**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                  | ** ** | **Quarterly report under Section 13  or 15(d) of the Securities Exchange Act of 1934.** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                        |       |                                                                                              |
| **For the  fiscal quarter ended March 31, 2006**                                                                                                                                                                       |
|                                                                                                                                                                                                                        |       |                                                                                              |
| **OR**                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                        |       |                                                                                              |
| **o**                                                                                                                                                                                                                       | ** ** | **Transition report under Section 13  or 15(d) of the Exchange Act.**                   |
|                                                                                                                                                                                                                        |       |                                                                                              |
| **For the  transition period  from               to               .** |

 

**COMMISSION FILE NUMBER0001229899**

 

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

(Exact name of registrant asspecified in its charter)

 

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

 

**4808 FAvenue, Marcus, Iowa 51035**

(Address of principalexecutive offices)

 

**(712)376-2800**

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.
|   | ý    Yes          o   No |
|--------|-----------------------------------------------------------------------------------------------------|

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
|   | o   Yes          ý   No |
|--------|----------------------------------------------------------------------------------------------------|

 

Indicate the number of shares outstanding for eachof the issuer’s classes of common equity as of the latest practicable date:

 

As of May 12, 2006, there were 10,941 unitsoutstanding.

 

 

----

 

**INDEX**

 
| **PART I.**    | **FINANCIAL  INFORMATION** | ** **                                                                        |
|----------------|----------------------------|-----------------------------------------------------------------------------------|
|           |                       |                                                                              |
| ** **     | **ITEM 1.**                | **FINANCIAL  STATEMENTS**                                                         | ** ** |
| ** **     | **ITEM  2.**               | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS** | ** ** |
| ** **     | **OF  OPERATIONS**         | ** **                                                                        |
| ** **     | **ITEM 3.**                | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                   | ** ** |
| ** **     | **ITEM 4.**                | **CONTROLS AND  PROCEDURES**                                                      | ** ** |
|           |                       |                                                                              |   |
| **PART II.**   | **OTHER INFORMATION**      | ** **                                                                        |
|           |                       |                                                                              |
| ** **     | **ITEM  1.**               | **LEGAL  PROCEEDINGS**                                                            | ** ** |
| ** **     | **ITEM 2.**                | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                  | ** ** |
| ** **     | **ITEM 3.**                | **DEFAULTS  UPON SENIOR SECURITIES**                                              | ** ** |
| ** **     | **ITEM 4.**                | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                          | ** ** |
| ** **     | **ITEM  5.**               | **OTHER  INFORMATION**                                                            | ** ** |
| ** **     | **ITEM 6.**                | **EXHIBITS  AND REPORTS ON FORM 8-K**                                             | ** ** |
|           |                       |                                                                              |   |
| **SIGNATURES** | ** **                 |
|                |                            |                                                                                   |  |  |

 

----

 

**PART I.    FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

**LITTLE SIOUX CORN PROCESSORS, LLCAND SUBSIDIARY**

 

Condensed ConsolidatedBalance Sheet

 
| ** **                                                                                                     | ** ** | **March 31** | ** ** | **September 30** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                     | ** ** | **(Unaudited)**   | ** ** | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Current  Assets**                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and  equivalents                                                                                          |       | $                 | 11,889,024 |                  | $          | 14,135,954 |   |
| Short-term  investments                                                                                        |       | 3,001,309         |       | 6,987,420             |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $20,000                                    |       | 2,073,279         |       | 2,518,278             |       |
| Other  receivables                                                                                             |       | 127,589           |       | 185,046               |       |
| Inventory                                                                                                      |       | 1,887,166         |       | 1,346,217             |       |
| Derivative  instruments                                                                                        |       | 1,795,034         |       | 566,609               |       |
| Prepaid  expenses                                                                                              |       | 1,462,419         |       | 1,008,754             |       |
| Total  current assets                                                                                          |       | 22,235,820        |       | 26,748,278            |       |
|                                                                                                           |       |              |       |                  |       |
| **Property  and Equipment**                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Land and  improvements                                                                                         |       | 2,769,067         |       | 2,762,708             |       |
| Buildings                                                                                                      |       | 15,769,737        |       | 15,768,603            |       |
| Processing  equipment                                                                                          |       | 34,374,334        |       | 32,910,303            |       |
| Grain  handling equipment                                                                                      |       | 5,299,705         |       | 5,264,448             |       |
| Rail and  other equipment                                                                                      |       | 1,502,800         |       | 1,342,950             |       |
| Furniture  and fixtures                                                                                        |       | 201,327           |       | 195,298               |       |
| Construction  in progress                                                                                      |       | 1,069,120         |       | 713,898               |       |
|                                                                                                           |       | 60,986,090        |       | 58,958,208            |       |
| Less  accumulated depreciation                                                                                 |       | 11,184,501        |       | 8,829,771             |       |
| Net property  and equipment                                                                                    |       | 49,801,589        |       | 50,128,437            |       |
|                                                                                                           |       |              |       |                  |       |
| **Other  Assets**                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| Long-term  investments                                                                                         |       | 100,172           |       | 48,000                |       |
| Land option  and other                                                                                         |       | 15,316            |       |                  |       |
| Deferred  loan costs, net                                                                                      |       | 189,375           |       | 237,641               |       |
| Total other  assets                                                                                            |       | 304,863           |       | 285,641               |       |
|                                                                                                           |       |              |       |                  |       |
| **Total  Assets**                                                                                              |       | $                 | 72,342,272 |                  | $          | 77,162,356 |   |
| ** **                                                                                                     |       |              |       |                  |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Current  Liabilities**                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  maturities of long-term debt                                                                          |       | 5,069,056         |       | 4,005,714             |       |
| Trade  accounts payable                                                                                        |       | 4,114,605         |       | 2,304,286             |       |
| Accrued  liabilities                                                                                           |       | 949,503           |       | 4,334,316             |       |
| Total  current liabilities                                                                                     |       | 10,133,164        |       | 10,644,316            |       |
|                                                                                                           |       |              |       |                  |       |
| **Long-Term Debt,**net of current maturities                                                                   |       | 13,419,713        |       | 16,092,315            |       |
|                                                                                                           |       |              |       |                  |       |
| **Deferred  Compensation**                                                                                     |       | 100,172           |       | 48,000                |       |
|                                                                                                           |       |              |       |                  |       |
| **Commitments  and Contingencies**                                                                             | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Minority  Interest**                                                                                         |       | 19,534,906        |       | 20,209,574            |       |
|                                                                                                           |       |              |       |                  |       |
| **Members’  Equity**                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Member  contributions, 10,941 units issued and outstanding at March 31, 2006 and  September 30, 2005 |       | 10,842,237        |       | 10,842,237            |       |
| Retained  earnings                                                                                             |       | 18,312,080        |       | 19,325,914            |       |
| Total members’  equity                                                                                    |       | 29,154,317        |       | 30,168,151            |       |
|                                                                                                           |       |              |       |                  |       |
| **Total  Liabilities and Members’ Equity**                                                                |       | $                 | 72,342,272 |                  | $          | 77,162,356 |   |

 

Notes toCondensed Consolidated Financial Statements are an integral part of thisStatement.

 

1

----

 

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Condensed ConsolidatedStatements of Operations

 
| ** **                                                  | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                  | ** ** | **March 31**    | ** ** | **March 31**    | ** ** |
| ** **                                                  | ** ** | **2006**             | ** ** | **2005**             | ** ** |
| ** **                                                  | ** ** | **(Unaudited)**      | ** ** | **(Unaudited)**      | ** ** |
|                                                        |       |                 |       |                 |       |
| **Revenues**                                                |       | $                    | 50,640,010 |                 | $          | 46,811,419 |   |
|                                                        |       |                 |       |                 |       |
| **Cost of Goods Sold**                                      |       | 35,580,077           |       | 32,998,374           |       |
|                                                        |       |                 |       |                 |       |
| **Gross Profit**                                            |       | 15,059,933           |       | 13,813,045           |       |
|                                                        |       |                 |       |                 |       |
| **Operating Expenses**                                      |       | 1,251,848            |       | 1,131,464            |       |
|                                                        |       |                 |       |                 |       |
| **Operating Income**                                        |       | 13,808,085           |       | 12,681,581           |       |
|                                                        |       |                 |       |                 |       |
| **Other Income (Expense)**                                  | ** ** | ** **           | ** ** | ** **           | ** ** |
| Interest  income                                            |       | 391,698              |       | 42,277               |       |
| Interest  expense                                           |       | (629,858             | )          | (505,719             | )          |
| CCC  Bio-Energy income                                      |       | 28,853               |       | 45,917               |       |
| Grants and  other income                                    |       | 49,548               |       | 104,736              |       |
| Total other  expense                                        |       | (159,759             | )          | (312,789             | )          |
|                                                        |       |                 |       |                 |       |
| **Net Income Before Minority Interest**                     |       | 13,648,326           |       | 12,368,792           |       |
|                                                        |       |                 |       |                 |       |
| **Minority Interest in Sudsidiary Income**                  |       | 5,446,091            |       | 4,957,679            |       |
|                                                        |       |                 |       |                 |       |
| **Net Income**                                              |       | $                    | 8,202,235  |                 | $          | 7,411,113 |   |
|                                                        |       |                 |       |                 |       |
| **Weighted Average Units Outstanding - Basic  and Diluted** |       | 10,941               |       | 10,941               |       |
|                                                        |       |                 |       |                 |       |
| **Net Income Per Unit - Basic and Diluted**                 |       | $                    | 749.68     |                 | $          | 677.37 |   |
|                                                        |       |                 |       |                 |       |
| **Distributions Per Unit - Basic and Diluted**              |       | $                    | 842.34     |                 | $          | 379.88 |   |

 

Notes toCondensed Consolidated Financial Statements are an integral part of thisStatement.

