**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 
| x                                               | ** ** | **Quarterly report under Section 13 or 15(d)  of the Securities Exchange Act of 1934.** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------|
|                                            |       |                                                                                         |
| **For the  fiscal quarter ended June 30, 2006** |
|                                            |       |                                                                                         |
| **OR**                                          |
|                                            |       |                                                                                         |
| **o**                                           | ** ** | **Transition report under Section 13 or 15(d)  of the Exchange Act.**                   |

 

**Forthe transition periodfrom               to               .**

 

# **COMMISSIONFILE NUMBER 0001229899**

** **

**LITTLESIOUX CORN PROCESSORS, L.L.C.**

(Exact name ofregistrant as specified in its charter)

 

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

** **

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

(Address ofprincipal executive offices)

** **

**(712)376-2800**

(Issuer’stelephone number)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 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.
|  | x  Yes | o  No |
|--|------------------|-----------------|

 

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

 

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

 

Indicatethe number of shares outstanding for each of the issuer’s classes of commonequity as of the latest practicable date:

As ofAugust 14, 2006, there were 10,941 units outstanding.

 

 

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**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**                                                                                        |       |       |       |

 

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**PART I.     FINANCIALINFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS.**

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARY**CondensedConsolidated Balance Sheet
| ** **                                            | ** ** | **June 30** | ** ** | **September 30** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| ** **                                            | ** ** | **(Unaudited)**  | ** ** | **(Audited)**         | ** ** |
| **ASSETS**                                            |       |             |       |                  |       |
| **Current Assets**                                    |       |             |       |                  |       |
| Cash and  equivalents                                 |       | $                | 14,771,606 |                  | $          | 14,135,954 |   |
| Short-term  investments                               |       | 6,524,419        |       | 6,987,420             |       |
| Trade accounts  receivable                            |       | 3,004,050        |       | 2,518,278             |       |
| Other  receivables                                    |       | 92,426           |       | 185,046               |       |
| Inventories                                           |       | 2,078,755        |       | 1,346,217             |       |
| Derivative  instruments                               |       | 1,345,240        |       | 566,609               |       |
| Prepaid expenses                                      |       | 1,957,929        |       | 1,008,754             |       |
| Total current  assets                                 |       | 29,774,425       |       | 26,748,278            |       |
| ** **                                            |       |             |       |                  |       |
| **Property and Equipment**                            |       |             |       |                  |       |
| Land and  improvements                                |       | 2,769,067        |       | 2,762,708             |       |
| Plant buildings  and equipment                        |       | 57,223,570       |       | 55,146,210            |       |
| Office buildings  and equipment                       |       | 351,696          |       | 335,392               |       |
|                                                  |       | 60,344,333       |       | 58,244,310            |       |
| Less accumulated  depreciation                        |       | 12,398,819       |       | 8,829,771             |       |
|                                                  |       | 47,945,514       |       | 49,414,539            |       |
| Construction in  progress                             |       | 2,381,051        |       | 713,898               |       |
| Net property and  equipment                           |       | 50,326,565       |       | 50,128,437            |       |
| ** **                                            |       |             |       |                  |       |
| **Other Assets**                                      |       |             |       |                  |       |
| Long-term  investments and other                      |       | 100,172          |       | 48,000                |       |
| Land option and  other                                |       | 74,616           |       | -                     |       |
| Deferred loan  costs, net of accumulated amortization |       | 165,243          |       | 237,641               |       |
| Total other  assets                                   |       | 340,031          |       | 285,641               |       |
| ** **                                            |       |             |       |                  |       |
| **Total Assets**                                      |       | $                | 80,441,021 |                  | $          | 77,162,356 |   |

 

See Notes to CondensedConsolidated Financial Statements 

2

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

Condensed Consolidated Balance Sheet 

 
| ** **                                                     | ** ** | **June 30** | ** ** | **September 30** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| ** **                                                     | ** ** | **(Unaudited)**  | ** ** | **(Audited)**         | ** ** |
| **LIABILITIES AND MEMBERS’ EQUITY**        |       |             |       |                  |       |
| **Current  Liabilities**                                       |       |             |       |                  |       |
| Current maturities of long-term liabilities                    |       | 3,349,093        |       | 4,005,714             |       |
| Accounts payable                                               |       | 2,719,921        |       | 968,667               |       |
| Accrued expenses                                               |       | 688,188          |       | 5,717,935             |       |
| Total current liabilities                                      |       | 6,757,202        |       | 10,692,316            |       |
| ** **                                                     |       |             |       |                  |       |
| **Long-Term  Liabilities,****net of current  maturities**      |       | 14,347,646       |       | 16,092,315            |       |
| ** **                                                     |       |             |       |                  |       |
| **Minority  Interest**                                         |       | 23,785,387       |       | 20,209,574            |       |
| ** **                                                     |       |             |       |                  |       |
| **Members’  Equity, 10,941 units issued and outstanding** |       | 35,550,786       |       | 30,168,151            |       |
| ** **                                                     |       |             |       |                  |       |
| **Total  Liabilities and Members’ Equity**                |       | $                | 80,441,021 |                  | $          | 77,162,356 |   |
|                                                                |            |                  |            |                       |            |  |  |

 

See Notes to CondensedConsolidated Financial Statements 

 

3

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

Condensed Consolidated Statements of Operations 

 
| ** **                                                 | ** ** | **Nine Months Ended   June 30  2006** | ** ** | **Nine Months Ended  June 30  2005** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **(Unaudited)**                                           | ** ** | **(Unaudited)**                                     | ** ** |
| **Revenues**                                               |       | $                                                         | 81,786,517 |                                                | $          | 69,912,725 |   |
| **Cost of Goods Sold**                                     |       | 55,325,395                                                |       | 47,981,733                                          |       |
| **Gross Margin**                                           |       | 26,461,122                                                |       | 21,930,992                                          |       |
| **Selling, General, and  Adminstrative Expenses**          |       | 2,006,645                                                 |       | 1,969,957                                           |       |
| **Operating Income**                                       |       | 24,454,477                                                |       | 19,961,035                                          |       |
| **Other Income (Expense)**                                 |       |                                                      |       |                                                |       |
| Interest income                                            |       | 533,400                                                   |       | 76,211                                              |       |
| Interest expense                                           |       | (962,648                                                  | )          | (793,021                                            | )          |
| Other income                                               |       | 270,047                                                   |       | 271,305                                             |       |
| Total other  expense                                       |       | (159,201                                                  | )          | (445,505                                            | )          |
| **Net Income Before Minority  Interest**                   |       | 24,295,276                                                |       | 19,515,530                                          |       |
| **Minority Interest in Sudsidiary  Income**                |       | 9,696,572                                                 |       | 7,816,621                                           |       |
| **Net Income**                                             |       | $                                                         | 14,598,704 |                                                | $          | 11,698,909 |   |
| **Net Income Per Unit - Basic and  Diluted**               |       | $                                                         | 1,334.31   |                                                | $          | 1,069.27 |   |
| **Distributions Per Unit - Basic  and Diluted**            |       | $                                                         | 842.34     |                                                | $          | 379.88 |   |
| **Weighted Average Units Outstanding- Basic and  Diluted** |       | 10,941                                                    |       | 10,941                                              |       |

 

See Notes to CondensedConsolidated Financial Statements 

4

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

CondensedConsolidated Statements of Operations 

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **June 30**                 | ** ** | **June 30**                 | ** ** |
| ** **                                                 | ** ** | **2006**                         | ** ** | **2005**                         | ** ** |
| ** **                                                 | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                  | ** ** |
| **Revenues**                                               |       | $                                | 31,146,507 |                             | $          | 23,101,306 |   |
| **Cost of Goods Sold**                                     |       | 19,745,318                       |       | 15,213,399                       |       |
| **Gross Margin**                                           |       | 11,401,189                       |       | 7,887,907                        |       |
| **Selling, General, and  Administrative Expenses**         |       | 754,797                          |       | 608,453                          |       |
| **Operating Income**                                       |       | 10,646,392                       |       | 7,279,454                        |       |
| **Other Income (Expense)**                                 | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Interest income                                            |       | 141,702                          |       | 33,934                           |       |
| Interest expense                                           |       | (332,790                         | )          | (287,302                         | )          |
| Other income                                               |       | 191,646                          |       | 120,652                          |       |
| Total other  expense                                       |       | 558                              |       | (132,716                         | )          |
| **Net Income Before Minority  Interest**                   |       | 10,646,950                       |       | 7,146,738                        |       |
| **Minority Interest in Sudsidiary  Income**                |       | 4,250,481                        |       | 2,858,942                        |       |
| **Net Income**                                             |       | $                                | 6,396,469  |                             | $          | 4,287,796 |   |
| **Net Income Per Unit - Basic and  Diluted**               |       | $                                | 584.63     |                             | 391.90     | $ |
| **Distributions Per Unit - Basic  and Diluted**            |       | $                                | —     |                             | 164.94     | $ |
| **Weighted Average Units Outstanding- Basic and  Diluted** |       | 10,941                           |       | 10,941                           |       |

 

See Notes to Condensed ConsolidatedFinancial Statements

 

