activities              |       | 1,440,784                                  |              | (574,425                                   | )          |
|                                                              |       |                                       |              |                                       |       |
| **Cash Flows from Financing Activities**                          |       |                                       |              |                                       |       |
| Payments of short-term debt                                       |       | —                                     |              | (38,102                                    | )          |
| Payments of long-term debt                                        |       | (817,044                                   | )                 | (5,404,343                                 | )          |
| Net cash used in financing activities                             |       | (817,044                                   | )                 | (5,442,445                                 | )          |
|                                                              |       |                                       |              |                                       |       |
| **Net increase in cash and equivalents**                          |       | 8,028,839                                  |              | 2,354,803                                  |       |
|                                                              |       |                                       |              |                                       |       |
| **Cash and Equivalents –**Beginning  of Period               |       | 14,135,954                                 |              | 3,907,380                                  |       |
|                                                              |       |                                       |              |                                       |       |
| **Cash and Equivalents –**End  of Period                     |       | $                                          |   22,164,793 |                                       | $          |   6,262,183 |   |
| ** **                                                        |       |                                       |              |                                       |       |
| **Supplemental Cash Flow Information**                            |       |                                       |              |                                       |       |
| Cash paid during the year for:                                    |       |                                       |              |                                       |       |
| Interest                                                          |       | $                                          |   289,210    |                                       | $          |   288,340 |   |
|                                                                   |            |                                            |                   |                                            |            |  |  |  |  |

 

Notes to Condensed ConsolidatedFinancial Statements are an integral part of this Statement.

 

4

----

 

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

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

December 31, 2005

** **

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The accompanying condensedquarterly consolidated financial statements represent Little Sioux CornProcessors, LLC and Subsidiary. See Note 1 to the consolidated financialstatements included in the Form 10-K for the fiscal year endedSeptember 30, 2005. That note discusses the consolidation. As used in thisreport in Form 10-Q, the “Company” represents Little Sioux Corn Processors, LLC(LLC) and its subsidiary LSCP, LLLP (LSCP).

 

The condensed consolidatedquarterly financial statements are unaudited. These statements include alladjustments (consisting of normal recurring accruals) that we considerednecessary to present a fair statement of the results of operations, financialposition, and cash flows. The results reported in these condensed, consolidatedfinancial statements should not be regarded as necessarily indicative ofresults that may be expected for the entire year.

 

*Nature of Business*

 

The Company operates a 52million gallon ethanol plant, located near Marcus, Iowa. The plant commencedoperations in April 2003. In July 2005, the Company completed itsexpansion, from a 40 million gallon plant to 52 million gallon plant. TheCompany sells its production of ethanol, distiller’s grains and solubles, andmodified wet distillers grains with solubles in the continental United States.

 

*Revenue Recognition*

 

Revenue from the sale of theCompany’s products is recognized at the time title to the goods and all risksof ownership transfer to the customers. This generally occurs upon shipment tothe customer or when the customer picks up the goods.

 

The Company records revenuefrom federal and state incentive programs related to the production of ethanolwhen the Company has sold the ethanol and completed all the requirements of theapplicable incentive program.

 

**2. DERIVATIVE INSTRUMENTS**

 

At December 31, 2005 andSeptember 30, 2005, the Company had recorded an asset for derivativeinstruments related to corn and natural gas options, and futures positions of$1,905,852 and $496,853, respectively. None of the positions open at December31, 2005 are designated as fair value or cash flow hedges. The Company hasrecorded a gain of $645,272 and a loss $1,358,848 in cost of goods sold relatedto its derivative instruments for the three months ended December 31, 2005 and2004, respectively.

 

AtDecember 31, 2005 and September 30, 2005, the Company had an interest rate capas described in Note 5 with a fair value of $60,124 and $69,756, respectively,recorded as an asset with derivative instruments. The interest rate cap was notdesignated as a cash flow hedge. The Company offset interest expense with a$9,632 loss and $8,164 gain, on the interest rate cap, respectively, for thethree months ended December 31, 2005 and 2004, respectively.

 

5

----

 

**3.  INVENTORY**

 

Inventory consists of thefollowing:
| ** **      | ** ** | **December 31, 2005** | ** ** | **September 30, 2005 *** | ** ** |
|-----------------|------------|-----------------------|------------|--------------------------|------------|
|            |       |                  |       |                     |       |
| Raw materials   |       | $                     | 737,928    |                     | $          | 579,568 |   |
| Work in process |       | 355,383               |       | 437,872                  |       |
| Finished goods  |       | 875,951               |       | 328,777                  |       |
| Totals          |       | $                     | 1,969,262  |                     | $          | 1,346,217 |   |

 

* Derived from auditedconsolidated financial statements.

 

**4.  CONSTRUCTION INPROGRESS**

 

Constructionin progress as of December 31, 2005 is approximately $238,000.  The Company estimates its costs to completethe construction of assets not yet placed in service to be approximately$664,000.

 

**5.  REVOLVINGPROMISSORY NOTE**

 

Under the terms of thefinancing agreement with the lending institution, the Company has a revolvingpromissory note of up to $3,500,000, subject to borrowing base limitations. InJuly 2005, the lending institution renewed the revolving promissory note untilMarch 2006.  The revolving promissorynote incurs interest monthly at the one month LIBOR plus 280 basis points.  The Company pays a commitment fee of .125% onthe unused portion of the revolving promissory note.  There were no balances outstanding on therevolving promissory note at December 31, 2005 and September 30, 2005.  The revolving promissory note as well as theterm notes described in Note 6 are subject to protective covenants under acommon financing agreement requiring the Company to maintain various financialratios, including debt service coverage and minimum net worth and workingcapital requirements and secured by all business assets.

 

6

----

 

**6.  LONG–TERM DEBT**

 

Long-term debt consists ofthe following:

 
| ** **                                                                                                                                                                                                    | ** ** | **December 31 2005** | ** **     | **September 30 2005*** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|----------------|------------------------|------------|
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Term note #2 payable to lending  institution, see terms below.                                                                                                                                                | ** ** | **$**                | **12,381,575** |                   | $          | 12,732,447 |   |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Term note #3 payable to lending  institution, see terms below.                                                                                                                                                | ** ** | **6,269,897**        |           | 1,293,643              |       |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Term note #5 payable to lending  institution, see terms below.                                                                                                                                                |       |                 |           | 5,400,000              |       |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| 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.                             | ** ** | **128,472**          |           | 138,889                |       |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| 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.                                           | ** ** | **139,757**          |           | 149,986                |       |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Note payable  to Iowa Department of Economic Development, due in sixty monthly installments  beginning August 1, 2004 of $1,167 without interest, payable in full on July  1, 2009, secured by all equipment. | ** ** | **189,000**          |           | 192,500                |       |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Capital  lease obligation, due in monthly installments initially totaling $6,658  commencing April 1, 2003 including implicit interest at 3.67% through March  1, 2008, secured by leased equipment.          | ** ** | **172,284**          |           | 190,564                |       |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Totals                                                                                                                                                                                                        | ** ** | **$**                | **19,280,985** |                   | $          | 20,098,029 |   |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Less amounts due within one year                                                                                                                                                                              | ** ** | **4,518,960**        |           | 4,005,714              |       |
|                                                                                                                                                                                                          |       |                 |           |                   |       |
| Totals                                                                                                                                                                                                        | ** ** | **$**                | **14,762,025** |                   | $          | 16,092,315 |   |

 

----

* Derived from auditedconsolidated financial statements.