 

2

----

 

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Condensed ConsolidatedStatements of Operations

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **March 31**      | ** ** | **March 31**      | ** ** |
| ** **                                                  | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **                                                  | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**        | ** ** |
|                                                        |       |                   |       |                   |       |
| **Revenues**                                                |       | $                      | 27,498,079 |                   | $          | 23,835,684 |   |
|                                                        |       |                   |       |                   |       |
| **Cost of Goods Sold**                                      |       | 20,086,266             |       | 15,828,089             |       |
|                                                        |       |                   |       |                   |       |
| **Gross Profit**                                            |       | 7,411,813              |       | 8,007,595              |       |
|                                                        |       |                   |       |                   |       |
| **Operating Expenses**                                      |       | 699,441                |       | 537,553                |       |
|                                                        |       |                   |       |                   |       |
| **Operating Income**                                        |       | 6,712,372              |       | 7,470,042              |       |
|                                                        |       |                   |       |                   |       |
| **Other Income (Expense)**                                  | ** ** | ** **             | ** ** | ** **             | ** ** |
| Interest  income                                            |       | 246,916                |       | 30,293                 |       |
| Interest  expense                                           |       | (328,971               | )          | (235,144               | )          |
| CCC  Bio-Energy income                                      |       | 3,288                  |       | 28,617                 |       |
| Grants and  other income                                    |       | 21,229                 |       | 81,420                 |       |
| Total other  expense                                        |       | (57,538                | )          | (94,814                | )          |
|                                                        |       |                   |       |                   |       |
| **Net Income Before Minority Interest**                     |       | 6,654,834              |       | 7,375,228              |       |
|                                                        |       |                   |       |                   |       |
| **Minority Interest in Sudsidiary Income**                  |       | 2,659,079              |       | 2,965,331              |       |
|                                                        |       |                   |       |                   |       |
| **Net Income**                                              |       | $                      | 3,995,755  |                   | $          | 4,409,897 |   |
|                                                        |       |                   |       |                   |       |
| **Weighted Average Units Outstanding - Basic  and Diluted** |       | 10,941                 |       | 10,941                 |       |
|                                                        |       |                   |       |                   |       |
| **Net Income Per Unit - Basic and Diluted**                 |       | $                      | 365.21     |                   | $          | 403.06 |   |
|                                                        |       |                   |       |                   |       |
| **Distributions Per Unit - Basic and Diluted**              |       | $                      | 842.34     |                   | $          | 379.88 |   |

 

Notes toCondensed Consolidated Financial Statements are an integral part of thisStatement.

 

3

----

 

**LITTLE SIOUXCORN PROCESSORS, LLC AND SUBSIDIARY**

 

Condensed ConsolidatedStatements of Cash Flows

 
| ** **                                                                 | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                 | ** ** | **March 31**    | ** ** | **March 31**    | ** ** |
| ** **                                                                 | ** ** | **2006**             | ** ** | **2005**             | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**      | ** ** | **(Unaudited)**      | ** ** |
| **Cash Flows from Operating Activities**                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| Net income                                                                 |       | $                    | 8,202,235  |                 | $          | 7,411,113 |   |
| Adjustments  to reconcile net income to net cash from operations:          |       |                 |       |                 |       |
| Depreciation  and amortization                                             |       | 2,402,996            |       | 1,815,618            |       |
| Deferred  compensation                                                     |       | 52,172               |       | —               |       |
| Minority  interest in subsidiary’s income                             |       | 5,446,091            |       | 4,957,679            |       |
| Change in  assets and liabilities:                                         |       |                 |       |                 |       |
| Receivables                                                                |       | 502,456              |       | 1,089,860            |       |
| Restricted  cash                                                           |       | —               |       | 2,084,507            |       |
| Inventory                                                                  |       | (540,949             | )          | 539,138              |       |
| Derivative  instruments                                                    |       | (1,228,425           | )          | (785,648             | )          |
| Prepaid  expenses                                                          |       | (453,665             | )          | 31,571               |       |
| Accounts  payable                                                          |       | 2,296,005            |       | (328,411             | )          |
| Accrued  liabilities                                                       |       | (4,720,432           | )          | 208,351              |       |
| Net cash  provided by operating activities                                 |       | 11,958,484           |       | 17,023,778           |       |
|                                                                       |       |                 |       |                 |       |
| **Cash Flows from Investing Activities**                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| Payments for  investments                                                  |       | (52,172              | )          | —               |       |
| Proceeds  from investments                                                 |       | 3,986,111            |       | —               |       |
| Capital  expenditures                                                      |       | (1,177,949           | )          | (1,620,854           | )          |
| Land option  and other                                                     |       | (15,316              | )          | —               |       |
| Net cash  provided by (used in) investing activities                       |       | 2,740,674            |       | (1,620,854           | )          |
|                                                                       |       |                 |       |                 |       |
| **Cash Flows from Financing Activities**                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| Proceeds of  short-term debt                                               |       | —               |       | 1,089,180            |       |
| Payments of  long-term debt                                                |       | (1,609,260           | )          | (6,259,456           | )          |
| Distribution  to minority interest                                         |       | (6,120,759           | )          | (1,593,844           | )          |
| Distribution  to members                                                   |       | (9,216,069           | )          | (2,406,156           | )          |
| Net cash  used in financing activities                                     |       | (16,946,088          | )          | (9,170,276           | )          |
|                                                                       |       |                 |       |                 |       |
| **Net increase (decrease) in cash and  equivalents**                       |       | (2,246,930           | )          | 6,232,648            |       |
| ** **                                                                 |       |                 |       |                 |       |
| **Cash and Equivalents****–**Beginning of Period                      |       | 14,135,954           |       | 3,907,380            |       |
| ** **                                                                 |       |                 |       |                 |       |
| **Cash and Equivalents –**End  of Period                              |       | $                    | 11,889,024 |                 | $          | 10,140,028 |   |
| ** **                                                                 |       |                 |       |                 |       |
| **Supplemental Cash Flow Information**                                     | ** ** | ** **           | ** ** | ** **           | ** ** |
| Cash paid  during the year for:                                            |       |                 |       |                 |       |
| Interest                                                                   |       | $                    | 596,965    |                 | $          | 554,938 |   |
|                                                                       |       |                 |       |                 |       |
| **Supplemental Disclosure of Noncash  Investing and Financing Activities** | ** ** | ** **           | ** ** | ** **           | ** ** |
| Capital  Expenditures in Accounts Payable                                  |       | $                    | 849,933    |                 |       |   |
|                                                                       |       |                 |       |                 |       |
| Distributions  Payable                                                     |       |                 |       | $                    | 2,945,493  |   |

 

Notes toCondensed Consolidated Financial Statements are an integral part of thisStatement.

 

4

----

 

**LITTLE SIOUX CORN PROCESSORS, LLCAND SUBSIDIARY**

 

Notes to Condensed Consolidated FinancialStatements (Unaudited)

 

March 31, 2006

 

**1. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

These condensed consolidated financial statementsand related notes should be used in conjunction with the consolidated financialstatements and notes included in the Company’s audited consolidated financialstatements for the year ended September 30, 2005, contained in the Company’sannual report of Form 10-K for 2005. As used in this report in Form 10-Q,the “Company” represents Little Sioux Corn Processors, LLC (LLC) and itssubsidiary LSCP, LLLP (LSCP).

 

The condensed consolidated interim financialstatements are unaudited. These statements include all adjustments (consistingof normal recurring accruals) that we considered necessary to present a fairstatement of the results of operations, financial position, and cash flows. Theresults reported in these condensed, consolidated financial statements shouldnot be regarded as necessarily indicative of results that may be expectedfor the entire year.