5

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

CondensedConsolidated Statements of Cash Flows 

 
| ** **                                          | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **June 30**                | ** ** | **June 30**                | ** ** |
| ** **                                          | ** ** | **2006**                        | ** ** | **2005**                        | ** ** |
| ** **                                          | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)**                 | ** ** |
| **Operating Activities**                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Net income                                          |       | $                               | 14,598,704 |                            | $          | 11,698,909 |   |
| Adjustments to  reconcile net income to net         |       |                            |       |                            |       |
| cash provided by  operating activities:             |       |                            |       |                            |       |
| Depreciation and  amortization                      |       | 3,641,446                       |       | 2,729,020                       |       |
| Minority  interest in subsidiary’s income      |       | 9,696,572                       |       | 7,816,621                       |       |
| Change in  operating assets and liabilities:        |       |                            |       |                            |       |
| Receivables                                         |       | (393,152                        | )          | 221,274                         |       |
| Restricted cash                                     |       | -                               |       | 2,730,481                       |       |
| Inventories                                         |       | (732,538                        | )          | 226,610                         |       |
| Derivative  instruments                             |       | (778,631                        | )          | (1,005,479                      | )          |
| Prepaid expenses                                    |       | (949,175                        | )          | (555,852                        | )          |
| Accounts payable                                    |       | 1,751,254                       |       | (177,684                        | )          |
| Accrued expenses                                    |       | (5,029,747                      | )          | 842,424                         |       |
| Net cash  provided by operating activities          |       | 21,804,733                      |       | 24,526,324                      |       |
| **Investing Activities**                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Proceeds from  investments                          |       | 463,001                         |       | -                               |       |
| Payments for  investments                           |       | (52,172                         | )          | -                               |       |
| Capital  expenditures                               |       | (3,767,176                      | )          | (1,674,372                      | )          |
| Land option and  other                              |       | (74,616                         | )          | -                               |       |
| Net cash used in  investing activities              |       | (3,430,963                      | )          | (1,674,372                      | )          |
| **Financing Activities**                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Net changes in  short-term debt                     |       | -                               |       | (37,920                         | )          |
| Payments of  long-term debt                         |       | (2,401,290                      | )          | (7,117,884                      | )          |
| Distribution paid  to minority interest             |       | (6,120,759                      | )          | (2,789,227                      | )          |
| Distribution  paid to members                       |       | (9,216,069                      | )          | (4,156,266                      | )          |
| Net cash used in  financing activities              |       | (17,738,118                     | )          | (14,101,297                     | )          |
| **Net increase in cash and  equivalents**           |       | 635,652                         |       | 8,750,655                       |       |
| **Cash and Equivalents**—  Beginning of Period |       | 14,135,954                      |       | 3,907,380                       |       |
| **Cash and Equivalents**— End of  Period       |       | $                               | 14,771,606 |                            | $          | 12,658,035 |   |

 

See Notes to CondensedConsolidated Financial Statements 

6

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

CondensedConsolidated Statements of Cash Flows 

 
| ** **                                      | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **June 30**                | ** ** | **June 30**                | ** ** |
| ** **                                      | ** ** | **2006**                        | ** ** | **2005**                        | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)**                 | ** ** |
| **Supplemental  Cash Flow Information**         | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Cash paid for interest                          |       | $                               | 898,546    |                            | $          | 847,247 |   |
| Equipment  acquired through a construction note |       |                            |       | $                               | 3,115,814  |   |
|                                                 |            |                                 |            |                                 |            |  |  |

 

See Notes to CondensedConsolidated Financial Statements 

 

7

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**LITTLE SIOUX CORN PROCESSORS, LLCAND SUBSIDIARY**

Notes to CondensedConsolidated Financial Statements (Unaudited)

June 30, 2006

**NOTE1:  NATURE OF OPERATIONS**

As used in this report in Form 10-Q, the “Company”represents Little Sioux Corn Processors, LLC (LLC) and its subsidiary LSCP,LLLP (LSCP).  The Company operates a 52million gallon ethanol plant, located near Marcus, Iowa.  The plantcommenced operations in April 2003.  In July 2005, the Company completedits expansion, from a 40 million gallon plant to a 52 million gallonplant.  The Company sells its productionof ethanol, distiller’s grains and solubles, modified wet distillers grainswith solubles and corn oil in the Continental United States.

**NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Basis of Presentation**

These condensed consolidated financial statements andrelated notes should be used in conjunction with the consolidated financialstatements and notes included in the Company’s audited consolidated financialstatements for the fiscal year ended September 30, 2005, contained in theCompany’s annual report of Form 10-K for 2005.

The condensed consolidated interim financialstatements are unaudited.  These statements include all adjustments(consisting of normal recurring accruals) that we considered necessary topresent a fair statement of the results of operations, financial position, andcash flows.  The results reported in these condensed, consolidatedfinancial statements should not be regarded as necessarily indicative of resultsthat may be expected for the entire year.

**Principles of Consolidation**

The condensed consolidated financial statementsinclude the accounts of the Company and its 60.15% owned subsidiary, LSCP,LLLP.  All significant inter-companytransactions and balances have been eliminated in consolidation.

**Use of Estimates**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from those estimates.

**Revenue Recognition**

Revenue from the sale of the Company’s products isrecognized at the time title of the goods and all risks of ownership transferto the customers.  This generally occursupon shipment to the customer or when the customer picks up the goods.

The Company records revenue from federal and stateincentive programs related to the production of ethanol when the Company hassold the ethanol and completed all the requirements of the applicable incentiveprogram.

**Income Taxes**

The Company is treated as a partnership for federaland state income tax purposes and generally does not incur taxes.  Instead, its earnings and losses are includedin the income tax returns of the members. Therefore, no provision or liability for federal or state income taxeshas been included in these financial statements.

8

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**Reclassifications**

The presentation of certain items in the consolidatedbalance sheet, statements of operations and cash flows for 2005 has beenchanged to conform to the classifications used at June 30, 2006.  These reclassifications had no effect onmembers’ equity, net income, or cash flows previously reported.

**NOTE 3: INVENTORIES**

Inventories are comprised of the following at:

 

|                 | ** ** | **June 30, 2006** | ** ** | **September 30, 2005*** | ** ** |
|-----------------|------------|-----------------------------|------------|-----------------------------------|------------|
| Raw materials   |       | $                           | 894,265    |                              | $          | 579,568 |   |
| Work in process |       | 646,663                     |       | 437,872                           |       |
| Finished goods  |       | 537,827                     |       | 328,777                           |       |
| Totals          |       | $                           | 2,078,755  |                              | $          | 1,346,217 |   |

----

*                    Derivedfrom audited consolidated financial statements.

**NOTE 4:  DERIVATIVEINSTRUMENTS**

At June 30, 2006 and September 30, 2005, the Companyhad recorded an asset for derivative instruments related to corn and naturalgas options and futures positions of $1,345,240 and $496,853,respectively.  None of the positions openat June 30, 2006 are designated as cash flow or fair value hedges.  TheCompany has recorded a loss of $688,177 in cost of goods sold related to itsderivative instruments for the three months ended June 30, 2006, and a gain of$430,499 in cost of goods sold for the nine months ended June 30, 2006.  The Company had recorded a loss of $477,395in cost of goods sold related to its derivative instruments for the threemonths ended June 30, 2005, and a loss of $1,705,389 in cost of goods sold forthe nine months ended June 30, 2005.

At June 30, 2006 and September 30, 2005, the Companyhad an interest rate cap as described in Note 7 with a fair value of $0 and$69,756, respectively, recorded as an asset with derivative instruments. The interest rate cap was not designated as a cash flow or fair value hedge. The Company charged interest expense with a $34,778 loss and $69,756 loss, onthe interest rate cap, respectively, for the three months and nine months,respectively, ending June 30, 2006.  TheCompany charged interest expense with a loss of $20,050 and offset interestexpense with a gain $27,254 for the three months and nine months, respectively,ending June 30, 2005.  The interest ratecap expired on June 1, 2006.

**NOTE5:  CONSTRUCTION IN PROGRESS**

The Company continues to make payments for theexpansion project.  For the nine monthsended June 30, 2006, the Company has not incurred any interest nor has theCompany capitalized any interest related to construction in progress.  The Company anticipates the expansion willcost approximately $70,000,000.

On April 10, 2006, the Company entered into anEleventh Amendment to Construction Loan Agreement with First National Bank ofOmaha.  Under this amendment, FirstNational Bank of Omaha has agreed to loan the Company up to $5,673,025 ofinterim financing pursuant to a Bridge Note to finance construction of two500,000-bushel cement grain bins in anticipation of the 40 million gallonexpansion of our existing ethanol plant. The Bridge Note will terminate October 1, 2006.  During the term of the Bridge Note, we haveagreed to pay interest only on a quarterly basis on the outstanding principleamount at a rate equal to the one-month LIBOR rate plus 280 basis points.   Upon completion of the term of the BridgeNote, the outstanding balance of this expansion note will either (i) be addedto the principal balance of our Term Note 3 with First National Bank of Omaharelating to the original construction of our ethanol plant; or (ii) paid fromproceeds from a new permanent financing between the Company and First National Bankof Omaha secured for the purpose of financing our 40 million gallon expansionof our existing plant.  The maturity dateof Term Note 3 is currently June 1, 2008.