 

7

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The Company obtained debtfinancing from a lending institution in the form of a revolving promissory noteand term notes, referred to by the lending institution as term notes #2, #3, #4and #5.  Term note #2 has fixed principal payments due quarterly withinterest at the three month LIBOR plus 280 basis points, which totaled 7.21% atDecember 31, 2005, payable in full on June 1, 2008.  As part of thefinancing agreement, the Company accepted a fixed rate option on term note #2by entering into an interest rate swap which effectively fixes the interestrate on this term note at 5.79% until this term note is repaid on June 1,2008.

 

Term note #3 bears interestat the three month LIBOR plus 280 basis points, which totaled 7.21% at December31, 2005.  Term note #4 bears interest at the one month LIBOR plus 280basis points.  Term notes #3 and #4 are payable in full on June 1,2008.  The Company is required to make quarterly payments of $506,588applied first to accrued interest on term note #4.  The remaining amountis applied to accrued interest on the term note #3 and then to principal untilthis note is repaid in full or until maturity.  After term note #3 isrepaid, payments are applied first to accrued interest and then to principal onthe term note #4 until paid in full or until maturity.  Term note #4 hadno outstanding balance as of December 31, 2005. Term note #4 allows subsequent borrowings up to the original $5,000,000to the extent of principal payments made until maturity and requires a commitmentfee of .25% on any used portion.  Termnote #5 was used to finance the plant expansion from 40 million gallons peryear production to 52 million gallons per year. In October 2005, term note #5 was added to term note #3 with paymentsand terms as described above.

 

As part of the financingagreement, the premium above the LIBOR on the term notes and revolvingpromissory note has been reduced based on a financial ratio from the original380 basis points.  The financing agreement requires an annual servicingfee of $50,000 for five years.  As described in Note 2, the Companyentered into an interest rate cap agreement to reduce the risk of increases ininterest rates.  The interest rate cap agreement is based on a notionalamount of $10,000,000 and caps increases in interest rates at 6.8% on thisamount until June 1, 2006.

 

The estimated maturities oflong-term debt at December 31, 2005 are as follows:

 
| 2006                 |   | $         | 4,518,960  |   |
|----------------------|--------|-----------|------------|--------|
| 2007                 |   | 5,466,132 |       |
| 2008                 |   | 9,141,110 |       |
| 2009                 |   | 154,783   |       |
| Total long-term debt |   | $         | 19,280,985 |   |

 

8

----

 

**7. MEMBERS’ EQUITY**

 

On January 17, 2006, theBoard of Director declared a distribution of $15,361,000 from LSCP to thepartners, which was paid in February 2006. The LLC received approximately $9,240,000 of this distribution.  In February 2006, the LLC paid $842.34 perunit to the LLC unit holders.

 

**8.  RELATED PARTY TRANSACTIONS**

 

For the three months endedDecember 31, 2005 and 2004, revenues from the sale of ethanol to Archer DanielsMidland (ADM) were approximately $20,307,000 and $19,592,000,respectively.  ADM markets all of theethanol sold by LSCP and receives a marketing fee.  The Company incurred marketing expenses ofapproximately $117,000 and $119,000, to ADM for the three months ended December31, 2005 and 2004, respectively.  AtDecember 31, 2005 and September 30, 2005, amounts due from ADM approximated 82%of trade accounts receivable.

 

In the three months endedDecember 31, 2005 and 2004, LSCP purchased approximately $991,000 and $1,281,000in corn from members of the LLC, respectively.

 

**9.  COMMITMENTS AND CONTINGENCIES**

 

ContractualObligations

 

The following table providesinformation regarding the consolidated contractual obligations of the Companyas of December 31, 2005:

 
| ** **                    | ** ** | **Total** | ** ** | **Less than One Year** | ** ** | **One to Three Years** | ** ** |
|-------------------------------|------------|-----------|------------|------------------------|------------|------------------------|------------|
| Long-Term  Debt Obligations   |       | $         | 19,280,985 |                   | $          | 4,518,960              |       | $ | 14,762,025 |   |
| Operating  Lease Obligations  |       | $         | 441,474    |                   | $          | 187,371                |       | $ | 254,103 |   |
| Purchase  Obligations         |       | $         | 19,792,191 |                   | $          | 17,846,021             |       | $ | 1,946,170 |   |
| Total Contractual Obligations |       | $         | 39,514,650 |                   | $          | 22,552,352             |       | $ | 16,926,298 |   |

 

9

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

Weprepared the following discussion and analysis to help you better understandour financial condition, changes in our financial condition, and results ofoperations for the three-month period ended December 31, 2005, compared tothe same period of the prior fiscal year. This discussion should be read inconjunction with the consolidated financial statements and the Management’sDiscussion and Analysis section for the fiscal year ended September 30, 2005,included in the Company’s Annual Report on Form 10-K.

 

**Disclosure Regarding Forward-Looking Statements**

 

Thisreport contains historical information, as well as forward-looking statementsthat involve known and unknown risks and relate to future events, our futurefinancial performance, or our expected future operations and actions. In somecases, you can identify forward-looking statements by terminology 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 similar expressions. Theseforward-looking statements are only our predictions based upon currentinformation and involve numerous assumptions, risks and uncertainties. Ouractual results or actions may differ materially from these forward-lookingstatements for many reasons, including the reasons described in this report.While it is impossible to identify all such factors, factors that could causeactual results to differ materially from those estimated by us include:

 

•           Overcapacity within the ethanol industry;

•           Actual ethanol, distillers grains and corn oil production varying fromexpectations;

•           Availability and costs of products and raw materials, particularly cornand natural gas;

•           Changes in the price and market for ethanol, distillers grains and cornoil;

•           Our ability to market and our reliance on third parties to market ourproducts;

•              Changesin or elimination of governmental laws, tariffs, trade or other controls orenforcement practices such as:

—           national, state or local energy policy;

—           federal ethanol tax incentives;

—           legislation establishing a renewable fuel standard or other legislationmandating the use of ethanol or other oxygenate additives;

—           state and federal regulation restricting or banning the use of MTBE; or

—           environmental laws and regulations that apply to our plant operationsand their enforcement;

•           Changes in the weather or general economic conditions impacting theavailability and price of corn and natural gas;

•           Total U.S. consumption of gasoline;

•           Fluctuations in petroleum prices;

•           Changes in plant production capacity or technical difficulties inoperating the plant;

•           Costs of construction and equipment;

•           Changes in our business strategy, capital improvements or developmentplans;

•           Results of our hedging strategies;

•           Changes in interest rates or the availability of credit;

•           Our ability to generate free cash flow to invest in our business andservice our debt;

•           Our liability resulting from litigation;

•           Our ability to retain key employees and maintain labor relations;

•           Changes and advances in ethanol production technology;

•           Competition from alternative fuels and alternative fuel additives.