 

*Nature of Business*

 

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

 

*Revenue Recognition*

 

Revenue from the sale of the Company’s products isrecognized at the time title of the goods and all risks of ownership transferto the customers. This generally occurs upon shipment to the customer or whenthe 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.

 

*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 March 31, 2006. Thesereclassifications had no effect on members’ equity, net income, or cash flowspreviously reported.

 

**2. DERIVATIVE INSTRUMENTS**

 

At March 31, 2006 and September 30, 2005,the Company had recorded an asset for derivative instruments related to cornand natural gas options and futures positions of $1,760,256 and $496,853,respectively. None of the positions open at March 31, 2006 are designatedas cash flow hedges. The Company has recorded a gain of $473,404 in cost ofgoods sold related to its derivative instruments for the three months ended March 31,2006, and a gain of $1,118,676 in cost of goods sold for the six months ended March 31,2006. The Company had recorded a gain of $130,854 in cost of goods sold relatedto its derivative instruments for the three months ended March 31, 2005,and a loss of $1,227,994 in cost of goods sold for the six months ended March 31,2005.

 

At March 31, 2006 and September 30, 2005,the Company had an interest rate cap as described in Note 6 with a fair valueof $34,778 and $69,756, respectively, recorded as an asset with derivativeinstruments. The interest rate cap was not designated as a cash flow hedge. TheCompany added to interest expense a $25,346 loss and $34,978 loss on theinterest rate cap for the three months and six months, respectively, ending March 31,2006. The Company offset interest expense with the gain on the interest ratecap of $39,140 and $47,304 for the three months and six months, respectively,ending March 31, 2005.

 

5

----

 

**3. INVENTORY**

 

Inventory consists of the following:

 
| ** **      | ** ** | **March 31, 2006** | ** ** | **September 30, 2005 *** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------------------|------------|
|            |       |                    |       |                          |       |
| Raw materials   |       | $                       | 771,480    |                          | $          | 579,568 |   |
| Work in process |       | 536,981                 |       | 437,872                       |       |
| Finished goods  |       | 578,705                 |       | 328,777                       |       |
| Totals          |       | $                       | 1,887,166  |                          | $          | 1,346,217 |   |

 

----

* Derived from audited consolidated financialstatements.

 

**4. CONSTRUCTION IN PROGRESS**

 

Construction in progressas of March 31, 2006 is approximately $1,069,000, which includes initialpayments on the McCormick Construction contract as discussed in Note 10. TheCompany estimates its costs to complete the construction to be approximately$5,486,000. For the six months ended March 31, 2006, the Company has notincurred any interest nor has the Company capitalized any interest related toconstruction in progress.

 

**5. REVOLVING PROMISSORY NOTE**

 

Under the terms of the financing agreementwith the lending institution, the Company has a revolving promissory note of upto $3,500,000, subject to borrowing base limitations. In July 2005, thelending institution renewed the revolving promissory note until March 2006.On April 30, 2006, the Company renewed the revolving promissory notethrough March 30, 2007. The revolving promissory note incurs interestmonthly at the one month LIBOR plus 280 basis points. The Company pays acommitment fee of .125% on the unused portion of the revolving promissory note.There were no balances outstanding on the revolving promissory note at March 31,2006. The revolving promissory note as well as the term notes described in Note6 are subject to protective covenants under a common financing agreementrequiring the Company to maintain various financial ratios, including debtservice coverage and minimum net worth and working capital requirements andsecured by all business assets.

 

6

----

 

**6. LONG–TERM DEBT**

 

Long-term debt consists of the following:

 
| ** **                                                                                                                                                                                                              | ** ** | **March 31 2006** | ** **     | **September 30  2005*** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|----------------|------------------------------|------------|
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Term note #2 payable to lending  institution, see terms below.                                                                                                                                                          | ** ** | **$**                  | **12,025,680** |                         | $          | 12,732,447 |   |
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Term note #3 payable to lending  institution, see terms below.                                                                                                                                                          | ** ** | **5,876,324**          |           | 1,293,643                    |       |
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Term note #5 payable to lending  institution, see terms below.                                                                                                                                                          |       |                   |           | 5,400,000                    |       |
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Note payable  to Iowa Energy Center, due in monthly payments of $3,472 without interest,  maturing on January 29, 2009, secured by real estate, subordinated to  term notes.                                       | ** ** | **118,055**            |           | 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.                                                | ** ** | **129,373**            |           | 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. | ** ** | **185,500**            |           | 192,500                      |       |
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Capital  lease obligation, due in monthly installments initially totaling $6,658  commencing April 1, 2003 including implicit interest at 3.67% through March 1,  2008, secured by leased equipment.          | ** ** | **153,837**            |           | 190,564                      |       |
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Totals                                                                                                                                                                                                                  | ** ** | **$**                  | **18,488,769** |                         | $          | 20,098,029 |   |
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Less amounts  due within one year                                                                                                                                                                                       | ** ** | **5,069,056**          |           | 4,005,714                    |       |
|                                                                                                                                                                                                                    |       |                   |           |                         |       |
| Totals                                                                                                                                                                                                                  | ** ** | **$**                  | **13,419,713** |                         | $          | 16,092,315 |   |

 

----

* Derived from audited consolidated financialstatements.

 

7

----

 

The Company obtained debt financing from a lendinginstitution in the form of a revolving promissory note and term notes,referred to by the lending institution as term notes #2, #3, and #4. Term note#2 has fixed principal payments due quarterly with interest at the three monthLIBOR plus 280 basis points, which totaled 7.62% at March 31, 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 aninterest rate swap which effectively fixes the interest rate on this term noteat 5.79% until this term note is repaid on June 1, 2008.

 

Term note #3 bears interest at the three month LIBORplus 280 basis points, which totaled 7.62% at March 31, 2006. Term note #4bears interest at the one month LIBOR plus 280 basis points. Term notes #3 and#4 are payable in full on June 1, 2008. The Company is required to makequarterly payments of $506,588 applied first to accrued interest on term note#4. The remaining amount is applied to accrued interest on the term note #3 andthen to principal until this note is repaid in full or until maturity. Afterterm note #3 is repaid, payments are applied first to accrued interest and thento principal on the term note #4 until paid in full or until maturity. Termnote #4 had no outstanding balance as of March 31, 2006. Term note #4allows subsequent borrowings up to the original $5,000,000 to the extent ofprincipal payments made until maturity and requires a commitment fee of .25% onany unused portion. Term note #5 was added to term note #3 on October 1,2005.

 

As part of the financing agreement, the premiumabove the LIBOR on the term notes and revolving promissory note has beenreduced based 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 in interestrates at 6.8% on this amount until June 1, 2006.

 

The estimated maturities of long-term debt at March 31,2006 are as follows:

 

| 2006                  |   | $         | 5,069,056  |   |
|-----------------------|--------|-----------|------------|--------|
| 2007                  |   | 5,511,135 |       |
| 2008                  |   | 7,765,078 |       |
| 2009                  |   | 143,500   |       |
| Total  long-term debt |   | $         | 18,488,769 |   |

 

**7. MEMBERS’ EQUITY**

 

On January 17, 2006, the Board ofDirectors declared a distribution of $15,361,000 from LSCP to the partners,which was paid in February 2006. The LLC received approximately $9,240,000of this distribution. In February 2006, the LLC paid $842.34 per unit tothe LLC unit holders.

 

**8. RELATED PARTY TRANSACTIONS**

 

For the three months and six months ending March 31,2006, revenues from the sale of ethanol to Archer Daniels Midland (ADM) wereapproximately $24,050,000 and $44,357,000, respectively. For the three monthsand six months ending March 31, 2005, revenues from the sale of ethanol toADM were approximately $20,477,000 and $40,069,000, respectively. ADM marketsall of the ethanol sold by LSCP and receives a marketing fee. The Companyincurred marketing expenses of approximately $144,000 and $261,000, to ADM forthe three months and six months ended March 31, 2006, respectively. TheCompany incurred marketing expenses of approximately $125,000 and $244,000,respectively, to ADM for the three months and six months ended March 31,2005, respectively. At March 31, 2006 and 2005, amounts due from ADMapproximated 89% and 91%, respectively, of trade accounts receivable.

 

8

----

 

In the three months and six months ended March 31,2006, LSCP purchased approximately $1,660,000 and $2,651,000 in corn frommembers of the LLC, respectively. In the three months and six months ended March 31,2005, LSCP purchases approximately $806,000 and $2,087,000, respectively, incorn from members of the LLC.