9

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The Bridge Note and Term Note 2, 3, and 4 aresubject to all terms and conditions of our existing Construction Loan Agreementwith First National Bank of Omaha, including the specific provisions regardingevents of default and the granting liens to secure our performance.  There are currently no amounts outstandingrelated to Bridge Note.

**NOTE6:  REVOLVING PROMISSORY 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. InApril 2006, the lending institution renewed the revolving promissory note untilMarch 2007. The revolving promissory note incurs interest monthly at the onemonth LIBOR plus 280 basis points.  TheCompany pays a commitment fee of .125% on the unused portion of the revolvingpromissory note.  There were no balancesoutstanding on the revolving promissory note at June 30, 2006.  The revolving promissory note, as well as theterm notes described in Note 7, is 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.

10

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**NOTE 7:  LONG-TERM LIABILITIES**

Long-termdebt consists of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **June 30, 2006** | ** ** | **September 30, 2005*** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| Term note 2 has fixed principal payments due  quarterly with interest at the three month LIBOR plus 280 basis points, which  totaled 8.03% at June 30, 2006, payable in full on June 1, 2008.   As part of the financing agreement, the Company accepted a fixed rate option  on term note 2 by entering into an interest rate swap which effectively fixes  the interest rate on this term note at 5.79% until this term note is repaid  on June 1, 2008. The Company did not designate the interest rate swap as  a fair value or cash flow hedge. The value of the interest rate swap is not  significant.                                                                                                                                                                                                                       | ** ** | $                           | 11,668,882 |                              | $          | 12,732,447 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                        |       |                              |       |
| Term note 3 bears interest at the three month LIBOR  plus 280 basis points, which totaled 8.03% at June 30, 2006.  Term note  3 is payable in full on June 1, 2008.  The Company is required to  make quarterly payments of $506,588 applied first to accrued interest on term  note 4.  The remaining amount is applied to accrued interest on term  note 3 and then to principal until this note is paid in full or until  maturity.  After term note 3 is repaid, payments are applied first to  accrued interest and then to principal until this note is paid in full or  until maturity.  After term note 3 is repaid, payments are applied first  to accrued interest and then to principal on term note 4 until paid in full  or until maturity.                                                             |       | 5,484,168                   |       | 1,293,643                         |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                        |       |                              |       |
| Term note 4 bears interest at the one month LIBOR  plus 280 basis points.  Term note 4 are payable in full on June 1,  2008. The Company is required to make quarterly payments of $506,588 applied  first to accrued interest on term note 4.  The remaining amount is  applied to accrued interest on term note 3 and then to principal until this  note is repaid in full or until maturity.  After term note 3 is repaid,  payments are applied first to accrued interest and then to principal on the  term note 4 until paid in full or until maturity.  Term note #4 had no  outstanding balance as of June 30, 2006. Term note 4 allows subsequent  borrowings up to the original $5,000,000 to the extent of principal payments  made until maturity and requires a commitment fee of .25% on any used  portion. |       |                        |       |                              |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                        |       |                              |       |
| Term note 5 was  added to term note 3 on October 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | —                      |       | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 107,639                     |       | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 118,833                     |       | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 182,000                     |       | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 135,217                     |       | 190,564                           |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                        |       |                              |       |
| Totals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | $                           | 17,696,739 |                              | $          | 20,098,029 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                        |       |                              |       |
| Less amounts due  within one year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 3,349,093                   |       | 4,005,714                         |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                        |       |                              |       |
| Totals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | $                           | 14,347,646 |                              | $          | 16,092,315 |   |

----

*                    Derivedfrom audited consolidated financial statements.

As part of the financing agreement, the premium abovethe LIBOR on the term notes and revolving promissory note has been reducedbased on a financial ratio from the original 380 basis points.  Thefinancing agreement requires an annual servicing fee of $50,000 for five years. As described in Note 2, the Company entered into an interest rate cap agreementto reduce the risk of increases in interest rates.  The interest rate capagreement is based on a notional amount of $10,000,000 and caps increases ininterest rates at 6.8% on this amount until June 1, 2006.  The interest rate cap expired on June 1,2006.

 

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Theestimated maturities of long-term liabilities at June 30, 2006 are as follows:

 

| 2007                         |   | $          | 3,349,093  |   |
|------------------------------|--------|------------|------------|--------|
| 2008                         |   | 14,140,751 |       |
| 2009                         |   | 206,895    |       |
| Total long-term  liabilities |   | $          | 17,696,739 |   |

 

**NOTE8:  MEMBERS’ EQUITY**

On January 17, 2006, theBoard of Directors 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.

**NOTE 9: RELATED PARTY TRANSACTIONS**

The Company has transactions in the normal course ofbusiness with various related parties. Significant related party transactions affecting financial statements asof and for the periods indicated as follows:

| Balance Sheet   | ** ** | **June 30, 2006** | ** ** | **September 30, 2005*** | ** ** |
|----------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| Accounts  receivable |       | $                           | 2,594,000  |                              | $          | 2,272,000 |   |
| Accounts payable     |       | $                           | 64,000     |                              | $          | 3,923,000 |   |

 

| Statements of Income | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Nine Months Ended  June 30, 2006** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Revenues                       |       | $                                                         | 27,807,000 |                                                     | $          | 72,164,000 |   |
| Expenses                       |       | $                                                         | 3,318,000  |                                                     | $          | 9,921,000 |   |

 

| Statements of Income | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Nine Months Ended  June 30, 2005** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Revenues                       |       | $                                                         | 19,927,000 |                                                     | $          | 59,996,000 |   |
| Expenses                       |       | $                                                         | 3,148,000  |                                                     | $          | 8,780,000 |   |

 

* Derived from audited consolidated financialstatements.

**NOTE 10:**  **COMMITMENTS, ANDCONTINGENCIES**

**Contractual Obligations**

The following table provides information regarding theconsolidated contractual obligations of the Company as of June 30, 2006:

 

|                               | ** ** | **Total** | ** ** | **Less than One Year** | ** ** | **One to Three Years** | ** ** |
|-------------------------------|------------|-----------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Long-Term Debt  Obligations   |       | $         | 17,696,739 |                                  | $          | 3,349,093                             |       | $ | 14,347,646 |   |
| Operating Lease  Obligations  |       | $         | 402,268    |                                  | $          | 187,371                               |       | $ | 214,897 |   |
| Purchase Obligations          |       | $         | 23,818,735 |                                  | $          | 23,242,356                            |       | $ | 743,576 |   |
| Total Contractual Obligations |       | $         | 41,917,742 |                                  | $          | 26,778,820                            |       | $ | 15,306,119 |   |

 

**Land Options**

** **On March 1, 2006, theCompany entered into a land option agreement for $15,000 that will be creditedagainst the purchase price of $1,500,000 should the Company decide to exercisethe option.  The land is expected to beused for 

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the potential 100 MGPY ethanol plant that isanticipated to be located near Akron, Iowa. The land option commences on the date of the execution of the optionagreement and continues for 180 days from, but not including, the date of theexecution of the agreement.  The optioncan be extended for another 180 days at the sole discretion of the Company withno additional consideration.  If the optionis not exercised after the 180 days, the land option agreement becomes null andvoid.  This is not the primary buildingsite, but can be used as an alternate.

On May 25, 2006, the Company entered into a landoption agreement for $25,000 that will be credited against the purchase priceof $2,436,000 should the Company decide to exercise the option.  The land is expected to be used for thepotential 100 MGPY ethanol plant that is anticipated to be located near Akron,Iowa.  The land option commences on thedate of the execution of the option agreement and continues for 180 days from,but not including, the date of the execution of the agreement.  The option can be extended for another 180days at the sole discretion of the Company with no additional consideration.  If the option is not exercised after the 180days, the land option agreement becomes null and void.  This is not the primary building site, butcan be used as an alternate.

On June 19, 2006, the Company entered into a landoption agreement for $15,000 that will be credited against the purchases priceof $2,340,000 should the Company decide to exercise the option.  The land is expected to be used for thepotential 100 MGPY ethanol plant that is anticipated to be located near Akron,Iowa.  The land option commences on thedate of the execution of the option agreement and continues for until December19, 2006.  The option can be extended toJune 19, 2007 at the sole discretion of the Company for an additional $10,000,which will be credited against the purchase price if the option isexercised.  If the option is notexercised after the specified date, the land option agreement becomes null andvoid.  The land included in this optionis adjacent to the land included in the option dated June 19, 2006.  The land included in these two options is theprimary building site, and both options must be exercised together.

On June 19, 2006, the Company entered into a landoption agreement for $15,000 that will be credited against the purchase priceof $2,100,000 should the Company decide to exercise the option.  The land is expected to be used for thepotential 100 MGPY ethanol plant that is anticipated to be located near Akron,Iowa.  The land option commences on thedate of the execution of the option agreement and continues for until December19, 2006.  The option can be extended toJune 19, 2007 at the sole discretion of the Company for an additional $10,000,which will be credited against the purchase price if the option isexercised.  If the option is not exercisedafter the specified date, the land option agreement becomes null and void.  The land included in this option is adjacentto the land included in the option dated June 16, 2006.  The land included in these two options is theprimary building site, and both options must be exercised together.