•           Other factors described elsewhere in this report.

 

 

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The cautionary statements referred to in this section also should beconsidered in connection with any subsequent written or oral forward-lookingstatements that may be issued by us or persons acting on our behalf.  We undertake no duty to update these forward-lookingstatements, even though our situation may change in the future. Furthermore, wecannot guarantee future results, events, levels of activity, performance, orachievements.  We caution you not to putundue reliance on any forward-looking statements, which speak only as of thedate of this report.  You should read this report and the documents thatwe reference in 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 Corn Processors, L.L.C. (the “Company”) is an Iowa limitedliability company that owns the sole general partnership interest of LSCP,LLLP, (the “Partnership”) an Iowa limited liability limited partnership.  As general partner, we manage the businessand day-to-day operations of the Partnership’s 52 million gallon per yearethanol plant located near Marcus, Iowa in northwest Iowa.  We currently own a 60.15% ownership interestin LSCP, LLLP.  The Company and its subsidiary, LSCP, LLLP, arecollectively referred to in this report as “LSCP,” “we,” or “us.”

 

Since April 2003, we have been engaged in the production ofethanol and distillers grains at our ethanol plant.  During fiscal year 2005, we underwent a plantexpansion which increased the ethanol production capacity of our plant from 40million gallons per year to 52 million gallons annually.  In October 2005, we completed installationof the corn oil segregation unit and began producing corn oil at our plant.  Prior to installation of the corn oilsegregation unit, the corn oil had been sold as an energy component of ourdistillers grains.  

 

Our revenues are derivedfrom the sale and distribution of our ethanol, distillers grains and corn oilthroughout the continental United States. Corn is supplied to us primarily from local agricultural producers andfrom purchases of corn on the open market. After processing the corn, ethanolis sold to ADM, which subsequently markets and sells the ethanol to gasolineblenders and refineries located throughout the continental United States. The price that we receive from the sale of ethanol to ADM is based upon theaverage price that ADM receives from the sale to its customers of ethanoloriginating from (i) our plant, (ii) ADM’s plant in Marshall,Minnesota and (iii) ADM’s plant in Columbus, Nebraska, minus a fee.  Exceptdistillers grains we sell directly to local farmers, our distillersgrains are sold through Commodity Specialist Company (“CSC”) which markets andsells the product to livestock feeders.  For our distillers grains,we receive a percentage of the selling price actually received by CSC inmarketing the distillers grains to its customers.  In October 2005, we entered into amarketing agreement with United Bio Energy, LLC (“UBE”) to market and sell allthe corn oil we produce.  The price that we receive from the sale of cornoil to UBE is based upon the price that UBE receives from the sale to itscustomers, minus a fixed fee.

 

We are subject to industry-wide factors that affect our operatingincome and cost of production.  Ouroperating results are largely driven by the prices at which we sell ethanol,distillers grain and corn oil and the costs related to their production. Historically, the price of ethanol tends to fluctuate in the samedirection as the price of unleaded gasoline and other petroleum products.  Surplus ethanol supplies also tend to putdownward price pressure on ethanol.  Inaddition, the price of ethanol is generally influenced by factors such asgeneral economic conditions, the weather, and government policies andprograms.  The price of distillers grains is generally influenced bysupply and demand, the price of substitute livestock feed, such as corn andsoybean meal, and other animal feed proteins. Surplus grain supplies also tend to put downward price pressure ondistillers grains.  In addition, ourrevenues are also impacted by such factors as our dependence on one or a fewmajor customers who market and distribute our products; the intenselycompetitive nature of our industry; possible legislation at the federal, state,and/or local level; changes in federal ethanol tax incentives.

 

Our two largest costs of production are corn and natural gas.  The cost of corn is affected primarily bysupply and demand factors such as crop production, carryout, exports,government policies and programs, risk management and weather, much of which wehave no control.  Natural gas pricesfluctuate with the energy complex in general. Over the last few years, natural gas prices have trended higher thanaverage and it appears prices will continue to trend higher due to the highprice of alternative fuels such as fuel oil. Our costs of production are affected by the cost of complying with theextensive environmental laws that regulate our industry.

 

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**Results of Operations for the ThreeMonths Ended December 31, 2005 and 2004**

 

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, 2005 and2004:

 
| ** **                              | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Income Statement Data**               | ** ** | **Amount**                 | ** ** | **%**                      | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $                          | 23,141,931 |                       | 100.0      |   | $ | 22,975,735 |   | 100.0 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Cost of  Goods Sold                     |       | $                          | 14,328,756 |                       | 61.9       |   | $ | 16,300,232 |   | 70.9 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Gross Profit                            |       | $                          | 8,813,175  |                       | 38.1       |   | $ | 6,675,503 |   | 29.1 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Operating  Expenses                     |       | $                          | 1,717,462  |                       | 7.4        |   | $ | 1,463,964 |   | 6.4 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Operating  Income                       |       | $                          | 7,095,713  |                       | 30.7       |   | $ | 5,211,539 |   | 22.7 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Other Income  (Expense)                 |       | $                          | (102,221   | )                          | (0.5       | ) | $ | (217,975 | ) | (1.0 | ) |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Net Income  Before Minority Interest    |       | $                          | 6,993,492  |                       | 30.2       |   | $ | 4,993,564 |   | 21.7 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Minority  Interest in Subsidiary Income |       | $                          | 2,787,012  |                       | 12.0       |   | $ | 1,992,348 |   | 8.7 |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Net Income                              |       | $                          | 4,206,480  |                       | 18.2       |   | $ | 3,001,216 |   | 13.1 |   |

 

*Revenues*

 

There was only a minorchange in revenues from the three months ended December 31, 2005 ascompared to the three months ended December 31, 2004.