 

**9. COMMITMENTS AND CONTINGENCIES**

 

Contractual Obligations

 

The following table provides information regardingthe consolidated contractual obligations of the Company as of March 31,2006:

 
| ** **                    | ** ** | **Total** | ** ** | **Less than One Year** | ** ** | **One to Three Years** | ** ** |
|-------------------------------|------------|-----------|------------|------------------------|------------|------------------------|------------|
| Long-Term Debt Obligations    |       | $         | 18,488,769 |                   | $          | 5,069,056              |       | $ | 13,419,713 |   |
| Operating Lease Obligations   |       | $         | 396,446    |                   | $          | 187,371                |       | $ | 209,076 |   |
| Purchase Obligations          |       | $         | 25,742,453 |                   | $          | 25,497,903             |       | $ | 244,550 |   |
| Total Contractual Obligations |       | $         | 44,627,666 |                   | $          | 30,754,330             |       | $ | 13,873,337 |   |

 

Land Option

 

On March 1, 2006, the Company entered into aland option agreement for $15,000 that will be credited against the purchaseprice of $1,500,000, should the Company decide to exercise the option. The landis expected to be used for the potential 100 MGPY ethanol plant that isanticipated 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 canbe extended for another 180 days at the sole discretion of the Company with noadditional consideration. If the option is not exercised after the 180 days,the land option agreement becomes null and void.

 

**10. SUBSEQUENT EVENTS**

 

On April 10, 2006, the Company entered into anEleventh Amendment to Construction Loan Agreement with First National Bank ofOmaha. Under this amendment, First National Bank of Omaha has agreed to loanthe Company up to $5,673,025 of interim financing pursuant to a Bridge Note tofinance construction of two 500,000-bushel cement grain bins in anticipation ofthe 40 million gallon expansion of our existing ethanol plant. The Bridge Notewill terminate October 1, 2006. During the term of the Bridge Note, theCompany agreed to pay interest only on a quarterly basis on the outstandingprinciple amount at a rate equal to the one-month LIBOR rate plus 280 basispoints. Upon completion of the term of the Bridge Note, the outstanding balanceof this expansion note will either (i) be added to the principal balanceof our Term Note 3 with First National Bank of Omaha relating to the originalconstruction of our ethanol plant; or (ii) paid from proceeds from a newpermanent financing between the Company and First National Bank of Omahasecured for the purpose of financing our 40 million gallon expansion of ourexisting plant. The maturity date of Term Note 3 is currently June 1,2008.

 

The Bridge Note 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.

 

On May 1, 2006, McCormick Construction Company, Inc.(“McC Inc.”), commenced construction on the expansion of LSCP, LLLP’s grainhandling facilities and the modification of existing silos to support theplanned forty million gallon expansion of the ethanol plant. The grainexpansion project is pursuant to the contract effective January 25, 2006,between LSCP, LLLP and McC Inc. for $5,673,025. Phase One is to besubstantially complete by May 1, 2007, and Phase Two is to besubstantially complete by September 1, 2007.

 

9

----

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF**

**OPERATIONS.**

 

We prepared the followingdiscussion and analysis to help you better understand our financial condition,changes in our financial condition, and results of operations for thethree-month period ended March 31, 2006, compared to the same period ofthe prior fiscal year. This discussion should be read in conjunction with theconsolidated financial statements and the Management’s Discussion and Analysis section forthe fiscal year ended September 30, 2005, included in the Company’s AnnualReport onForm 10-K.

 

**Disclosure RegardingForward-Looking Statements**

 

This report containshistorical information, as well as forward-looking statements that involveknown and unknown risks and relate to future events, our future financialperformance, or our expected future operations and actions. In some cases, youcan identify forward-looking statements by terminology such as “may,” “will,” “should,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,”“hope,” “predict,” “target,” “potential,” or “continue” or the negative ofthese terms or other similar expressions. These forward-looking statements areonly our predictions based upon current information and involve numerousassumptions, risks and uncertainties. Our actual results or actions may differmaterially from these forward-looking statements for many reasons, includingthe reasons described in this report. While it is impossible to identify allsuch factors, factors that could cause actual results to differ materially fromthose estimated by us include:

 

•                     Projected growth, overcapacity or contraction in the ethanol market inwhich we operate;

•                     Fluctuations in the price and market for ethanol and distillers grains;

•                     Changes in plant production capacity, variations actual ethanol anddistillers grains production from expectations or technical difficulties inoperating the plant;

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

•                     Changes in our business strategy, capital improvements or developmentplans for expanding, maintaining or contracting our presence in the market inwhich we operate;

•                     Costs of construction and equipment;

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

•                     Our ability to distinguish ourselves from our current and futurecompetition;

•                      Changes in or elimination of governmentallaws, tariffs, trade or other controls or enforcement practices such as:

—           national, state or local energy policy;

—           federal ethanol tax incentives;

—           legislation mandating the use of ethanol orother oxygenate additives;

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

—           environmental laws and regulations that applyto our plant operations and their enforcement;

•                     Increased competition in the ethanol and oil industries;

•                     Fluctuations in US oil consumption and petroleum prices;

•                     Changes in general economic conditions or the occurrence of certainevents causing an economic impact in the agriculture, oil or automobileindustries;

•                     Anticipated trends in our financial condition and results of operations

•                     Our liability resulting from litigation;

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

•                     Changes and advances in ethanol production technology; and

•                     Competition from alternative fuels and alternative fuel additives.

 

The cautionary statementsreferred to in this section also should be considered in connection withany subsequent written or oral forward-looking statements that may beissued by us or persons acting on our behalf. We undertake no duty to updatethese forward-looking statements, even though our situation may change inthe future. Furthermore, we cannot guarantee future results, events, levels ofactivity, performance, or achievements. We caution you not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis report. You should read this report and the documents that we reference inthis report and have filed as exhibits, completely and with the understandingthat our actual future results may be materially different from what wecurrently expect. We qualify all of our forward-looking statements by thesecautionary statements.

 

10

----

 

**Overview**

 

Little Sioux CornProcessors, L.L.C. (the “Company”) is an Iowa limited liability company thatowns the sole general partnership interest of LSCP, LLLP, (the “Partnership”)an Iowa limited liability limited partnership. As general partner, we managethe business and day-to-day operations of the Partnership’s 52 million gallonper year (MGY) ethanol plant located near Marcus, Iowa in northwest Iowa. Wecurrently own a 60.15% ownership interest in LSCP, LLLP. The Company and itssubsidiary, LSCP, LLLP, are collectively referred to in this report as “LSCP,” “we,”or “us.”

 

Our revenues are derived from the sale anddistribution of our ethanol, distillers grains and corn oil throughout thecontinental 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 of ethanolto ADM is based upon the average price that ADM receives from the sale to itscustomers of ethanol originating from (i) our plant, (ii) ADM’s plantin Marshall, Minnesota and (iii) ADM’s plant in Columbus, Nebraska, minusa fee. Except distillers grainswe sell directly to local farmers, our distillers grains are sold throughCommodity Specialist Company (“CSC”) which markets and sells the product tolivestock feeders. Forour distillers grains, we receive a percentage of the selling price actuallyreceived by CSC in marketing the distillers grains to its customers. We marketand sell our corn oil to regional wholesalers. Presently, the end use of ourcorn oil is in the livestock industry. In the long term, our corn oil could bemarketed for human consumption; however, market penetration as human food isunknown at this time as corn oil extraction in dry milling is relatively newand suitability for human consumption has not yet been determined.

 

We are subject toindustry-wide factors that affect our operating income and cost of production. Ouroperating results are largely driven by the prices at which we sell ethanol,distillers grain and corn oil and the costs related to their production. Historically,the price of ethanol tends to fluctuate in the same direction as the price ofunleaded gasoline and other petroleum products. Surplus ethanol supplies alsotend to put downward price pressure on ethanol. In addition, the price ofethanol is generally influenced by factors such as general economic conditions,the weather, and government policies and programs. The price of distillersgrains is generally influenced by supply and demand, the price of substitutelivestock feed, such as corn and soybean meal, and other animal feed proteins. Surplusgrain supplies also tend to put downward price pressure on distillers grains. Inaddition, our revenues are also impacted by such factors as our dependence onone or a few major customers who market and distribute our products; theintensely competitive nature of our industry; possible legislation at thefederal, state, and/or local level; changes in federal ethanol tax incentives.