**NOTE 11:  SUBSEQUENT EVENTS**

On July 10, 2006, the Company signed a contract withFagen Engineering, LLC, an affiliate of a related party, to perform theelectrical design services for the grains area expansion.  The cost of the project is approximately$265,000 plus certain reimbursable expenses.

On July 17, 2006, the Company signed a “Change Order”agreement with McCormick Construction for the expansion of the DDG StorageBuilding for $936,000.  The expectedsubstantial completion date is September 1, 2007.

On August 1, 2006, the Company purchased approximatelyeight acres of land west of the current plant location along the north side ofthe railroad tracks.  The purchase priceof the land was approximately $58,000. The land will be used as part of the expansion project.

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

We prepared the following discussion and analysis tohelp you better understand our financial condition, changes in our financialcondition, and results of operations for the three month and nine month periodsended June 30, 2006, compared to the same periods of the prior fiscal year.This discussion should be read in conjunction with the consolidated financialstatements and the Management’s Discussion and Analysis section for the fiscalyear ended September 30, 2005, included in the Company’s Annual Report on Form10-K.

**Disclosure Regarding Forward-Looking Statements**

This report contains historical information, as wellas forward-looking statements that involve known and unknown risks and relateto future events, our future financial performance, or our expected futureoperations and actions.  In some cases,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 thenegative of these terms or other similar expressions.  These forward-looking statements are only ourpredictions based upon current information and involve numerous assumptions,risks and uncertainties.  Our actualresults or actions may differ materially from these forward-looking statementsfor many reasons, including the reasons described in this report.  While it is impossible to identify all suchfactors, factors that could cause actual results to differ materially fromthose estimated by us include:

·                    Projectedgrowth, overcapacity or contraction in the ethanol market in which we operate;

·                    Fluctuationsin the price and market for ethanol and distillers grains;

·                    Changesin plant production capacity, variations in actual ethanol and distillersgrains production from expectations or technical difficulties in operating theplant;

·                    Availabilityand costs of products and raw materials, particularly corn and natural gas;

·                    Changesin our business strategy, capital improvements or development plans forexpanding, maintaining or contracting our presence in the market in which weoperate;

·                    Costsof construction and equipment;

·                    Ourability to market and our reliance on third parties to market our products;

·                    Ourability to distinguish ourselves from our current and future competition;

·                    Changesto infrastructure, including

–  expansionof rail capacity,

–  increasesin truck fleets capable of transporting ethanol within localized markets,

–  additionalstorage facilities for ethanol, expansion of refining and blending facilitiesto handle ethanol,

–  growth inservice stations equipped to handle ethanol fuels, and

–  growth inthe fleet of FFVs capable of using E85 fuel;

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

–  national,state or local energy policy;

–  federalethanol tax incentives;

–  legislationmandating the use of ethanol or other oxygenate additives;

–  state andfederal regulation restricting or banning the use of MTBE; or

–  environmentallaws and regulations that apply to our plant operations and their enforcement;

·                    Increasedcompetition in the ethanol and oil industries;

·                    Fluctuationsin US oil consumption and petroleum prices;

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

·                    Anticipatedtrends in our financial condition and results of operations

·                    Ourliability resulting from litigation;

·                    Ourability to retain key employees and maintain labor relations;

·                    Changesand advances in ethanol production technology; and

·                    Competitionfrom alternative fuels and alternative fuel additives.

 

The cautionary statements referred to in this sectionalso should be considered in connection with any subsequent written or oralforward-looking statements that may be issued by us or persons acting on ourbehalf.  We undertake no duty to updatethese forward-looking statements, even though our situation may change in thefuture. 

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Furthermore, we cannot guarantee future results,events, levels of activity, performance, or achievements.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we referencein this report and have filed as exhibits, completely and with theunderstanding that our actual future results may be materially different fromwhat we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

**Overview**

Little Sioux Corn Processors, L.L.C. (the “Company”)is an Iowa limited liability company that owns the sole general partnershipinterest of LSCP, LLLP, (the “Partnership”) an Iowa limited liability limitedpartnership.  As general partner, wemanage the business and day-to-day operations of the Partnership’s 52 milliongallon per year (MGY) ethanol plant located near Marcus, Iowa in northwestIowa.  We currently own a 60.15%ownership interest in LSCP, LLLP.  The Company and its subsidiary, LSCP,LLLP, are collectively referred to in this report as “LSCP,” “we,” or “us.”

Ourrevenues are derived from the sale and distribution of our ethanol, distillersgrains and corn oil throughout the continental United States.  Corn is supplied to us primarily from localagricultural producers and from purchases of corn on the open market. Afterprocessing the corn, ethanol is sold to ADM, which subsequently markets andsells the ethanol to gasoline blenders and refineries located throughout thecontinental United States.  The price that we receive from the sale ofethanol to ADM is based upon the average price that ADM receives from the saleto its customers of ethanol originating from (i) our plant, (ii) ADM’splant in Marshall, Minnesota and (iii) ADM’s plant in Columbus, Nebraska,minus a marketing fee.  Except distillers 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.  We market and sell our corn oil toregional wholesalers.  Presently, the enduse of our corn oil is in the livestock industry.  In the long term, our corn oil could bemarketed for human consumption; however, the feasibility of market penetrationas human food is unknown at this time as corn oil extraction in dry milling isrelatively new and suitability for human consumption has not yet beendetermined.

We are subject to industry-wide factors that affectour operating income and cost of production. Our operating results are largely driven by the prices at which we sellethanol, distillers grain and corn oil and the costs related to theirproduction.  Historically, the price of ethanol tends to fluctuate in thesame direction as the price of unleaded gasoline and other petroleumproducts.  Surplus ethanol supplies alsotend to put downward price pressure on ethanol. In addition, the price of ethanol is generally influenced by factorssuch as general 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 andnatural gas.  The cost of corn isaffected primarily by supply and demand factors such as crop production,carryout, exports, government policies and programs, risk management andweather, much of which we have no control. Natural gas prices fluctuate with the energy complex in general.  Over the last few years, natural gas priceshave trended higher than average and it appears prices will continue to trendhigher due to the high price of alternative fuels such as fuel oil.  Our costs of production are affected by thecost of complying with the extensive environmental laws that regulate ourindustry.

**Results of Operations for the ThreeMonths Ended June 30, 2006 and 2005**

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our consolidated statements ofoperations for the three months ended June 30, 2006 and 2005:

 

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|                                         | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Income Statement Data**     | ** ** | **Amount**                  | ** ** | **%**                       | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $                           | 31,146,507 |                        | 100.0      |   | $ | 23,101,306 |   | 100.0 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Cost of Goods Sold                      |       | $                           | 19,745,318 |                        | 63.4       |   | $ | 15,213,399 |   | 65.9 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Gross Profit                            |       | $                           | 11,401,189 |                        | 36.6       |   | $ | 7,887,907 |   | 34.1 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Operating Expenses                      |       | $                           | 754,799    |                        | 2.4        |   | $ | 608,453 |   | 2.6 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Operating Income                        |       | $                           | 10,646,392 |                        | 34.2       |   | $ | 7,279,454 |   | 31.5 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Other Income (Expense)                  |       | $                           | 558        |                        | 0.0        |   | $ | (132,716 |   | (0.6 | ) |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Net Income Before  Minority Interest    |       | $                           | 10,646,950 |                        | 34.2       |   | $ | 7,146,738 |   | 30.9 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Minority Interest in  Subsidiary Income |       | $                           | 4,250,481  |                        | 13.6       |   | $ | 2,858,942 |   | 12.4 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Net Income                              |       | $                           | 6,396,469  |                        | 20.6       |   | $ | 4,287,796 |   | 18.5 |   |

 

*Revenues**. *The increase in revenues from the three months ended June 30, 2006 compared to the three months ended June 30, 2005 is due primarily to an increase in the gallons of ethanol sold which is attributable to an increase in production commensurate with our plant expansion in 2005 and increase in the price per gallon received.  The gallons of ethanol sold in the three months ended June 30, 2006 increased approximately 13% over the gallons we sold in the three months ended June 30, 2005.  In addition, the price we received for our ethanol increased approximately 23% in the three months ended June 30, 2006 compared to the three months ended June 30, 2005. Revenue from sales of our co-products also increased by 5% in the three months ended June 30, 2006 compared to the three months ended June 30, 2005 due to a better mix of wet and dry distillers grains sold.

Our plant expansion was placed on line in the fourth quarter of fiscal 2005.  Accordingly, we will be unable to make an accurate comparison of year-over-year revenue results until the fourth quarter of this fiscal year, when our production capacity will be consistent.

Due to a number of factors,including the higher price of petroleum gasoline and seasonal demand, ethanolprices remained high during the first six months of calendar 2006.  We believe the favorable prices result fromhigher gasoline prices, which encourages voluntary blending, and the growingrecognition of ethanol as an alternative energy source.  Based on existing market conditions, weexpect favorable pricing to continue at least through the end of our fiscalyear because the price of unleaded gasoline is expected to remain at or aboveits current price levels through the peak summer driving season and into fall.