 

Revenue from the sale ofethanol increased 3% from the three months ended December 31, 2004 to thethree months ended December 31, 2005.  The increase was due primarilyto a 5% increase in the average price per gallon, offset by a 2% decrease insales volume.  In the first fiscalquarter of 2005, ethanol prices have remained historically strong and areexpected to remain favorable, although certain conditions could alter thisview.  Increased demand, firm crude oil and gas markets, publicacceptance, and positive political signals have all contributed to a strengtheningof ethanol prices.  However, due to the increase in the supply of ethanolfrom the number of new ethanol plants scheduled to begin production and theexpansion of current plants, management believes the industry will need tocontinue to grow demand in order to sustain these higher price levels.  According to the Renewable Fuels Association,at December 31, 2005, there were 95 ethanol plants in operation nationwidethat with the capacity to produce more than 4.3 billion gallons annually, withan additional 31 new plants and nine expansions under construction expected toadd an additional estimated 1.5 billion gallons of annual productioncapacity.  Unless the new supply is equally met with demand, downwardpressure on ethanol prices could occur. If ethanol prices start to decline, ourearnings will decline in the process, especially if corn costs fail to remainlow and stable.  Areas where demand mayincrease are new markets in New Jersey, Pennsylvania, Massachusetts, NorthCarolina, South Carolina, Michigan, Tennessee, Louisiana and Texas.  According to the Renewable Fuels Association,Minnesota may also generate additional demand due to the recent passage ofstate legislation mandating a 20% ethanol blend in its gasoline. Montana passeda similar mandate this year, but it will not go into effect until 60 milliongallons of ethanol are produced in the state.

 

Our revenues and profits are impacted by federal andethanol supports and tax incentives. Changes to these supports or incentives could significantly impactdemand for ethanol.  The passage of theVolumetric Ethanol Excise Tax Credit (“VEETC”) is expected to provide theflexibility necessary to expand ethanol blending into higher blends of ethanolsuch as E85, E diesel and fuel cell markets. In addition, the most recent ethanol supports are contained in theEnergy Policy Act of 2005. Most notably, the Act creates a Renewable FuelsStandard (“RFS”) which is

 

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expectedto favorably impact the ethanol industry by enhancing both the production anduse of ethanol.  The RFS is a nationalflexible program 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. The RFS requires refiners to use 4 billion gallons of renewable fuels in2006, increasing to 7.5 billion gallons by 2012.

 

On December 28, 2005,the EPA released interim rules governing the implementation of the 2006RFS requirement.  The EPA’s interim rule imposesa collective compliance approach, which means the requirement for 2006 fuel useis determined in the aggregate rather than on a refiner-by-refiner basis.  The EPA adopted this approach for 2006because current uncertainties regarding the RFS might result in unnecessarilyhigh costs of compliance if each party was required to independentlycomply.  Although there is not arequirement for individual parties to demonstrate compliance in 2006, the EPAfound that increases in ethanol production and projections for future demandindicate that the 2006 volume is likely to be met.  However, in the unlikely event that the RFSis not met in 2006, the EPA expects to adjust the volume requirement in 2007 tocover the deficit.  There are no otherconsequences for failure to collectively meet the 2006 standard.  The EPA expects to promulgate morecomprehensive regulations by August 8, 2006, but the interim rules andcollective compliance approach are expected to apply for the entire 2006 calendaryear.  In 2007 and subsequent years, theEPA expects to specifically identify liable parties, determine the applicableRFS, and develop a credit trading program. Further, the standards for compliance, record-keeping and reporting areexpected to be clarified.

 

Since the current nationalethanol production capacity exceeds the 2006 RFS requirement, it is management’sbelief that other market factors are primarily responsible for current ethanolprices.  Accordingly, it is possible that the RFS requirements may notsignificantly impact ethanol prices in the short-term.  For instance, ifgasoline prices continue to trend higher, consumers will look for lower pricedalternative fuels. The Consumer Federation of America recently published areport that states that consumers could save up to $0.08 per gallon at the pumpif ethanol were blended at 10%.  Since ethanol blended fuel is a cheaperalternative for consumers, the demand for such ethanol blended fuel couldincrease thus increasing the overall demand for ethanol.  This couldpositively affect our earnings.  However,the increased requirement of 7.5 billion by 2012 is expected to support ethanolprices in the long term.  A greater supply of ethanol on the market fromthese additional plants and plant expansions could reduce the price we are ableto charge for our ethanol.  This would have a negative impact on ourearnings.

 

Demand for ethanol may also increase as a result ofincreased consumption of E85 fuel. E85 fuel is a blend of 70% to 85% ethanol andgasoline. According to the Energy Information Administration, E85 consumptionis projected to increase from a national total of 11 million gallons in 2003 to47 million gallons in 2025. E85 can be used as an aviation fuel, as reported bythe National Corn Growers Association, and as a hydrogen source for fuel cells.According to the Renewable Fuels Association, there are currently more than 5million flexible fuel vehicles capable of operating on E85 in the United Statesand automakers such as Ford and General Motors have indicated plans to produceseveral million more flexible fuel vehicles per year.  The American Coalition for Ethanol reportsthat there are currently approximately 600 retail gasoline stations supplyingE85.  However, this remains a relativelysmall percentage of the total number of U.S. retail gasoline stations, which isapproximately 170,000.

 

Revenue from the sale ofdistiller’s grains decreased 18% from the three months ended December 31,2004 to the three months ended December 31, 2005.  The decrease was due to a decrease in thesales price of distillers grains.  Thedecrease in price of distiller’s grains was largely due to a decrease in theprice of corn and soybeans, which are the components of distiller’s grains’principal competition in the feed markets, namely corn and soybean meal. The lower corn and soybean prices were the result of an abundant supply ofgrains and feed protein due to a large grain harvest in 2005, the secondlargest on record, and a large grain carryout into 2006.  Distillers grains prices are expected toremain low in the foreseeable future unless the price of corn and soybean mealincreases.

 

In October 2005, wecompleted installation of our corn oil segregation unit and are operating theunit at below capacity.  We have not yetoperated the corn oil segregation unit at full capacity.  We intend toinitially market the unrefined corn oil to the animal feed and bio-dieselmarkets after startup to assure that quality specifications can bemaintained.  In the long term, the corn oil co-product could be marketedfor human consumption.  Specific details regarding market penetration intohuman food are unknown at this time since corn oil

 

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extraction in a dry mill situation such as ours hasnot yet been proven, nor has its suitability for human consumption beendetermined.

 

*Cost of Goods Sold*

 

Our cost of goods sold as apercentage of revenues were 61.9% and 70.9% for the three months ended December 31,2005 and 2004 respectively.  The decrease in our cost of goods sold fromperiod to period is primarily due to our reduced corn costs, reduced costs forour derivative instruments, offset by significantly increased costs for ournatural gas.

 

The average price per bushelwe paid for our corn decreased approximately 16% for the three months ended December 31,2005 compared to the three months ended December 31, 2004.  Theselower corn costs from the first quarter of fiscal 2006 are a result offavorable market conditions.  The 2005national corn crop was the second largest on record with national production atapproximately 11.11 billion bushels, exceeded only by the 2004 crop (atapproximately 11.8 billion bushels), with Iowa’s corn production atapproximately 2.162 billion bushels.  Thelarge 2005 corn crop allowed ethanol plants to purchase corn inexpensivelythroughout fourth calendar quarter of 2005. As a result, profit margins were much higher for many ethanol plants in2005.  Due to the large 2005 corn crop, we anticipate corn costs willremain low and stable into the 2005-2006 marketing year.  However, we expect the grain market to beginfocusing on prospects for the 2006 crop, where variables such as rainfall,planting dates, and temperatures will likely cause market uncertainty andcreate corn price volatility as the growing season begins.  Recently, many market analysts are predictinglower U.S. corn acreage this year due to higher fertilizer prices caused byhigh natural gas prices, decreased domestic fertilizer production and increasedglobal demand for fertilizers.  Although carryout supplies for 2006marketing year appear adequate, any production shortfall during the 2006growing season will create volatility and may increase our cost of corn.