 

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

 

**Results of Operations for the ThreeMonths Ended March 31, 2006 and 2005**

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our consolidatedstatements of operations for the three months ended March 31, 2006 and2006:

 
| ** **                             | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Income Statement Data**              | ** ** | **Amount**              | ** ** | **%**                   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                               |       | $27,498,079             |       | 100.0                   |       | $23,835,684 |   | 100.0 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Cost of Goods Sold                     |       | $20,086,266             |       | 73.0                    |       | $15,828,089 |   | 66.4 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Gross Profit                           |       | $7,411,813              |       | 27.0                    |       | $8,007,595 |   | 33.6 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Operating Expenses                     |       | $699,441                |       | 2.6                     |       | $537,553 |   | 2.3 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Operating Income                       |       | $6,712,372              |       | 24.4                    |       | $7,470,042 |   | 31.3 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Other Income (Expense)                 |       | $(57,538                | )          | (0.2                    | )          | $(94,814 | ) | (0.4 | ) |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Net Income Before Minority Interest    |       | $6,654,834              |       | 24.2                    |       | $7,375,228 |   | 30.9 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Minority Interest in Subsidiary Income |       | $2,659,079              |       | 9.7                     |       | $2,965,331 |   | 12.4 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Net Income                             |       | $3,995,755              |       | 14.5                    |       | $4,409,897 |   | 18.5 |   |

 

11

----

 

*Revenues**.*The increase in revenues from the three months ended March 31, 2006 compared to the three months ended March 31, 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. The gallons of ethanol sold in the three months ended March 31, 2006 increased approximately 15% over the gallons we sold in the three months ended March 31, 2005. In addition, the price we received for our ethanol increased approximately 2% in the three months ended March 31, 2006 compared to the three months ended March 31, 2005. In addition, revenue from sales of our co-products increased by 3% in the three months ended March 31, 2006 compared to the three months ended March 31, 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.

 

Dueto a number of factors, including the higher price of petroleum gasoline andseasonal demand, ethanol prices remained high during our first quarter of 2006.We believe the favorable prices result from higher gasoline prices, whichencourages voluntary blending, and the growing recognition of ethanol as analternative energy source. Based on existing market conditions, we expectfavorable pricing to continue at least through the end of our second fiscalquarter because the price of unleaded gasoline is expected to remain at orabove its current price levels as we enter the peak summer driving season.

 

Inaddition, we expect ethanol prices will be positively impacted by blenders andrefineries increasing their use of ethanol in response to environmentalliability concerns about methyl tertiary butyl ether (“MTBE”) and increasedconsumer acceptance and exposure of ethanol. For instance, if gasoline pricescontinue to trend higher, consumers will look for lower priced alternativefuels. The Consumer Federation of America recently published a report thatstates that consumers could save up to $0.08 per gallon at the pump if ethanolwere blended at 10%. Since ethanol blended fuel is a cheaper alternative forconsumers, the demand for such ethanol blended fuel could increase thusincreasing the overall demand for ethanol. This could positively affect ourearnings. However, the recent voluntary shift away from MTBE to ethanol has putincreased focus on America’s ethanol and gasoline supplies. Legislation wasrecently introduced in the Senate and House that would strike the $0.54secondary tariff on imported ethanol due to concerns that the recent spikes inretail gasoline prices are a result of ethanol supplies. Management believesthese concerns over ethanol supplies are misguided. The Energy InformationAdministration (“EIA”) estimates that 130,000 barrels per day of ethanol willbe needed to replace the volume of MTBE refiners have chosen to remove from thegasoline pool. The most recent EIA report shows that U.S. ethanol productionhas soared to 302,000 barrels per day in February, clearly enough ethanol tomeet the new MTBE replacement demand while continuing to supply existingmarkets. Further, ethanol production capacity continues to increase as newplants come on-line. Nevertheless, if the legislation is passed, the price ofethanol may decrease, negatively affecting our earnings.

 

Although the Energy Policy Act of 2005 effectively eliminated RFG requirements with the enactment of the national renewable fuel standard, federal air quality laws in some areas of the country still require the use of RFG. Historically, RFG has been formulated with either MTBE or ethanol. As petroleum blenders now phase away from MTBE due to environmental liability concerns, the demand for ethanol as an oxygenate could increase. However, on April 25, 2006, President Bush announced that he has asked EPA Administrator Stephen Johnson to grant temporary reformulated gas (“RFG”) waivers to areas that need them to relieve critical fuel supply shortages.

 

12

----

 

Such waivers may result in decrease in demand for ethanol driving down the price of ethanol. In addition, 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 April 27, 2006 there were 97 ethanol plants in operation nationwide with the capacity to produce more than 4.4 billion gallons annually, with approximately 35 additional plants expected to come into production in the next 18 months, along with nine existing plants expanding production capacity an additional 2.2 billion gallons. Accordingly, the price of ethanol may trend downward if supply exceeds demand which would negatively impact on our earnings.

 

On April 12, 2006, HF 2754 was passed by the Iowa House of Representatives and Iowa Senate. If enacted, HF 2754 is expected to expand consumer access to ethanol blended fuels and biodiesel 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 retails fuels beginning in 2009 and increases to 25% by 2019. The IRFS, not a mandate, 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 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 bill also provides for an expanded infrastructure program designed to help retailers and wholesalers offset the cost of bringing E85 and biodiesel blends to customers. The legislation is now before Governor Tom Vilsack, who is expected to sign the bill into law. However, there is no guarantee that the bill will be signed by the Governor. If enacted, the bill 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, while this bill may cause ethanol prices to increase in the short term due to additional demand, 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.

 

With respect to distillers grains, we believe that prices will remain at or near its currently low and stable levels due to the low price of corn and soybean meal and, therefore, revenues from the sale of distiller grains should remain relatively consistent with 2005. The lower corn and soybean prices were 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 goods sold as apercentage of revenues were 73.0% and 66.4% for the three months ended March 31,2006 and 2005, respectively. The increase in our cost of goods sold from periodto period is primarily due to (i) a 13% increase in the bushels of cornused in the production process; (ii) a 12% increase in MMBTUs of naturalgas we consumed at significantly higher prices than the same period in 2005;and (iii) increased expenses as a result of changes in the fair value ofnatural gas derivative instruments.

 

The increase in the numberof bushels used in the production process and MMBTUs of natural gas is a resultof increased ethanol production from our plant expansion in 2005. In addition,the price we paid for natural gas increased 74% in the second quarter of fiscal2006 compared to the second quarter of fiscal 2005. Natural gas has recentlybeen available only at prices exceeding historical averages. These prices areincreasing our costs of production. We expect natural gas prices to remain highor increase at least through the 2006 calendar year.

 

The increase in our cost ofgoods sold was offset by changes in the fair value of our derivativeinstruments. Our cost of goods sold includes a gain of $1,143,316 in the secondquarter of fiscal 2006 related to our corn derivative instruments, compared toa gain of $154,454 in the second quarter of fiscal 2005. Our cost of goods soldincludes a loss of $669,912 in the second quarter of fiscal 2006 related to ournatural gas derivative instruments, compared to a loss of $23,600 in the secondquarter of fiscal 2005. We recognize the gains or losses that result from thechanges in the value of our derivative instruments in cost of goods sold as thechanges occur. As corn and natural gas prices fluctuate, the value of ourderivative instruments are impacted, which affects our financial performance. Weanticipate continued volatility in our cost of goods sold due to the timing ofthe changes in value of the derivative instruments relative to the cost and useof the commodity being hedged.

 

*Operating Expenses**.*Our operating expenses as apercentage of revenues were consistent from period to period. These percentageswere 2.5% and 2.3% for the three months ended March 31, 2006 and 2005,respectively.

 

13

----

 

*Operating Income**.*Our income from operationsfor the three months ended March 31, 2006 totaled $6,712,372 compared to$7,470,042 for the three months ended March 31, 2005 before minorityinterest. This was a result of the decrease in gross profit for the threemonths ended March 31, 2006, as well as higher operating expenses for thesame period.

 

*Other Income (Expense)**.*Our other expense as apercentage of revenues was 0.2% and 0.4% for the three months ended March 31,2006 and 2005, respectively. This change was primarily a result of an increasein interest income offset by an increase of interest expense. Our interestincome has increased to $246,916 for the three months ended March 31, 2006from $30,293 for the three months ended March 31, 2005. This increaseresulted from the income from short term investments. Our interest expenseincreased to $328,971 for the three months ended March 31, 2006 from$235,144 for the three months ended March 31, 2005. This increase is aresult of increased loan amounts due to our $5,600,000 expansion completed infiscal 2005.

 

Income from the UnitedStates Department of Agriculture’s Commodity Credit Corporation BioenergyProgram for the three months ended March 31, 2006 totaled $3,288 comparedto $28,617 for the three months ended March 31, 2005. This decrease of 89%reflects the structure of the federal bioenergy program, which providesincentives for increases in ethanol production. We expect minimal payments fromthis program in2006 because of increased participation byethanol producers, decreased funding, and a termination of the program on June 30, 2006.