As petroleum blenders have phased away from blending MTBE as an oxygenate for gasoline due to environmental liability concerns, the demand for ethanol has increased.  However, a greater supply of ethanol on the market from additional plants and plant expansions could reduce the price we are able to charge for our ethanol especially if supply outpaces demand.  As of July 26, 2006, the Renewable Fuels Association reports that there were 101 ethanol plants in operation nationwide with the capacity to produce more than 4.8 billion gallons annually, with approximately 39 additional plants expected to come into production in the next 18 months, along with seven existing plants, expanding total ethanol production capacity by an additional 2.5 billion gallons. Accordingly, the price of ethanol may trend downward if supply exceeds demand which would negatively impact on our earnings.

On May 30, 2006, HF 2754 was signed into law by Iowa Governor Tom Vilsack.  HF 2754 is expected to expand consumer access to ethanol blended fuels and biodiesel in Iowa through the creation of an Iowa renewable fuels standard (IRFS) and a series of retail tax credits.  The IRFS requires a 10% blend of renewable fuels in all Iowa retail fuels beginning in 2009 and increases to 25% by 2019.  The IRFS allows gasoline retailers flexibility in meeting the standard through the sale of E10, E85, and biodiesel blends.  In addition, the bill provides a new ethanol promotion tax credit for each gallon of ethanol blended into gasoline beginning in 2009 which will replace the 

16

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existing tax credit.  The incentive is linked to a retailer’s achievement of the IRFS schedule.  The tax credit increases from $0.025 per gallon for retailers within 4% of the RFS schedule to $0.065 per gallon for retailers meeting or exceeding the RFS schedule.  The legislation also provides for an expanded infrastructure program designed to help retailers and wholesalers offset the cost of bringing E85 and biodiesel blends to customers.  This legislation is expected to favorably impact the Iowa ethanol industry by enhancing demand for ethanol, which may lead to increased prices for ethanol in the Iowa market.  However, the bill may result in an increase in the number of plants in Iowa and future supply could outweigh the demand for ethanol in the future.  In addition, other states have enacted similar legislation which may have the same impact on national ethanol supply and demand.

With respect to distillers grains, we believe that prices will remain at or near their currently low and stable levels due to the low price of corn and soybean meal.  We expect revenues from the sale of distiller grains should remain relatively consistent with 2005.  The lower corn and soybean prices are the result of an abundant supply of grains and feed protein due to a large grain harvest in 2005, the second largest on record, and a large grain carryout in 2006.

*Cost of Goods Sold. *Our cost of goodssold as a percentage of revenues were 63.4% and 65.9% for the three monthsended June 30, 2006 and 2005, respectively. The percentage decrease in our cost of goods sold from period to periodis primarily due to the increased revenues used to calculate the percentage, partiallyoffset by a 12% increase in the number of bushels of corn used in theproduction process and a 5% increase in the cost per bushel, and an 11%increase in the MMBTUs of natural gas we consumed at significantly higherprices than the same period in 2005.

The increase in the number of bushels used in theproduction process and MMBTUs of natural gas is a result of increased ethanolproduction from our plant expansion in 2005. Although corn carryout supplies for 2006 marketing year appear adequate,an increase in corn exports as well as sustained domestic usage may increasetotal demand for corn and result in upward pressure on corn prices.  Additionally, due to increased exposure ofethanol, corn is now being viewed as an “energy commodity” as opposed tostrictly a “grain commodity.” This has placed upward pressure on cornprices.   Any increase in the price ofcorn will cause our cost of goods sold to rise and, as a result, our net incomemay decline.

Inaddition, the price we paid for natural gas increased 69% in the third quarterof fiscal 2006 compared to the third quarter of fiscal 2005.  Natural gas has recently been available onlyat prices exceeding historical averages. Historically, natural gas pricesin the $5/mmbtu range were considered high.  These prices are increasing our costs of production.  We expectnatural gas prices to remain high or elevated given the unpredictable marketsituation.  This could increase our gas costs substantially, which willincrease our cost of goods sold and may cause our net income to decrease.

The increase in our cost of goods sold was impacted bychanges in the fair value of our derivative instruments.  Our cost ofgoods sold includes a loss of $688,177 in the third quarter of fiscal 2006related to our derivative instruments, compared to a loss of $477,395 in thethird quarter of fiscal 2005.  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.  We anticipatecontinued volatility in our cost of goods sold due to the timing of the changesin value of the derivative instruments relative to the cost and use of thecommodity being hedged.

*Operating Expenses. *Our operatingexpenses as a percentage of revenues were consistent from period toperiod.  These percentages were 2.4% and2.6% for the three months ended June 30, 2006 and 2005, respectively.

*Operating Income. *Our income fromoperations for the three months ended June 30, 2006 totaled $10,646,392compared to $7,279,454 for the three months ended June 30, 2005 before minorityinterest.  This was a result of theincrease in gross profit for the three months ended June 30, 2006, partiallyoffset by higher operating expenses for the same period.

*Other Income (Expense). *Wehad other income totaling $558 for the three months ended June 30, 2006compared to other expenses totaling $132,716 for the three months ended June30, 2005.  This change was primarily aresult of an increase in interest income. Our interest income has increased to $141,702 for the three months ended

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June 30, 2006 from $33,934 for the three months endedJune 30, 2005.  This increase resultedfrom the interest income from short-term investments.  Our interest expense increased to $332,790for the three months ended June 30, 2006 from $287,302 for the three monthsended June 30, 2005.  This increase is aresult of increased loan amounts due to our $5,400,000 expansion completed infiscal 2005.

In addition, we may experience increased interestexpenses on Term Note #3.  In order toprotect our exposure to rising interest rates, we entered into an interest ratecap agreement.  However, our interestrate cap agreement expired on June 1, 2006, but our obligations under TermNote #3 continue until June 1, 2008.

Income from the United States Department ofAgriculture’s Commodity Credit Corporation Bioenergy Program for the threemonths ended June 30, 2006 totaled $21,569 compared to $95,485 for the threemonths ended June 30, 2005. This decrease of 77% reflects the structure of thefederal bioenergy program, which provides incentives for increases in ethanolproduction. We do not expect any further payments from this program in 2006 dueto termination of the program on June 30, 2006.

**Results of Operations for the NineMonths Ended June 30, 2006 and 2005**

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our consolidated statements ofoperations for the nine months ended June 30, 2006 and 2005:

|                                         | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Income Statement Data**     | ** ** | **Amount**                  | ** ** | **%**                       | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $                           | 81,786,517 |                        | 100.0      |   | $ | 69,912,725 |   | 100.0 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Cost of Goods Sold                      |       | $                           | 55,325,395 |                        | 67.6       |   | $ | 47,981,733 |   | 68.7 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Gross Profit                            |       | $                           | 26,461,122 |                        | 32.4       |   | $ | 21,930,992 |   | 31.3 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Operating Expenses                      |       | $                           | 2,006,645  |                        | 2.5        |   | $ | 1,969,957 |   | 2.8 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Operating Income                        |       | $                           | 24,454,477 |                        | 29.9       |   | $ | 19,961,035 |   | 28.5 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Other Income (Expense)                  |       | $                           | (159,201   | )                           | (0.2       | ) | $ | (445,505 | ) | (0.6 | ) |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Net Income Before  Minority Interest    |       | $                           | 24,295,276 |                        | 29.7       |   | $ | 19,515,530 |   | 27.9 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Minority Interest in  Subsidiary Income |       | $                           | 9,696,572  |                        | 11.9       |   | $ | 7,816,621 |   | 11.2 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Net Income                              |       | $                           | 14,598,704 |                        | 17.8       |   | $ | 11,698,909 |   | 16.7 |   |

 

*Revenues.*  The increase inrevenues from the nine months ended June 30, 2006 compared to the nine monthsended June 30, 2005 was primarily due to a 9% increase in the gallons ofethanol sold.  In addition, the price wereceived for our ethanol increased approximately 10% in the nine months endedJune 30, 2006 compared to the nine months ended June 30, 2005.

*Cost of Goods Sold*.  Our cost of goods sold as a percentageof revenues were 67.6% and 68.7% for the nine months ended June 30, 2006 and2005, respectively.  The percentagedecrease in our cost of goods sold is primarily due to the increased revenuesused to calculate the percentage, partially offset by an increase in thebushels of corn used in the production process, and an increase in the MMBTUsof natural gas we consumed at significantly higher prices than the same periodin 2005.

*Operating Expenses. *Our operatingexpenses as a percentage of revenues decreased by 0.3% compared to 2005, butthe overall amount remained relatively constant for the nine months ended June30, 2006 and 2005.

 

 

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*Operating Income. *Our income fromoperations as a percentage of revenues increased to 29.9% for the nine monthsended June 30, 2006 compared to 28.5% for the nine months ended June 30,2005.   This increase in operating incomeresulted primarily from increased revenues resulting from higher ethanol pricesand gallons sold.

*Other Income (Expense). *Ourother expense as a percentage of revenues was 0.2% and 0.6% for the nine monthsended June 30, 2006 and 2005, respectively. This decrease in other expense was due primarily to the increase ininterest income we received during the period.