 

The cost of our natural gasincreased 61% for the three months ended December 31, 2005 compared to thethree months ended December 31, 2004. This increase resulted from higher natural gas costs per MMBTU which wasprimarily due to an increase in the price of crude oil and relatedproducts.  Natural gas prices, along withother energy sources, saw a significant increase during late summer 2005 as aresult of Hurricane Katrina and Hurricane Rita and the interruption ofproduction in the Gulf of Mexico, the home of the largest natural gas hubs inthe United States.  As the damage fromthe hurricane became apparent, natural gas prices substantially increased,nearly doubling.  It is currently unknownhow the damage will affect long-term prices of natural gas.  Future hurricanes in the Gulf of Mexico couldcause similar or greater uncertainty.  Inaddition, the price of natural gas has historically fluctuated with seasonalweather changes, often experiencing price spikes during extended coldspells.  Global demand for natural gas isalso expected to continue to increase, which may further drive up prices. We look for continued volatility in the natural gas market and expect thistrend of much higher than average natural gas prices to continue throughcalendar year 2006.  Any ongoingincreases in the price of natural gas will increase our cost of production andmay negatively impact our future profit margins.

 

Cost of goods sold includes a gain of $645,272 forthe three months ended December 31, 2005 related to our corn and naturalgas derivative instruments, up from a loss of $1,358,849 in the three monthsended December 31, 2004.  Werecognize the gains or losses that result from the changes in the value of ourderivative instruments in cost of goods sold as the changes occur.  Ascorn and natural gas prices fluctuate, the value of our derivative instrumentsare impacted, which affects our financial performance.  For the threemonths ended December 31, 2005, the increases in the value of ourderivative instruments partially offset the increases in the cash prices forcorn and natural gas.  We anticipate continued volatility in our cost ofgoods sold due to the timing of the changes in value of the derivativeinstruments relative to the cost and use of the commodity being hedged.

 

*Operating Expenses*

 

Our operating expenses as apercentage of revenue were approximately 7.4% and 6.4% for the three monthsended December 31, 2005 and 2004 respectively.  This increase isprimarily due to larger depreciation expenses resulting from our expansioncompleted in fiscal 2005.

 

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*Operating Income*

 

Our income from operationsfor the three months ended December 31, 2005 totaled $7,095,713 comparedto $5,211,539 for the three months ended December 31, 2004.  This 36%increase was a result of the reduced cost of goods sold for the period,compared to the same period last year.

 

*Other Income and Expense*

 

Our other income and expensefor the three months ended December 31, 2005 was an expense of $102,221compared to an expense of $217,975 for the three months ended December 31,2004.  This reduction in expenses resulted from increases in interestincome which was $144,782 for the three months ended December 31, 2005compared to $11,984 for the three months ended December 31, 2004.

 

Our USDA Commodity CreditCorporation Bioenergy Program payments were $25,565 for the three months ended December 31,2005 compared to $17,300 for the three months ended December 31,2004.  This increase is attributable to an increase in ethanol productionfrom the same period last year as a result of our plant expansion.  Although Bioenergy Program incentive programswere once a significant source of income for us, the programs are much lesssignificant because of the means by which the programs structure, fund, andcondition the payments.  Payments under the Bioenergy Program are basedupon increases in ethanol production relative to previous years.  Due to the size of our plant expansion, anyprogram payments we receive in the future will be significantly less than ouroriginal payments and we do not expect future program payments to have the sameimpact on cash flow as they have in the past. The receipt of these additional program payments is subject to thecontinued availability of program funds, which may be reduced as a result ofincreased participation in the program by new and expanding plants as well asdecreased federal funding.  In addition,the accrued income from the Bioenergy Program is significantly less than the amountwe are eligible for based on our production.  This reduction is attributedto an increase in the number of eligible participants in the program, whichreduces our share of the payments.  We do not anticipate receiving unpaidamounts for past pro rata reductions.  The receipt of these additionalprogram payments is subject to the continued availability of program funds,which may be reduced as a result of increased participation in the program bynew and expanding plants as well as decreased federal funding.  TheBioenergy Program is scheduled to expire on September 30, 2006.

 

Duringthe first fiscal quarter of 2006, we were involved in a dispute with ADM regarding the actual priceADM is required to pay for the ethanol it purchases from us under the ethanolmarketing agreement. Pursuant to our ethanol marketing agreement with ADM, theprice ADM pays us for our ethanol is calculated by averaging the price ADMreceives for all the ethanol it sells originating from (i) our plant, (ii) ADM’splant in Marshall, Minnesota and (iii) ADM’s plant in Columbus,Nebraska.  In October 2005, ADM contacted us and claimed that that sincethe inception of the ethanol marketing agreement, ADM has mistakenly failed tofactor in its hedging costs for the ethanol sold from Marshall and Columbus,which resulted in an overpayment to us of approximately $3.9 million.  In support of its claim, ADM provided us withdocumentation demonstrating how the hedging costs incurred by ADM when it soldMarshall and Columbus ethanol would affect the price received by us forethanol.  After engaging independentaccountants to review ADM’s claimed overpayment, we orally offered in December 2005 to settle the claim bypaying ADM approximately $3,900,000 less actual legal and accounting expenses incurredin connection with investigation and settlement of the claimedoverpayment.  ADM has orally agreed toaccept our settlement offer.  We have notyet executed a written settlement agreement.

 

**Changes in Financial Condition forthe Three Months Ended December 31, 2005**

 

Consolidated assets totaled$84,031,598 at December 31, 2005 compared to $77,162,356 at September 30,2005.  Current assets totaled $34,272,990 at December 31, 2005 upfrom $26,748,278 at September 30, 2005.  The change resulted from increasedcash, which was $22,164,793 at December 31, 2005 compared to $14,135,954at September 30, 2005.  We were accumulating cash in anticipation ofa distribution of earnings to the partners and our members and in anticipationof an increase in expenditures resulting from the plant expansion.

 

Consolidated currentliabilities totaled $11,850,356 at December 31, 2005 similar to the$10,644,316 at September 30, 2005.

 

Long-term debt, net ofcurrent maturities, totaled $14,762,025 at December 31, 2005, down from $16,092,315at September 30, 2005, due to our regularly scheduled loan payments.