 

**Results of Operations for the SixMonths Ended March 31, 2006 and 2005**

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our consolidatedstatements of operations for the six months ended March 31, 2006 and March 31,2005:

 
| ** **                             | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Income Statement Data**              | ** ** | **Amount**              | ** ** | **%**                   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                               |       | $                       | 50,640,010 |                    | 100.0      |   | $ | 46,811,419 |   | 100.0 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Cost of Goods Sold                     |       | $                       | 35,580,077 |                    | 70.3       |   | $ | 32,998,374 |   | 70.5 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Gross Profit                           |       | $                       | 15,059,933 |                    | 29.7       |   | $ | 13,813,045 |   | 29.5 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Operating Expenses                     |       | $                       | 1,251,848  |                    | 2.4        |   | $ | 1,131,464 |   | 2.4 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Operating Income                       |       | $                       | 13,808,088 |                    | 27.3       |   | $ | 12,681,581 |   | 27.1 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Other Income (Expense)                 |       | $                       | (159,759   | )                       | (0.3       | ) | $ | (312,789 | ) | (0.7 | ) |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Net Income Before Minority Interest    |       | $                       | 13,648,326 |                    | 27.0       |   | $ | 12,368,792 |   | 26.4 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Minority Interest in Subsidiary Income |       | $                       | 5,446,091  |                    | 10.8       |   | $ | 4,957,679 |   | 10.6 |   |
|                                   |       |                    |       |                    |       |   |   |   |   |
| Net Income                             |       | $                       | 8,202,235  |                    | 16.2       |   | $ | 7,411,113 |   | 15.8 |   |

 

*Revenues**.*The increase in revenues from the six monthsended March 31, 2006 compared to the six months ended March 31, 2005was primarily due to a 7% increase in the gallons of ethanol sold. In addition,the price we received for our ethanol increased approximately 3% in the sixmonths ended March 31, 2006 compared to the six months ended March 31,2005.

 

*Cost of Goods Sold*. Our cost of goods soldas a percentage of revenues were 70.3% and 70.5% for the six months ended March 31,2006 and 2005, respectively. The decrease in our cost of goods sold isprimarily due to the change in the average price paid for corn. The average perbushel price paid for corn was approximately 23% less for the six months ended March 31,2006 than the average price paid for the six months ended March 31, 2005.

 

14

----

 

*Operating Expenses**.*Our operating expenses as apercentage of revenues remained the same at 2.4% for both the six months ended March 31,2006 and 2005.

 

*Operating Income**.*Our income from operationsremained approximately the same for the six months ended March 31, 2006compared to the six months ended March 31, 2005 at 27.3% and 27.1%,respectively.

 

*Other Income (Expense)**.*Our other expense as apercentage of revenues was 0.3% and 0.7% for the six months ended March 31,2006 and 2005, respectively. This decrease in other expense was due primarilyto the increase in interest income we received during the period.

 

**Changes in Financial Condition forthe Six Months Ended March 31, 2006**

 

Consolidated assets totaled$72,342,272 at March 31, 2006 compared to $77,162,356 at September 30,2005. Current assets totaled $22,235,820 at March 31, 2006 down from$26,748,278 at September 30, 2005. The change resulted from a reduction incash and short term investments, which was $14,890,333 at March 31, 2006compared to $21,123,374 at September 30, 2005. This reduction was due tothe distribution declared in January 2006 and paid in February 2006. See“Distribution to Unit Holders” below.

 

Consolidated currentliabilities totaled $10,133,164 at March 31, 2006 similar to the$10,644,316 at September 30, 2005.

 

Long-term debt, net ofcurrent maturities, totaled $13,419,713 at March 31, 2006 down from$16,092,315 at September 30, 2005. This reduction occurred as a result ofour regularly scheduled loan payments.

 

**Plant Operations and Expansion**

 

*MarcusPlant Expansion*. On August 9, 2005, the Boardof Directors approved plans to proceed with a 40 million gallon per yearexpansion to 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. We are proceeding with the development of the final expansiondesign which will enable us to submit the Title V application. We expect theTitle V emissions permit to be obtained prior to the anticipated start date ofconstruction. We must receive the Title V emissions permit prior to beginningconstruction of the expansion. We expect to engage Fagen, Inc. toconstruct the expansion. Fagen, Inc. designed and built our current plant.However, we have not yet signed a design-build agreement for the expansion. Weanticipate signing a design-buildagreement and commencing construction in August 2006 and will be completedin Fall 2007.

 

In February 2006, weengaged McCormick Construction Company, Inc. (“McC Inc.”) for theexpansion of our grain handling facilities and modification of existing grainsilos to support the planned 40 million gallon per year expansion of the Marcusethanol plant. In exchange for these services, we have agreed to pay McC Inc.,a lump sum of $5,673,025. On May 1, 2006, McC Inc. commenced constructionon the expansion of the grain handling facilities and modification of existinggrain silos. We anticipate that the expansion of the grain handling facilitieswill be substantially complete by May 1, 2007 and the remodeling of theexisting grain silos will be substantially complete by September 1, 2007.

 

Subsequent to the periodcovered by this report, 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 handling facilitiesand modification of existing grain silos. See “Indebtedness – Short-Term DebtSources” for more information on our bridge financing.

 

We currently estimate thetotal cost of the expansion to be approximately $55,000,000. This is apreliminary estimate and we expect it will change as we continue to gatherinformation relating to the expansion. We expect to fund the prospectiveexpansion using a combination of debt and our cash on hand. We do not expect toseek additional equity from our members. The total amount of debt financingnecessary to fund the plant expansion will depend on the amount of grants andgovernment incentives we are able to secure. Loan covenants in our currentfinancing agreements may restrict the amount of cash we can use for thispurpose.

 

15

----

 

The expansion will mostlikely add 10 employees to the current staff of 35 and will increase our cornusage from 18 million to approximately 35 million bushels annually.

 

*Akron Plant*. On March 2, 2006 the Board ofDirectors approved plans to proceed with development and construction of asecond ethanol plant just south of Akron, Iowa in Plymouth County. The exactsite has not yet been determined due to the ongoing evaluation of potentialsites. Once constructed, the Akron plant is expected to use approximately100,000 bushels of corn per day or 38 million bushes per year and produce 100million gallons of fuel-grade ethanol and 320,000 tons of distiller grainsannually. It is anticipated that the plant will employ 40 full-time employeesonce operational. The total project is anticipated to cost $150 million. Constructionof the plant will take approximately 14-16 months and it is hoped that theconstruction can be started in mid to late 2007. However, commencement ofconstruction on the proposed plant is contingent on a number of factors,including final site selection, execution of construction contracts, receipt offinancing and government permits, identification and acquisition of necessary resources.There is no assurance that these contingencies can be satisfied.

 

**Liquidity and Capital Resources**

 

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

 
| ** **                                            | ** ** | **Six Months Ended March 31,** | ** **     |
|-------------------------------------------------------|------------|-------------------------------------|----------------|
| ** **                                            | ** ** | **2006**                            | ** **     | **2005** | ** ** |
| Net cash from operating activities                    |       | $                                   | 11,958,484     |   | $ | 17,023,778 |   |
| Net cash provided by (used for) investing  activities |       | $                                   | 2,740,674      |   | $ | (1,620,854 | ) |
| Net cash used for financing activities                |       | $                                   | (16,946,088    | ) | $ | (9,170,276 | ) |
| **Net increase (decrease) in cash and equivalents**   | ** ** | **$**                               | **(2,246,930** | **)** | **$** | **6,232,648** | ** ** |

 

*Cash FlowFrom Operations**.*Cashprovided by operating activities was $11,958,484 from the first six months offiscal 2006 was down from $17,023,778 for the first six months of fiscal 2005. Thisdecrease resulted from a change in valuation of our derivative instruments andinventories. Our capital needs are being adequately met through cash from ouroperating activities and our current credit facilities.

 

*Cash FlowFrom Investing Activities**.*Cashprovided from investing activities was $2,740,674 for the first six months offiscal 2006, compared to cash used in investing activities of $1,620,854 forthe first six months of fiscal 2005. This increase resulted from increases inproceeds from investments.

 

*Cash Flow From FinancingActivities*. Weused cash to pay down our debt by $1,609,260 in the first six months of fiscal2006 compared to $5,170,276 in the first six months of fiscal 2005. Additionally,the total amount of cash we distributed to partners and members totaled $15,336,828in the first six months of fiscal 2006 compared to $4,000,000 in the first sixmonths of fiscal 2005.

 

**Indebtedness**

 

### ***Short-Term Debt Sources***. We maintain a line of credit with First National Bank of Omaha, whichwe recently renewed through March 2007, to finance short-term workingcapital requirements. Under the line of credit, we may borrow up to$3,500,000 revolving promissory note. The interest payable on the revolvingpromissory note is due monthly at the one month LIBOR plus 2.80%. We pay a commitmentfee of 0.125% on the unused portion of the line. There was no outstandingbalance as of March 31, 2006. The maximum available credit under this noteis based on receivable and inventory balances. Our current receivable andinventory balances are not sufficient to allow us to use the maximum amount ofthe operating line of credit. As of March 31, 2006, the maximum amountavailable from the operating line of credit was approximately $2,109,442. Asthe balances in these accounts fluctuate, the amount of available credit onthis note may be reduced or increased subject to the maximum of $3,500,000.The operating line of credit is subject to protective covenants requiring us tomaintain various financial ratios. The operating line of credit is secured byall business assets.