**Changes in Financial Condition for the Nine Months Ended June30, 2006**

Consolidated assets totaled $80,441,021 at June 30,2006 compared to $77,162,356 at September 30, 2005.  Current assets totaled $29,774,425 at June30, 2006 up from $26,748,278 at September 30, 2005.  The change resulted from (i) an increase ininventories which totaled $2,078,755 at June 30, 2006 compared to $1,346,217 atSeptember 30, 2005; (ii) an increase in the fair market value of ourderivatives which totaled $1,345,240 at June 30, 2006 compared to $566,609 atSeptember 30, 2005; (iii) and an increase in prepaid expenses which totaled$1,957,929 at June 30, 2006 compared to $1,008,754 at September 30, 2005.

Consolidated current liabilities totaled $6,757,202 atJune 30, 2006 compared to the $10,692,316 at September 30, 2005.  The change resulted from the reduction ofaccrued expenses which totaled $688,188 at June 30, 2006 compared to $5,717,935at September 30, 2005.  At our fiscalyear ended September 30, 2005 we had accrued approximately $3,900,000 for theADM pricing dispute which was settled and paid in fiscal 2006.

Long-term debt, net of current maturities, totaled$14,347,646 at June 30, 2006 down from $16,092,315 at September 30, 2005.This reduction occurred as a result of our regularly scheduled loan payments.

**Strategies: Expansion**

***MarcusPlant Expansion***

On August 9,2005, the Board of Directors approved plans to proceed with a 40 MGY expansionto our plant. We are researching the various transportation and otheroperational concerns relating to expansion. In order to expand the plant to addanother 40 million gallons per year of production capacity, we must obtain aTitle V emissions permit prior to the anticipated start date of construction. Anapplication for the Title V emissions permit has been submitted to the IowaDepartment of Natural Resources. We expect to receive our Title V permit September1, 2006. We are proceeding with the development of the final expansion design. Weexpect to engage Fagen, Inc. to construct the expansion. Fagen, Inc.designed and built our current plant. However, we have not yet signed adesign-build agreement for the expansion. We anticipate signing a design-buildagreement and commencing construction in September 2006. If constructionbegins in September 2006, we expect the expansion will be completed in fall2007.

In February 2006, we engaged McCormick ConstructionCompany, Inc. (“McC Inc.”) for the expansion of our grain handlingfacilities and modification of existing grain silos to support the planned 40million gallon per year expansion of the Marcus ethanol plant.  In exchange for these services, we haveagreed to pay McC Inc., a lump sum of $5,673,025.  On May 1, 2006, McC Inc. commencedconstruction on the expansion of the grain handling facilities and modificationof existing grain silos.  We anticipatethat the expansion of the grain handling facilities will be substantiallycomplete by May 1, 2007 and the remodeling of the existing grain silos will besubstantially complete by September 1, 2007.

On July 17, 2006 in conjunction with our existingexpansion construction contract with McC Inc., we signed a “Change Order”agreement with McC Inc. for the expansion of our dried distillers grainsstorage building.  In exchange for theseadditional services, we have agreed to pay McC Inc., a lump sum of$936,000.  We anticipate that theexpansion of the dried distillers grains storage building will be substantiallycomplete by September 1, 2007.

On July 10, 2006, we entered into an agreement withFagen Engineering, LLC, an affiliate of Fagen, Inc., to perform the electricaldesign services for our expansion of the grain handling facilities, modificationof our 

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existing grain silos and expansion of our distillersgrains storage building.  In exchange forthese additional services, we have agreed to pay Fagen Engineering, LLC$265,079 plus certain reimbursable expenses.

Subsequent to the period covered by this report, onAugust 1, 2006, we purchased approximately eight acres of land west of theMarcus plant along the north side of the railroad tracks.  The purchase price of the land wasapproximately $58,000.  The land will beused as part of the Marcus expansion project.

We currently estimate the total cost of the expansionto be approximately $70,000,000. This is a preliminary estimate and we expectit will change as we continue to gather information relating to theexpansion.  We expect to fund theprospective expansion using a combination of debt and our cash on hand.  On April 10, 2006, we entered into a EleventhAmendment to Construction Loan Agreement with First National Bank of Omaha toobtain interim financing to finance the expansion of the grain handlingfacilities and modification of existing grain silos.  See “Indebtedness — Short-Term Debt Sources”for more information on our bridge financing. The total amount of debt financing necessary to fund the plant expansionwill depend on the amount of grants and government incentives we are able tosecure.  Loan covenants in our currentfinancing agreements may restrict the amount of cash we can use for thispurpose.  We do not expect to seekadditional equity from our members to fund this expansion.

The expansion will most likely add 10 employees to thecurrent staff of 35 and will increase our corn usage from 18 million toapproximately 35 million bushels annually.

***Akron Plant Expansion***

On March 2, 2006 the Board of Directors approved plansto proceed with development and construction of a second ethanol plant justsouth of Akron, Iowa in Plymouth County.  Once constructed, the Akronplant is expected to use approximately 100,000 bushels of corn per day or 38million bushes per year and produce 100 million gallons of fuel-grade ethanoland 320,000 tons of distiller grains annually.  We anticipate that theAkron plant will employ 40 full-time employees once operational.  The total Akron project is expected to costapproximately $150,000,000.  However, we have not yet determined ourfinancing plan for the Akron plant and may finance the plant with additionalindebtedness or by issuing additional equity securities.

Construction of the plant will take approximately14-16 months and we hope to start the construction in mid to late 2007. However, commencement of construction on the proposed plant is contingent on anumber of factors, including final site selection, execution of constructioncontracts, receipt of financing and government permits, identification andacquisition of necessary resources.  There is no assurance that thesecontingencies can be satisfied.

*Primary Plant Site*.  We have obtained two options for the realestate which make up our primary Akron plant site in Plymouth County. On June19, 2006, we entered into a real estate option agreement with the Mary FrancesWohlenberg Trust, an unrelated party, granting us an option to purchaseapproximately 156 acres of land (the “Wohlenberg Site”).  The price of the option was $15,000.  Under the terms of the option agreement, wehave the option to purchase the land for $15,000 per surveyed acre. This optionexpires on December 19, 2006, however we may extend the option to June 19, 2007for an additional payment of $10,000. In the event we exercise this option, theoption agreement allows us to apply the amounts paid for the option andextensions of the option towards the total purchase price for the land. If theoption is not exercised after the specified date, the option agreement becomesnull and void.  This option must beexercised together with our option on the adjacent Lias site (described below).

OnJune 19, 2006, we entered into a real estate option agreement with Robert E.and Margaret Lias, unrelated parties, granting us an option to purchaseapproximately 140 acres of land adjacent to the Wohenberg site (the “Lias Site”).  The price of the option was $15,000.  Under the terms of the option agreement, wehave the option to purchase the land for $15,000 per surveyed acre. This optionexpires on December 19, 2006, however we may extend the option to June 19, 2007for an additional payment of $10,000. In the event we exercise this option, theoption agreement allows us to apply the amounts paid for the option andextensions of the option towards the total purchase price for the land. If theoption is not exercised after the specified date, the option agreement becomesnull and void.  This option must beexercised together with our option on the adjacent property (described above).

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*Alternative Plant Sites*.  In addition to the options which make up ourprimary plant site, we have acquired options for two alternative plantsites.  On March 1, 2006, we entered intoa real estate option agreement for an alternative Akron plant site with VirgilJ. Smith and Dennis J. and Diane L. Smith, unrelated parties, granting us anoption to purchase approximately 109 acres of land.  The price of the option was $15,000.  Under the terms of the option agreement, wehave the option to purchase the land for $1,500,000. The land option commenceson the date of the execution of the option agreement and continues for 180 daysfrom, but not including, the date of the execution of the agreement.  The option can be extended for another 180days at our sole discretion with no additional consideration. In the event weexercise this option, the option agreement allows us to apply the amounts paidfor the option and extensions of the option towards the total purchase pricefor the land.  If the option is notexercised after the 180 days, the land option agreement becomes null and void.

OnMay 25, 2006, we entered into a real estate option agreement for a secondalternative Akron plant site with Woodrow T. and Dorothy M. Ford, unrelatedparties, granting us an option to purchase approximately 348 acres ofland.  The price of the option was$25,000.  Under the terms of the optionagreement, we have the option to purchase the land for $7,000 per surveyedacre. The land option commences on the date of the execution of the option agreementand continues for 180 days from, but not including, the date of the executionof the agreement.  The option can beextended for another 180 days at our sole discretion with no additionalconsideration. In the event we exercise this option, the option agreementallows us to apply the amounts paid for the option and extensions of the optiontowards the total purchase price for the land. If the option is not exercised after the 180 days, the land optionagreement becomes null and void.