 

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**Plant Operations and Expansion**

 

On August 9, 2005, the Board of Directors approved plans toproceed with a 40 million gallon per year expansion to our plant.  Wecurrently estimate the cost of the expansion to be approximately $50,000,000and we expect to fund the prospective expansion without additional equity fromour members.  This is a preliminaryestimate and we expect it will change as we continue to gather informationrelating to the expansion.  We intend touse a portion of our cash on hand to help finance the expansion.  Our loan covenants may restrict the amount ofcash we can use for this purpose.  Inaddition, we expect to acquire additional debt to finance the required capitalexpenditure; however, the total amount of debt financing necessary to fund theplant expansion will depend on the amount of grants and government incentiveswe are able to secure.  We anticipateconstruction of the expansion will begin in August 2006 and will becompleted by August 2007.  The expansion may be delayed for a numberof reasons and there is no assurance that the expansion will not be delayedbeyond the anticipated completion date.

 

We have entered intonegotiations with Fagen, Inc. of Granite Falls, Minnesota to expand ourplant’s annual ethanol production capacity by 40 million gallons peryear.  However, we havenot executed a letter of intent or definitive agreement with Fagen, Inc.and there is no assurance that we will be able to do so or that the terms willbe as anticipated.  If our negotiations with Fagen, Inc. aresuccessful, we will be dependent upon Fagen, Inc. and ICM, Inc. fortheir expertise in integrating process and facility design into a constructionand operationally efficient facility which is very important to the success ofthe expansion.  We will depend on Fagen, Inc. and ICM, Inc. for timelycompletion of the expansion of our plant; however, their involvement in otherprojects could delay the commencement and start-up operation of ourexpansion.  If we are unable to finalize a letter of intent or definitiveagreement with Fagen, Inc., we will explore other options to expand theplant.  However, there is no assurance that we will be able to obtain areplacement general contractor.  If we are unable to retain a replacementgeneral contractor, we may be forced to abandon our expansion plans.

 

Management anticipates thatthe plant will continue to operate at or above name-plate capacity of 52million gallons per year for the next 12 months.  We expect to havesufficient cash from cash flow generated by continuing operations, debtfinancing secured to fund plant expansion, current lines of credit through ourrevolving promissory note, and cash reserves to cover the costs of expansion aswell as our usual operating costs over the next 12 months, which consistprimarily of corn supply, natural gas supply, staffing, office, audit, legal,compliance, working capital costs and debt service obligations.  The following is our estimate of our costsfor the next 12 months for the plant as it currently operates (52 MGYproduction capacity):

 

| Corn Costs                        |       | $     | 37,500,000     |       |
|-----------------------------------|------------|-------|----------------|------------|
| General and  Administrative Costs |       | $     | 8,100,000      |       |
| Natural Gas  Costs                |       | $     | 14,200,000     |       |
| Chemical  Costs                   |       | $     | 5,100,000      |       |
| Other  Production Costs           |       | $     | 15,300,000     |       |
| **Total  Operating Costs:**       | ** ** | **$** | **80,200,000** | ** ** |

 

The estimates in the table set forth aboveare based upon our operational experience; however, these are only estimatesand our actual expenses and costs could be much higher due to a varietyof factors outside our control, such as:

 

•                  Changesin the availability and price of corn;

•                  Changesin federal ethanol tax incentives;

•                  Changesin the environmental regulations that apply to our plant operations;

•                  Increasedcompetition in the ethanol industry;

•                  Changesin interest rates or the availability of credit;

•                  Changesin our business strategy, capital improvements or development plans;

•                  Changesin plant production capacity or technical difficulties in operating the plant;

•                  Changesin general economic conditions or the occurrence of certain events causing aneconomic impact in the agriculture, oil or automobile industries; and

•                  Changesin the availability and price of natural gas;

 

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•                  Increasesor decreases in the supply and demand for distillers grains; and

•                  Changesin federal and/or state laws (including the elimination of any federal and/orstate ethanol tax incentives).

 

**Liquidity and Capital Resources**

 

The following table showscash flows for the three months ended December 31, 2005 and 2004:

 
| ** **                                            | ** ** | **Three Months Ended  December 31** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Net cash  from operating activities                   |       | $                                        | 7,405,099  |   | $ | 8,371,673 |   |
| Net cash provided  by (used for) investing activities |       | $                                        | 1,440,784  |   | $ | (574,425 | ) |
| Net cash  used for financing activities               |       | $                                        | (817,044   | ) | $ | (5,442,445 | ) |

 

*Cash FlowFrom Operations*

 

The decrease in net cashflow provided from operating activities for the three months ended December 31,2005 compared to three months ended December 31, 2004 was primarily due toincrease in an unrealized gains from our derivative instruments, an increase infinished goods inventory, and increased collections of receivablebalances.  Our capital needs are being adequately met through cash fromour operating activities and our current credit facilities.

 

*Cash FlowFrom Investing Activities*

 

The increase in net cashflow provided from investing activities for the three months ended December 31,2005 compared to same period in 2004 was primarily due to changes in short-terminvestments.

 

Management estimates thatapproximately $1,000,000 in capital expenditures will be made in the nexttwelve months for general improvements, all of which are expected to befinanced from a portion of cash flows from operations and additional debtfinancing.

 

On August 9, 2005, theBoard of Directors approved plans to proceed with a 40 million gallon per yearexpansion to our plant.  The cost of theexpansion is expected to be approximately $50,000,000, which will be financedusing both a portion of our cash and additional debt to finance the requiredcapital expenditure.  Our expansion projections are based upon ourhistorical operating costs and historical revenues and there is no guarantee orassurance that our past financial performance can accurately predict futureresults especially in connection with expansion.  In addition, theexpansion may cost more and may present additional challenges and risks thatnegatively impact our future financial performance.  We anticipateconstruction of the expansion will begin in August 2006 and will becompleted by August 2007.

 

*Cash Flow From FinancingActivities**.*

 

We used cash to pay down ourdebt by $817,044 for the three months ended December 31, 2005 compared to$5,442,445 for the same period in 2004. During the three months ended December 31, 2004 we made asubstantial payment on our term note #4, which had no outstanding balanceduring three months ended December 31, 2005.

 

**Indebtedness**

 

### ***Short-Term Debt Sources***

### ** **

We have a revolvingpromissory note of up to $3,500,000 with First National Bank of Omaha through March 2006. The interest payable on the revolving promissory note is due monthly at the onemonth LIBOR plus 2.80%.  The revolving promissory note is our operatingline of credit.  We did not have an outstanding balance at December 31,2005 or at December 31, 2004.  The maximum available credit underthis note is based on receivable

 

17

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and inventory balances.  As the balances inthese accounts fluctuate, the amount of available credit on this note may bereduced or increased subject to the maximum of $3,500,000.  The operatingline of credit is subject to protective covenants requiring us to maintainvarious financial ratios.  The operating line of credit is secured by allbusiness assets.