### ** **

On April 10, 2006, weentered into an Eleventh Amendment to Construction Loan Agreement with FirstNational Bank of Omaha. Under this amendment, First National Bank of Omaha hasagreed to loan us up to

 

16

----

 

$5,673,025 of interim financing pursuant to a BridgeNote to finance the expansion of our grain handling facilities and modificationof existing grain silos. The Bridge Note will terminate on October 1, 2006.During the term of the bridge loan, we have agreed to pay interest only on aquarterly basis on the outstanding principal amount at a rate equal to theone-month LIBOR rate plus 280 basis points. Upon completion of the term of thebridge loan, the outstanding balance of this new expansion loan will either (i) beadded to the principal balance of our Term Note 3 with First National Bank ofOmaha relating to the original construction of our ethanol plant; or (ii) paidfrom proceeds from a new permanent financing between us and First National Bankof Omaha secured for the purpose of financing our 40 million gallon expansionof our existing plant. The maturity date of Term Note 3 is currently June 1,2008.

 

Our new bridge loan issubject 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 of liens to secure our performance. In theevent of default, First National Bank of Omaha may accelerate the due dateof the new loan and declare all obligations immediately due and payable. Allloan proceeds will be disbursed pursuant to a Construction DisbursementAgreement between us, First National Bank of Omaha, ICM, AgStar FinancialServices ACA (the disbursing agent) and Old Republic National Title InsuranceCompany (the title company).

 

#### ***Long-Term DebtSources***. We have long-term debtfinancing consisting of four term notes held by First National Bank of Omahaand referred to as Term Notes #2, #3, and #4. At March 31, 2006, theprincipal balance on Term Note #2 was $12,025,680. Term Note #2 is payable inquarterly installments. Interest on Term Note #2 is at the three month LIBORplus 2.80%, which totaled 7.62% as of March 31, 2006. Term Note #2 ispayable in full on June 1, 2008. In order to achieve a fixed interest rateon Term Note #2, we entered into an interest rate swap which helps protect ourexposure to increases in interest rates and the swap effectively fixes theinterest rate on Term Note #2 at 5.79% until June 1, 2008.

####  

At March 31, 2006, theprincipal balance on Term Note #3 was $5,876,324. Term Note #3 is payable inquarterly installments. Interest on Term Note #3 is at the three month LIBORplus 2.80%, which totaled 7.62% as of March 31, 2006. Term Note #3 ispayable in full on June 1, 2008. In order to protect our interest rateexposure on Term Note #3, we entered into an interest rate cap agreement basedon a principal amount of $10,000,000. The financing agreement caps our interestrate at 6.80% for Term Note #3 until June 1, 2006. As part of thefinancing agreement, we have agreed to pay an annual servicing fee of $50,000for five years.

 

At March 31, 2006,there was no principal balance on Term Note #4. Term Note #4 is payable inquarterly installments. Interest on Term Note #4 is at the one month LIBOR plus2.80%. Term Note #4 is payable in full on June 1, 2008. Term Note #4allows borrowings up to the original principal of $5,000,000 to the extent ofprincipal payments made until maturity.

 

We have a capital leaseobligation in the amount of $153,837 on which we initially pay monthlyinstallments totaling $6,658, with an implicit interest rate of 3.7%. Thisobligation is secured by the leased equipment and runs through March 1,2008.

 

We have a note in the amountof $118,055 payable to the Iowa Energy Center on which we pay monthlyinstallments of $3,472 without interest. This note is secured by real estate,but is subordinated to the term notes. It matures on January 29, 2009.

 

We have a note with FarmersState Bank of Marcus, Iowa in the amount of $129,373 on which we pay monthlyinstallments of $5,921, including interest at 6%. This note is secured byreal estate, but is subordinated to the term notes. It matures on January 29,2009.

 

We have a note totaling$185,500 payable to the Iowa Department of Economic Development on which we paymonthly installments of $1,667 without interest. This note is secured by allequipment and matures on July 1, 2009.

 

17

----

 

*ContractualObligations and Commercial Commitments*

 

Except as disclosed in this report, there were nomaterial changes in the Company’s contractual obligations and commercialcommitments during the three months ended March 31, 2006.

 

**Distribution to Unit Holders**

 

On January 17, 2006 ourBoard of Directors, acting as general partner of the Partnership, approved atotal cash distribution of $15,361,000 from the Partnership to all limitedpartners of record as of January 17, 2006. As a holder of 60.1539% of thelimited partnership units of the Partnership, we received a cash distributionof $9,240,240. On the same day, we approved a cash distribution of $842.34 permembership unit to the Company’s unit holders of record as of January 17,2006. After expenses of approximately $24,000, the remaining 9,216,041.94 wasdistributed to our members in February 2006. We expect that this distribution will notaffect our ability to maintain financial covenants and meet operating costs.

 

**Critical Accounting Estimates**

 

There were no material changes in the Company’saccounting estimates during the three months ended March 31, 2006.

 

**Off-Balance Sheet Arrangements.**

 

We currently have nooff-balance sheet arrangements.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

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

 

**Interest Rate Risk**

 

We are exposed to marketrisk from changes in interest rates. Exposure to interest rate risk resultsfrom holding a revolving promissory note and four term notes which bearvariable interest rates. Specifically, we have $17,902,004 outstanding invariable rate, long-term debt as of March 31, 2006. The specifics of eachnote are discussed in greater detail in “**Item 2 – Management’s Discussion and Analysis of Financial Conditionand Results of Operations – Liquidity and Capital Resources**.”

 

In order to achieve afixed interest rate on Term Note #2, we entered into an interest rate swapwhich helps protect our exposure to increases in interest rates and the swapeffectively fixes the interest rate on Term Note #2 at 5.79% until June 1,2008. When thethree-month LIBOR plus 2.80% exceeds 5.79%, the Company receives payments forthe difference between the market rate and the swap rate. Conversely, when thethree-month LIBOR plus 2.80% is below 5.79%, the Company makes payments for thedifference between the market rate and the swap rate. While our exposure is nowgreatly reduced, there can be no assurance that the interest rate swapagreement will provide us with protection in all scenarios. For example, ifinterest rates were to fall below 5.79%, we would still be obligated payinterest at 5.79% under the interest rate swap agreement.

 

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

 

At March 31, 2006 and September 30, 2005,we had an interest rate cap with a fair value of $34,778 and

 

18

----

 

$69,756,respectively, recorded as an asset with derivative instruments. The interestrate cap was not designated as a cash flow hedge. We charged interest expensewith a loss of $25,346 and gain of $39,140 on the interest rate cap for thethree months ended March 31, 2006 and 2005, respectively. We offset interestexpense with a loss of $34,978 and gain of $47,304 on the interest rate cap forthe six months ended March 31, 2006 and 2005, respectively.

 

**Commodity Price Risk**

 

We are also exposed tomarket risk from changes in commodity prices. Exposure to commodity price riskresults from our dependence on corn and natural gas in the ethanol productionprocess. We seek to minimize the risks from fluctuations in the prices of cornand natural gas through the use of derivative instruments. In practice, asmarkets move, we actively manage our risk and adjust hedging strategies asappropriate. Although we believe our hedge positions accomplish an economichedge against our future purchases, they are not designated as such for hedgeaccounting purposes, which would match the gain or loss on our hedge positionsto the specific commodity purchase being hedged. We are marking to market ourhedge positions, which means as the current market price of our hedge positionschanges, the gains and losses are immediately recognized in our cost of goodssold.

 

The immediate recognition ofhedging gains and losses can cause net income to be volatile from quarter toquarter due to the timing of the change in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged. At March 31,2006 and September 30, 2005, the fair value of our derivative instrumentsfor corn and natural gas is an asset in the amount of $1,760,256 and $496,853,respectively. There are several variables that could affect the extent to whichour derivative instruments are impacted by price fluctuations in the cost ofcorn or natural gas. However, it is likely that commodity cash prices will havethe greatest impact on the derivatives instruments with delivery dates nearestthe current cash price.