**Liquidity and Capital Resources**

The following table shows cash flows for the ninemonths ended June 30, 2006 and 2005:

|                                           | ** ** | **Nine Months Ended June 30,** | ** **  |
|-------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                | ** ** | **2006**                                           | ** **  | **2005** | ** ** |
| Net cash from operating  activities       |       | $                                                  | 21,804,733  |   | $ | 24,526,324 |   |
| Net cash used for  investing activities   |       | $                                                  | (3,430,963  | ) | $ | (1,674,372 | ) |
| Net cash used for  financing activities   |       | $                                                  | (17,738,118 | ) | $ | (14,101,297 | ) |
| **Net increase in cash and  equivalents** | ** ** | **$**                                              | **635,652** | ** ** | **$** | **8,750,655** | ** ** |

 

*CashFlow From Operations. *Cash provided by operatingactivities was $21,804,733 for the first nine months of fiscal 2006 was downfrom $24,526,324 for the first nine months of fiscal 2005. This decreaseresulted primarily from the payment of the ADM price dispute settlement ofapproximately $3,900,000 in fiscal 2006. Our capital needs are being adequately met through cash from ouroperating activities and our current credit facilities.

*CashFlow From Investing Activities. *Cash used ininvesting activities was $3,430,963 for the first nine months of fiscal 2006,compared to cash used of $1,674,372 for the first nine months of fiscal 2005.This increase resulted from increases in funds used for our current expansionconstruction.

*Cash Flow From Financing Activities*.  We used cash to pay down our debt by$2,401,290 in the first nine months of fiscal 2006 compared to $7,155,804 inthe first nine months of fiscal 2005. Additionally, the total amount of cash wedistributed to partners and members totaled $15,336,828 in the first ninemonths of fiscal 2006 compared to $6,945,493 in the first nine months of fiscal2005.

**Indebtedness**

### *Short-Term Debt Sources*.  Wemaintain a line of credit with First National Bank of Omaha, March 2007, tofinance short-term working capital requirements.  Under the line of credit, we may borrow up to$3,500,000 revolving promissory note.  The interest payable on therevolving promissory note is due monthly at the one month LIBOR plus2.80%.  We pay a commitment fee of 0.125% on the unused portion of theline.  There was no outstanding balance as of June 30, 2006.  Themaximum available credit under this note is based on receivable and inventorybalances.  Our current receivable and inventory balances are notsufficient to allow us to use the maximum amount of the operating line of credit. As of June 30, 2006, the maximum amount available from the operating line 

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###  

### of credit was approximately $2,711,651.  As the balances in these accounts fluctuate, the amount ofavailable credit on this note may be reduced or increased subject to themaximum of $3,500,000.  The operating line of credit is subject toprotective covenants requiring us to maintain various financial ratios. The operating line of credit is secured by all business assets.

On April 10, 2006, we entered into an EleventhAmendment to Construction Loan Agreement with First National Bank of Omaha.Under this amendment, First National Bank of Omaha has agreed to loan us up to$5,673,025 of interim financing pursuant to a Bridge Note to finance theexpansion of our grain handling facilities and modification of existing grainsilos.  The Bridge Note will terminate onOctober 1, 2006.  During the term of thebridge loan, we have agreed to pay interest only on a quarterly basis on theoutstanding principal amount at a rate equal to the one-month LIBOR rate plus280 basis points. Upon completion of the term of the bridge loan, theoutstanding balance of this new expansion loan will either (i) be added to theprincipal balance of our Term Note 3 with First National Bank of Omaha relatingto the original construction of our ethanol plant; or (ii) paid from proceedsfrom a new permanent financing between us and First National Bank of Omahasecured for the purpose of financing our 40 million gallon expansion of ourexisting plant.  The maturity date of TermNote 3 is currently June 1, 2008.  Therewas no outstanding balance related to this note as of June 30, 2006.

Our new bridge loan is subject to all terms andconditions of our existing Construction Loan Agreement with First National Bankof Omaha, including the specific provisions regarding events of default and thegranting of liens to secure our performance. In the event of default, FirstNational Bank of Omaha may accelerate the due date of the new loan and declareall obligations immediately due and payable. All loan proceeds will bedisbursed pursuant to a Construction Disbursement Agreement between us, FirstNational Bank of Omaha, ICM, AgStar Financial Services ACA (the disbursingagent) and Old Republic National Title Insurance Company (the title company).

#### *Long-Term Debt Sources*.  We have long-termdebt financing consisting of three term notes held by First National Bank ofOmaha and referred to as Term Notes #2, #3, and #4. At June 30, 2006, theprincipal balance on Term Note #2 was $11,668,882. Term Note #2 is payable inquarterly installments. Interest on Term Note #2 is at the three month LIBORplus 2.80%, which totaled 8.03% as of June 30, 2006. Term Note #2 is payable infull on June 1, 2008. In order to achieve a fixed interest rate on Term Note#2, we entered 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.

At June 30, 2006, the principal balance on Term Note#3 was $5,484,168. Term Note #3 is payable in quarterly installments. Intereston Term Note #3 is at the three month LIBOR plus 2.80%, which totaled 8.03% asof June 30, 2006. Term Note #3 is payable in full on June 1, 2008.  As part of the financing agreement, wehave agreed to pay an annual servicing fee of $50,000 for five years.

At June 30, 2006, there was no principal balance onTerm Note #4. Term Note #4 is payable in quarterly installments. Interest onTerm Note #4 is at the one month LIBOR plus 2.80%. Term Note #4 is payable infull on June 1, 2008. Term Note #4 allows borrowings up to the originalprincipal of $5,000,000 to the extent of principal payments made untilmaturity.

We have a capital lease obligation in the amount of$135,217 on which we initially pay monthly installments totaling $6,658, withan implicit interest rate of 3.6%. This obligation is secured by the leasedequipment and runs through March 1, 2008.

We have a note in the amount of $107,639 payable tothe Iowa Energy Center on which we pay monthly installments of $3,472 withoutinterest. This note is secured by real estate, but is subordinated to the termnotes. It matures on January 29, 2009.

We have a note with Farmers State Bank of Marcus, Iowain the amount of $118,833 on which we pay monthly installments of $5,921,including interest at 6%. This note is secured by real estate, but issubordinated to the term notes. It matures on January 29, 2009.

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We have a note totaling $182,000 payable to the IowaDepartment of Economic Development on which we pay monthly installments of$1,167 without interest. This note is secured by all equipment and matures onJuly 1, 2009.

*Contractual Obligations andCommercial Commitments*. Except as disclosed in this report, there were no material changes inthe Company’s contractual obligations and commercial commitments during thethree months ended June 30, 2006.  

**CriticalAccounting Estimates**

Therewere no material changes in the Company’s accounting estimates during the threemonths ended June 30, 2006.

**Off-Balance Sheet Arrangements.**

We currently have no off-balance sheet arrangements.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

We are exposed to the impactof market fluctuations associated with interest rates and commodity prices asdiscussed below. We have no exposure to foreign currency risk as all of itsbusiness is conducted in U.S. Dollars. We use derivative financial instrumentsas part of an overall strategy to manage market risk. We use cash, futures andoption contracts to hedge changes to the commodity prices of corn and naturalgas. We do not enter into these derivative financial instruments for trading orspeculative purposes, nor do we designate these contracts as hedges foraccounting purposes pursuant to the requirements of SFAS 133, *Accounting for Derivative Instruments and Hedging Activities*.

**Interest Rate Risk**

Weare exposed to market risk from changes in interest rates. Exposure to interestrate risk results primarily from holding a revolving promissory note and threeterm notes which bear variable interest rates.  Specifically, wehave $17,153,050 outstanding in variable rate, long-term debt as of June 30,2006.  The specifics of each noteare discussed in greater detail in “**Item 2 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Indebtedness**.”

In order to achieve a fixed interest rate on Term Note#2, we entered 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. When the three-month LIBOR plus2.80% exceeds 5.79%, we receive payments for the difference between the marketrate and the swap rate. Conversely, when the three-month LIBOR plus 2.80% isbelow 5.79%, we make payments for the difference between the market rate andthe swap rate. While our exposure is now greatly reduced, there can be noassurance that the interest rate swap agreement will provide us with protectionin all scenarios. For example, if interest rates were to fall below 5.79%, wewould still be obligated pay interest at 5.79% under the interest rate swapagreement.

In order to protect our interest rate exposure on TermNote #3, we entered into an interest rate cap agreement to reduce the risk ofincreases in interest rates. The interest rate cap agreement is based on anotional amount of $10,000,000 and caps increases in interest rates at 6.8% onthis amount. The interest rate cap agreement expired on June 1, 2006; however,obligations under Term Note #3 continue until June 1, 2008. Accordingly,we are vulnerable to rising interest rates.

Since the interest ratecap has expired, it had no value as of June 30, 2006.  At September 30, 2005 the fair value of thisinterest rate cap was $69,756, which was recorded as an asset with derivativeinstruments.  The interest rate cap wasnot designated as a cash flow hedge. We charged interest expense with a loss of$34,778 and $20,050 on the interest rate cap for the three months ended June30, 2006 and 2005, respectively. We charged interest expense with a loss of$69,756 and offset interest expense with a gain of $27,254 on the interest ratecap for the nine months ended June 30, 2006 and 2005, respectively.