 

#### ***Long-TermDebt Sources***

#### ** **

We have long-term debtfinancing consisting of four term notes held by First National Bank of Omahaand referred to as Term Notes #2, #3, #4 and #5.  At December 31,2005, the principal balance on Term Note #2 was $12,381,575.  Term Note #2is payable in quarterly installments.  Interest on Term Note #2 is at thethree month LIBOR plus 2.80%, which totaled 7.21% as of December 31,2005.  In order to achieve a fixed interest rate on Term Note #2, weentered into an interest rate swap which helps protect our exposure toincreases in interest rates and the swap effectively fixes the interest rate onTerm Note #2 at 5.79% until June 1, 2008. Term Note #2 is payable in full on June 1, 2008.

 

At December 31, 2005,the principal balance on Term Note #3 is $6,269,897.  Term Note #3 ispayable in quarterly installments.  Interest on Term Note #3 is at thethree month LIBOR plus 2.80%, which totaled 7.21% as of December 31,2005.  In order to protect our interest rate exposure on Term Note #3, weentered into an interest rate cap agreement based on a principal amount of$10,000,000.  The financing agreement caps our interest rate at 6.80% forTerm Note #3 until June 1, 2006.  As part of the financing agreement,we have agreed to an annual servicing fee of $50,000 for five years.  Term Note #3 is payable in full on June 1,2008.

 

At December 31, 2005,there was no principal balance on Term Note #4.  Term Note #4 allowsborrowings up to the original principal of $5,000,000 to the extent ofprincipal payments made until maturity and requires a commitment fee of 0.25%on any unused portion.  Term Note #4 ispayable in quarterly installments with interest at the one month LIBOR plus2.80%.  Term Note #4 is payable in full on June 1, 2008.

 

On October 1, 2005, theprincipal balance of $5,400,000 on Term Note #5 was transferred to Term Note #3with payment and terms as described above.  Term Note #5 was theconstruction note used for the plant expansion. Prior to the conversion to TermNote #3, we were required to make interest only payments quarterly.

 

The revolving promissorynote and Term Notes #2, #3 and #4 are subject to numerous protective covenantsrequiring us to maintain various financial ratios.  Our failure to complywith the protective loan covenants or maintain the required financial ratiosmay cause acceleration of the outstanding principal balances on the revolvingpromissory note and terms notes and/or the imposition of fees, charges orpenalties.

 

We have a capital leaseobligation in the amount of $172,284 on which we initially pay monthlyinstallments totaling $6,658, with an implicit interest rate at 3.67%. This obligation is secured by the leased equipment and runs through March 1,2008.

 

We have a note in the amountof $128,472 payable to the Iowa Energy Center on which we pay monthlyinstallments of $3,472 without interest.  This note is secured by realestate, but is subordinated to the term notes.  It matures on January 29,2009.

 

We have a note with FarmersState Bank of Marcus, Iowa in the amount of $139,757 on which we pay monthlyinstallments of $5,921, including interest at 6%.  This note is secured byreal estate, but is subordinated to the term notes.  It matures on January29, 2009.

 

We have a note totaling$189,000 payable to the Iowa Department of Economic Development on which we paymonthly installments of $1,167 without interest. This note is secured by allequipment and matures on July 1, 2009.

 

*ContractualObligations and Commercial Commitments*

 

There were no material changes in the Company’scontractual obligations and commercial commitments during the three monthsended December 31, 2005.

 

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**Distribution to Unit Holders**

 

No distributions were madeto members during the fiscal quarter ended December 31, 2005.  On January 17, 2006 our Board ofDirectors, acting on behalf of the Company as general partner of Partnership,approved a resolution authorizing the distribution of a maximum of $15,361,000of earnings to partners.  The resolutionprovided the authority for the Board of Directors to make a distribution, butdid not require any such distribution.  On the same date, our Board ofDirectors, acting on behalf of the Company, as general partner of thePartnership, declared a distribution of $15,361,000 to the partners.  The Partnership will make the distribution onor before March 1, 2006.  Because we own a 60.15% ownership interestof the partnership, we will receive a distribution of $9,240,240.  We willdistribute $9,216,041, or $842.34 per unit, to our unit holders.  Weexpect that this distribution will not affect our ability to maintain financialcovenants and meet operating costs.

 

**Critical Accounting Estimates**

 

There were no material changes in the Company’saccounting estimates during the three months ended December 31, 2005.

 

**Off-Balance Sheet Arrangements.**

 

We currently have nooff-balance sheet arrangements.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk.**

 

We are exposed to theimpact of market fluctuations associated with interest rates and commodityprices as discussed below. We have no exposure to foreign currency risk as allof its business is conducted in U.S. Dollars. We use derivative financialinstruments as part of an overall strategy to manage market risk. We use cash,futures and option contracts to hedge changes to the commodity prices of cornand natural gas. We do not enter into these derivative financial instrumentsfor trading or speculative purposes, nor do we designate these contracts ashedges for accounting purposes pursuant to the requirements of SFAS 133, *Accounting for Derivative Instruments and Hedging Activities*.

 

**Interest Rate Risk**

 

We are exposed to marketrisk from changes in interest rates. Exposure to interest rate risk resultsfrom holding a revolving promissory note and four term notes which bearvariable interest rates.  Specifically, we have $19,426,090 outstanding invariable rate, long-term debt as of September 30, 2005.  Thespecifics of each note are discussed in greater detail in “**Item 2 – Management’s Discussionand Analysis of Financial Condition and Results of Operations – Indebtedness**.”

 

In order to achieve afixed interest rate on Term Note #2, we entered into an interest rate swapwhich helps 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.  When thethree month LIBOR plus 2.80% exceeds 5.79%, the Company receives payments forthe difference between the market rate and the swap rate.  Conversely,when the three-month LIBOR plus 2.80% is below 5.79%, the Company makespayments for the difference between the market rate and the swap rate.  While our exposure is now greatly reduced,there can be no assurance that the interest rate swap agreement will provide uswith protection in all scenarios.  Forexample, if interest rates were to fall below 5.79%, we would still beobligated pay interest at 5.79% under the interest rate swap agreement.

 

In order to protect ourinterest rate exposure on Term Note #3, we entered into an interest rate capagreement to reduce the risk of increases in interest rates.  The interestrate cap agreement is based on a notional amount of $10,000,000 and capsincreases in interest rates at 6.8% on this amount.  The interest rate cap agreement expires on June 1,2006; however, obligations under Term Note #3 continue until June 1,2008.  Accordingly, when the interestrate cap expires, we will be vulnerable to rising interest rates.

 

19

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At December 31, 2005 and September 30,2005, we had an interest rate cap with a fair value of $60,124 and $69,756,respectively, recorded as an asset with derivative instruments.  Theinterest rate cap was not designated as a cash flow hedge.  We offsetinterest expense with a loss of $9,632 and $8,164 gain, on the interest ratecap for the three months ended December 31, 2005 and 2004, respectively.