 

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

 

We estimate that ourexpected corn usage is approximately 18 to 19 million bushels per year for theproduction of 52 million gallons of ethanol. We have price protection forapproximately 95% of our expected corn usage for fiscal year ended September 30,2006 and approximately 55% of our usage for fiscal year 2007 using CBOT futuresand options and Over-the-Counter option contracts. As we move forward,additional protection may be necessary. As corn prices move in reaction tomarket trends and information, our income statement will be affected dependingon the impact 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 on marketmovements, crop prospects and weather, these price protection positions may causeimmediate adverse effects, but are expected to produce long-term positivegrowth for us.

 

To manage our natural gasprice risk, we entered into a natural gas purchase agreement with our supplierto supply us with natural gas. This purchase agreement fixes the price at whichwe purchase natural gas. We estimate that we have forward contracts in placefor approximately 95% of our natural gas needs through September 2006. Inaddition to procuring natural gas requirements through summer and fall 2006, wehave purchased approximately 60% of our fall and winter 2006 and 2007 naturalgas requirements utilizing both cash, futures and options contracts. We may alsopurchase additional natural gas requirements for the 2007 calendar year as weattempt to further reduce our susceptibility to price increases.

 

At the time we purchasedprice protection for natural gas, the market was experiencing a great deal ofprice uncertainty. Due to this uncertainty, we purchased amounts for most ofthe plant’s needs and implemented derivative instruments to allow us to benefitin the event natural gas prices declined. Energy sector prices have increasedand natural gas, as a portion of the total energy market, has responded withhigher prices to be cost competitive with its alternatives. In the future, we may notbe able to secure natural gas for prices less than current market price and we may notrecover high costs of production resulting from high natural gas prices, which may raiseour costs of production.

 

19

----

 

A sensitivity analysis hasbeen prepared to estimate our exposure to corn and natural gas price risk. Thetable presents the fair value of our derivative instruments as of March 31,2006 and September 30, 2005 and the potential loss in fair value resultingfrom a hypothetical 10% adverse change in such prices. The fair value of thepositions is a summation of the fair values calculated by valuing each netposition at quoted market prices as of the applicable date. The results of thisanalysis, which may differ from actual results, are as follows:

 

| ** **              | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse Change  — Market Risk** | ** ** |
|-------------------------|------------|----------------|------------|----------------------------------------------------------------|------------|
| March 31, 2006     |       | $              | 1,760,256  |                                                           | $          | 176,025 |   |
| September 30, 2005 |       | $              | 496,853    |                                                           | $          | 49,685 |   |

 

**ITEM 4. CONTROLSAND PROCEDURES.**

 

Our management, including our President and ChiefExecutive Officer (the principal executive officer), Stephen Roe, along withour Chief Financial Officer (the principal financial officer), Gary Grotjohn,have reviewed and evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended) as of March 31, 2006. Based upon thisreview and evaluation, these officers have concluded that our disclosurecontrols and procedures are effective to ensure that information required to bedisclosed in the reports that we file or submit 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, includingour principal executive officer and principal financial officer, have reviewedand evaluated any changes in our internal control over financial reporting thatoccurred as of March 31, 2006 and there has been no change that hasmaterially affected or is reasonably likely to materially affect our internalcontrol over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS.**

 

None.

 

**ITEM 1A.RISK FACTORS.**

 

The following Risk Factor isprovided to supplement and update the Risk Factors previously disclosed in ourAnnual Report on Form 10-K. The Risk Factor set forth below should be readin conjunction with the considerations set forth above in “MANAGEMENT’SDICUSSION AND ANALYSIS” and the risk factors set forth in the Annual Report on Form 10-Kfor the fiscal year ended September 30, 2005.

 

**Risks Related to Our ExpansionStrategy**

 

Wegive no assurances that we will be able to implement our expansion strategy asplanned or at all. We are planning to expand our current production capacity(52 million gallons per year) by an additional 40 million gallons annually. Inaddition, we are planning to construct a new ethanol plant near Akron, Iowa inPlymouth County. We willneed additional financing to implement our expansion strategy and we give noassurance as to the availability or the terms of any additional financing we may require.We may not have access to the funding required for the expansion of ourbusiness or such funding may not be available to us on acceptable terms.

 

The cost of the expansion ofour existing plant is expected to be approximately $55,000,000, which we expectto finance using both a portion of our cash and additional debt to finance therequired capital expenditure.

 

20

----

 

The total project cost for the Akron plant isexpected to be $150 million. We have not yet determined our financing for theAkron plant and may finance the plant with additional indebtedness or byissuing 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 or commitments with any bank, lender,governmental entity, underwriter or financial institution for debt financing. Ifdebt financing on acceptable terms is not available for any reason, we may beforced to abandon our expansion plans. We could face financial risks associatedwith incurring additional indebtedness, such as reducing our liquidity andaccess to financial markets and increasing the amount of cash flow required toservice such indebtedness, or associated with issuing additional stock, such asdilution of ownership and earnings.

 

We have not received certain permits and failure toobtain these permits would prevent expansion of our current plant orconstruction of the new plant. Before we can begin expansion of current plant or construction of thenew plant, we must obtain numerous regulatory approvals 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 substantiallyincrease our costs, which could have a material adverse effect on our resultsof operations and financial condition. Our expansion plans may alsoresult in other unanticipated adverse consequences, such as the diversion ofmanagement’s attention from our existing operations.

 

Our construction costs may alsoincrease to levels that would make a new facility too expensive to complete orunprofitable to operate. We expect Fagen, Inc. will expand our existingplant and construct the Akron plant and that Fagen, Inc. will engage ICM, Inc.to provide design and engineering services. Therefore, we will be highlydependent upon Fagen, Inc. and ICM, Inc. to expand our plant, but wehave no letter of intent or definitive binding agreement with either companywhich might limit our exposure to higher costs in developing and completing theexpansion or new construction. Contractors, engineering firms, constructionfirms and equipment suppliers also receive requests and orders from otherethanol companies and, therefore, we may not be able to secure theirservices or products on a timely basis or on acceptable financial terms. We may suffersignificant delays or cost overruns as a result of a variety of factors, suchas shortages of workers or materials, transportations constraints, adverseweather, unforeseen difficulties or labor issues, any of which could prevent usfrom commencing operations as expected at our facilities.

 

Accordingly, we give you noassurance that we will be able to implement our expansion strategy as plannedor at all. There also is no assurance that we will find an appropriate site forthe new Akron facility or that we will be able to finance, construct, developor operate the new facility or our expanded facility successfully.

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

None.

 

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

 

None.

 

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

 

We held our 2006 annualmembers meeting on Thursday, March 23, 2006. At the annual membersmeeting, the members elected Vince Davis, Darrell Downs and Doug Lansink to ourboard of directors in an uncontested election to serve until the 2009 annualmembers meeting and until their successors are duly elected and qualified. Themembers elected all directors nominees in an uncontested election.

 
| ** **    | ** ** | **For** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** |
|---------------|------------|---------|------------|--------------|------------|-------------|------------|
| Vince Davis   |       | 6,875   |       | 66           |       | 29          |       |
| Darrell Downs |       | 6,916   |       | 33           |       | 21          |       |
| Doug Lansink  |       | 6,891   |       | 40           |       | 39          |       |

 

The other directors whoseterms of office continued after the meeting are Verdell Johnson, TimothyOhlson, Myron Pingel, Daryl Haack, Dale Arends and Ron Wetherell.

 

21

----

 

**ITEM 5.OTHER INFORMATION.**

 

None.

 

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

 

(a)           The following exhibits are filed as part of this report.

 

10.1           Settlement Agreement and Release of Claimsbetween LSCP, LLLP and Archer Daniels Midland Company dated February 15,2006.

 

10.2           StandardShort Form Agreement between Owner and Contractor for Grain HandlingExpansion and Existing Silo Modification dated January 25, 2006 with McCormick Construction Company, Inc.

 

10.3           Eleventh Amendment to Construction LoanAgreement dated March 30, 2006 with First National Bank of Omaha.

 

31.1           Certificate pursuant to 17 CFR 240.13a-14(a).

 

31.2           Certificate pursuant to 17 CFR 240.13a-14(a).

 

32.1           Certificate pursuant to 18 U.S.C. § 1350.

 

32.2           Certificate pursuant to 18 U.S.C. § 1350.

 

(b)           Reports on Form 8-K:  None.

 

**SIGNATURES**

 

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

 

 
|   |              | LITTLE SIOUX CORN PROCESSORS, L.L.C.  |
|--------|-------------------|---------------------------------------|
|   |              |                                  |
|   |              |                                  |
| Date:  | May 15, 2006 |                                  |   | /s/ Stephen Roe |   |
|   |              | Stephen Roe                           |
|   |              | President and Chief Executive Officer |
|   |              |                                  |
|   |              |                                  |
| Date:  | May 15, 2006 |                                  |   | /s/ Gary Grotjohn |   |
|   |              | Gary Grotjohn                         |
|   |              | Chief Financial Officer               |

 

22

----