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**CommodityPrice Risk**

We arealso exposed to market risk from changes in commodity prices.  Exposure tocommodity price risk results from our dependence on corn and natural gas in theethanol production process.  We seek to minimize the risks fromfluctuations in the prices of corn and natural gas through the use ofderivative instruments.  In practice, as markets move, we actively manageour risk and adjust hedging strategies as appropriate.  Although webelieve our hedge positions accomplish an economic hedge against our futurepurchases, they are not designated as such for hedge accounting purposes, whichwould match the gain or loss on our hedge positions to the specific commoditypurchase being hedged.  We are marking to market our hedge positions,which means as the current market price of our hedge positions changes, thegains and losses are immediately recognized in our cost of goods sold.

Theimmediate recognition of hedging gains and losses can cause net income to bevolatile from quarter to quarter due to the timing of the change in value ofthe derivative instruments relative to the cost and use of the commodity beinghedged. At June 30, 2006 and September 30, 2005, the fair value of ourderivative instruments for corn and natural gas is an asset in the amount of$1,345,240 and $496,853, respectively. There are several variables that couldaffect the extent to which our derivative instruments are impacted by pricefluctuations in the cost of corn or natural gas. However, it is likely thatcommodity cash prices will have the greatest impact on the derivativesinstruments with delivery dates nearest the current cash price.

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

Weestimate that our expected corn usage is approximately 18 million bushels peryear for the production of 52 million gallons of ethanol.  We have priceprotection for approximately 89% of our expected corn usage for fiscal yearended September 30, 2006 and approximately 60% of our usage for fiscalyear 2007 using forward contracts, CBOT futures and options andOver-the-Counter option contracts.  As we move forward, additionalprotection may be necessary.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on theimpact such market movements have on the value of our derivativeinstruments.  As we move forward, additional price protection may berequired to solidify our margins into fiscal year 2007.  Depending onmarket movements, crop prospects and weather, these price protection positionsmay cause immediate adverse effects, but are expected to produce long-termpositive growth for us.

Tomanage our natural gas price risk, we entered into a natural gas purchaseagreement with our supplier to supply us with natural gas.  This purchase agreement fixes the price atwhich we purchase natural gas.  We estimate that we have forward contractsin place for approximately 95% of our natural gas needs throughSeptember 2006.  In addition to procuring natural gas requirementsthrough summer and fall 2006, we have purchased approximately 85% of our falland winter 2006 and 2007 natural gas requirements utilizing both cash, futuresand options contracts.  We may also purchase additional natural gas requirementsfor the 2007 calendar year as we attempt to further reduce our susceptibilityto price increases.

At thetime we purchased price protection for natural gas, the market was experiencinga great deal of price uncertainty.  Due to this uncertainty, we purchasedamounts for most of the plant’s needs and implemented derivative instruments toallow us to benefit in the event natural gas prices declined.  Energysector prices have increased and natural gas, as a portion of the total energymarket, has responded with higher prices to be cost competitive with itsalternatives.  In the future, we may not be able to secure naturalgas for prices less than current market price and we may not recover high costsof production resulting from high natural gas prices, which may raise our costsof production.

Asensitivity analysis has been prepared to estimate our exposure to corn andnatural gas price risk. The table presents the fair value of our derivativeinstruments as of June 30, 2006 and September 30, 2005 and the potentialloss in fair value resulting from a hypothetical 10% adverse change in suchprices.  The fair value of the 

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positions is a summationof the fair values calculated by valuing each net position at quoted marketprices as of the applicable date. The results of this analysis, which maydiffer from actual results, are as follows:

|                         | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse Change  — Market Risk** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------|------------|
| June 30, 2006           |       | $                   | 1,345,240  |                                                                                    | $          | 134,524 |   |
| September 30, 2005 |       | $                   | 496,855    |                                                                                    | $          | 49,685 |   |

 

**ITEM 4.  CONTROLS ANDPROCEDURES.**

Our management, includingour President and Chief Executive Officer (the principal executive officer),Stephen Roe, along with our Chief Financial Officer (the principal financialofficer), Gary Grotjohn, have reviewed and evaluated the effectiveness of ourdisclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934, as amended)as of June 30, 2006.  Based upon this review and evaluation, these officershave concluded that our disclosure controls and procedures are effective toensure that information required to be disclosed in the reports that we file orsubmit under the Exchange Act  isrecorded, processed, summarized and reported within the time periods requiredby the forms and rules of the Securities and Exchange Commission; and toensure that the information required to be disclosed by an issuer in thereports that it files or submits under the Exchange Act is accumulated andcommunicated to our management including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

Our management, including our principal executiveofficer and principal financial officer, have reviewed and evaluated anychanges in our internal control over financial reporting that occurred as ofJune 30, 2006 and there has been no change that has materially affected or isreasonably likely to materially affect our internal control over financialreporting.

**PARTII.     OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS.**

None.

**ITEM 1A.  RISK FACTORS.**

The following Risk Factor is provided to supplementand update the Risk Factors previously disclosed in our Annual Report on Form10-K.  The Risk Factor set forth belowshould be read in conjunction with the considerations set forth above in “MANAGEMENT’SDICUSSION AND ANALYSIS” and the risk factors set forth in the Annual Report onForm 10-K for the fiscal year ended September 30, 2005.

**Risks Related to Our Expansion Strategy**

We give no assurances thatwe will be able to implement our expansion strategy as planned or at all.* *Weare planning to expand our current production capacity (52 million gallons peryear) by an additional 40 million gallons annually.  In addition, we are planning to construct anew ethanol plant near Akron, Iowa in Plymouth County.   We will need additional financing toimplement our expansion strategy and we give no assurance as to theavailability or the terms of any additional financing we may require. We maynot have access to the funding required for the expansion of our business orsuch funding may not be available to us on acceptable terms.

The cost of the expansion of our existing plant isexpected to be approximately $70,000,000, which we expect to finance using botha portion of our cash and additional debt to finance the required capitalexpenditure. The total project cost for the Akron plant is expected to be$150,000,000.  We have not yet determinedour financing plan for the Akron plant and may finance the plant withadditional indebtedness or by issuing additional equity securities.  The use of retained cash to finance theseexpenditures could impact our ability to make future distributions to ourmembers.  We do not have contracts orcommitments with any bank, lender, governmental 

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entity,underwriter or financial institution for debt financing.  If debt financing on acceptable terms is notavailable for any reason, we may be forced to abandon our expansion plans.  We could face financial risks associated withincurring additional indebtedness, such as reducing our liquidity and access tofinancial markets and increasing the amount of cash flow required to servicesuch indebtedness, or associated with issuing additional stock, such asdilution of ownership and earnings.

We have not receivedcertain permits and failure to obtain these permits would prevent expansion ofour current plant or construction of the new plant.  Before we can begin expansion of our currentplant or construction of the new plant, we must obtain numerous regulatoryapprovals and permits.  While weanticipate receiving these approvals and permits, there is no assurance thatthese requirements can be satisfied in a timely manner or at all.  In addition, governmental requirements may substantially increase our costs, whichcould have a material adverse effect on our results of operations and financialcondition.  Our expansion plansmay also result in other unanticipated adverse consequences, such as thediversion of management’s attention from our existing operations.

Our construction costs may also increase to levelsthat would make a new facility too expensive to complete or unprofitable tooperate.  We expect Fagen, Inc. willexpand our existing plant and construct the Akron plant and that Fagen, Inc.will engage ICM, Inc. to provide design and engineering services.  Therefore, we will be highly dependent uponFagen, Inc. and ICM, Inc. to expand our plant, but we have no letterof intent or definitive binding agreement with either company which might limitour exposure to higher costs in developing and completing the expansion or newconstruction.  Contractors, engineeringfirms, construction firms and equipment suppliers also receive requests andorders from other ethanol companies and, therefore, we may not be able tosecure their services or products on a timely basis or on acceptable financialterms.  We may suffer significant delaysor cost overruns as a result of a variety of factors, such as shortages ofworkers or materials, transportation constraints, adverse weather, unforeseendifficulties or labor issues, any of which could prevent us from commencingoperations as expected at our facilities.

Accordingly, we give you no assurance that we will beable to implement our expansion strategy as planned or at all.  There also is no assurance that we will findan appropriate site for the new Akron facility or that we will be able tofinance, construct, develop or operate the new facility or our expandedfacility successfully.

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

None.

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

None.

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

None.

**ITEM 5.**  **OTHERINFORMATION.**

None.

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.**

(a)                                  Thefollowing exhibits are filed as part of this report.
|        | 10.1   |   | Electrical  Design Services Agreement dated July 10, 2006 with Fagen Engineering, LLC. |   |
|--------|--------|--------|----------------------------------------------------------------------------------------|--------|
|   |   |   |                                                                                   |   |
|   | 10.2   |   | Change Order  Agreement dated July 17, 2006 with McCormick Construction Company, Inc.  |   |

 

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|        | 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 onForm 8-K:  None.

**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                        | LITTLE SIOUX CORN PROCESSORS, L.L.C.  |
|------------------------|---------------------------------------|
|                   |                                  |
| Date: August 14,  2006 | /s/ Stephen Roe                       |
|                   | Stephen Roe                           |
|                   | President and Chief Executive Officer |
|                   |                                  |
| Date: August 14,  2006 | /s/ Gary Grotjohn                     |
|                   | Gary Grotjohn                         |
|                   | Chief Financial Officer               |

 

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