 

**Commodity Price Risk**

 

We are also exposed tomarket risk from changes in commodity prices.  Exposure to commodity pricerisk results from our dependence on corn and natural gas in the ethanol productionprocess.  We seek to minimize the risks from fluctuations in the prices ofcorn and natural gas through the use of derivative instruments.  Inpractice, as markets move, we actively manage our risk and adjust hedgingstrategies as appropriate.  Although we believe our hedge positionsaccomplish an economic hedge against our future purchases, they are notdesignated as such for hedge accounting purposes, which would match the gain orloss 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.

 

The immediate recognition ofhedging gains and losses can cause net income to be volatile from quarter toquarter due to the timing of the change in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged.  At December 31,2005 and September 30, 2005, the fair value of our derivative instrumentsfor corn and natural gas is an asset in the amount of $1,905,852 and $496,853,respectively.  There are several variables that could affect the extent towhich our derivative instruments are impacted by price fluctuations in the costof corn or natural gas.  However, it is likely that commodity cash priceswill have the greatest impact on the derivatives instruments with deliverydates nearest the current cash price.

 

To manage our corn pricerisk, our hedging strategy is designed to establish a price ceiling and floorfor our corn purchases.  We have taken a net long position on our exchangetraded futures and options contracts, which allows us to offset increases ordecreases in the market price of corn.  The upper limit of loss on ourfutures contracts is the difference between the contract price and the cashmarket price of corn at the time of the execution of the contract.  The upper limit of loss on our exchangetraded and over-the-counter option contracts is limited to the amount of thepremium we paid for the option.

 

We estimate that ourexpected corn usage is approximately 18 to 19 million bushels per year for theproduction of 52 million gallons of ethanol.  We have price protection forapproximately 65% of our expected corn usage for fiscal year ended September 30,2006 and approximately 50% of our usage for fiscal year 2007 using CBOT futuresand options and Over-the-Counter option contracts.  As we move forward,additional protection may be necessary.  As corn prices move in reactionto market trends and information, our income statement will be affecteddepending on the impact such market movements have on the value of ourderivative instruments.  As we move forward, additional price protectionmay be required to solidify our margins into fiscal year 2007.  Dependingon market movements, crop prospects and weather, these price protectionpositions may cause immediate adverse effects, but are expected to producelong-term positive growth for us.

 

To manage our natural gasprice risk, we entered into a natural gas purchase agreement with our supplierto supply us with natural gas.  Thispurchase agreement fixes the price at which we purchase natural gas.  Weestimate that we have forward contracts in place for approximately 95% of ournatural gas needs through September 2006.  The forward contractsprovide for approximately 50% higher gas prices for the 2005-2006 winter monthsthan for the 2004-2005 winter months.  In addition to procuring naturalgas requirements through summer and fall 2006, we have purchased approximately50% of our fall and winter 2006 and 2007 natural gas requirements utilizingboth cash, futures and options contracts.  We may also purchase additionalnatural gas requirements for the winter 2006 months and 2007 calendar years aswe attempt to further reduce our susceptibility to price increases.

 

At the time we purchasedprice protection for natural gas, the market was experiencing a great deal ofprice uncertainty.  Due to this uncertainty, we purchased amounts for mostof the plant’s needs and implemented derivative instruments on a portion of ourrequirements to allow us to benefit in the event natural gas pricesdeclined.  Energy sector prices have increased and natural gas, as aportion of the total energy market, has responded with higher prices to be costcompetitive with its alternatives.  In the future, we may not be ableto secure natural gas for prices less than current market price and we may notrecover high costs of production resulting from high natural

 

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gas prices, which may raise our costs of production.

 

A sensitivity analysis hasbeen prepared to estimate our exposure to corn and natural gas price risk. Thetable presents the fair value of our derivative instruments as of December 31,2005 and September 30, 2005 and the potential loss in fair value resultingfrom a hypothetical 10% adverse change in such prices. The fair value of thepositions is a summation of the fair values calculated by valuing each netposition at quoted market prices as of the applicable date. The results of thisanalysis, which may differ from actual results, are as follows:

 

| **Year Ended**           | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse Change  — Market Risk** | ** ** |
|--------------------------|------------|----------------|------------|----------------------------------------------------------------|------------|
| December 31,  2005  |       | 1,905,852      |       | $                                                              | 190,585    |   |
| September 30,  2005 |       | $              | 496,853    |                                                           | $          | 49,685 |   |
|                          |            |                |            |                                                                |            |  |  |

 

**Item 4.  Controls and Procedures.**

 

Our management, including our President and ChiefExecutive Officer (the principal executive officer), Stephen Roe, along withour Chief Financial Officer (the principal financial officer), Gary Grotjohn,have reviewed and evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended) as of December 31, 2005.  Basedupon this review and evaluation, these officers have concluded that ourdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods required by the forms and rules of the Securities and ExchangeCommission; and to ensure that the information required to be disclosed by anissuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to our management including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Our management, includingour principal executive officer and principal financial officer, have reviewedand evaluated any changes in our internal control over financial reporting thatoccurred as of December 31, 2005 and there has been no change that hasmaterially affected or is reasonably likely to materially affect our internalcontrol over financial reporting.

 

**PART II.     OTHER INFORMATION**

 
| **Item 1.** | **Legal  Proceedings.**                                           |
|-------------|-------------------------------------------------------------------|
|        |                                                              |
|        | None.                                                             |
|        |                                                              |
| **Item 2.** | **Unregistered  Sales of Equity Securities and Use of Proceeds.** |
|        |                                                              |
|        | None.                                                             |
|        |                                                              |
| **Item 3.** | **Defaults  Upon Senior Securities.**                             |
|        |                                                              |
|        | None.                                                             |
|        |                                                              |
| **Item 4.** | **Submission  of Matters to a Vote of Security Holders.**         |
|        |                                                              |
|        | None.                                                             |
|        |                                                              |
| **Item 5.** | **Other  Information.**                                           |
|        |                                                              |
|        | None.                                                             |

 

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| **Item 6.** | **Exhibits  and Reports on Form 8-K.** |
|-------------|---------------------------------------------|
|        |                                        |   |   |
| ** **  | (a)                                         | The following exhibits are filed as part of this  report. |
|        |                                        |   |   |
|        |                                        | 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. |
|        |                                        |   |   |
|        | (b)                                         | Reports on Form 8-K. |
|        |                                        |   |   |
|        |                                        | None. |   |
|             |                                             |  |  |  |

 

**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   |                   | LITTLE SIOUX CORN PROCESSORS, L.L.C.  |
|--------|------------------------|---------------------------------------|
|   |                   |                                  |
|   |                   |                                  |
| Date:  | February 14, 2005 |                                  |   | /s/ Stephen Roe |   |
|   |                   | Stephen Roe                           |
|   |                   | President and Chief Executive Officer |
|   |                   |                                  |
|   |                   |                                  |
| Date:  | February 14, 2005 |                                  |   | /s/ Gary Grotjohn |   |
|   |                   | Gary Grotjohn                         |
|   |                   | Chief Financial Officer               |

 

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