**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ý****      ****Annual report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.**

 

**For thefiscal year ended September 30, 2005**

 

**OR**

 

o        **Transition report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.**

 

**COMMISSIONFILE NUMBER 0001229899**

 

**LITTLE SIOUXCORN PROCESSORS, L.L.C.**

(Exact name of small businessissuer as specified in its charter)

 
| **Iowa**                                                                        | ** ** | **42-1510421**                             |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|
| **(State  or other jurisdiction of  incorporation or organization)**            | ** ** | **(I.R.S.  Employer  Identification No.)** |
| ** **                                                                      | ** ** | ** **                                 |
| **4808 F Avenue, Marcus, Iowa 51035**                                           |
| (Address of  principal executive offices)                                       |
|                                                                            |       |                                       |
| **(712) 376-2800**                                                              |
| (Issuer’s  telephone number, including area code)                          |
|                                                                            |       |                                       |
| Securities registered  pursuant to Section 12(b) of the Exchange Act: |
| **None**                                                                        |
|                                                                            |       |                                       |
| Securities registered  pursuant to Section 12(g) of the Exchange Act: |
| **Membership  Units**                                                           |

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405of the Securities Act.oYes    ý  No

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act.oYes    ý  No

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.      ý Yes    oNo

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).o Yes     ý  No

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).o Yes     ý No

 

The aggregate market value of the registrant’s membershipunits held by non-affiliates of the registrant was $32,823,000 computed by referenceto the price at which membership units were last sold.

 

As of the date of this filing, there are 10,941 membershipunits of the registrant outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Theregistrant has incorporated by reference into Part III of this Annual Reporton Form 10-K portions of its definitive proxy statement to be filed withthe Securities and Exchange Commission within 120 days after the close of thefiscal year covered by this Annual Report.

 

 

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**INDEX**

 
| **PART I.**                                                                                             | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                         |       |
| **ITEM 1. BUSINESS**                                                                                         | ** ** |
| **ITEM 1A. RISK FACTORS**                                                                                    | ** ** |
| **ITEM 2. PROPERTIES**                                                                                       | ** ** |
| **ITEM 3. LEGAL PROCEEDINGS**                                                                                | ** ** |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                              | ** ** |
|                                                                                                         |       |
| **PART II**                                                                                             | ** ** |
|                                                                                                         |       |
| **ITEM 5. MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS AND  ISSUER PURCHASES OF MEMBERSHIP UNITS** | ** ** |
| **ITEM 6. SELECTED FINANCIAL DATA**                                                                          | ** ** |
| **ITEM 7. MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**       | ** ** |
| **ITEM 7A. QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK**                                     | ** ** |
| **ITEM 8. FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA**                                                     | ** ** |
| **ITEM 9. CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**           | ** ** |
| **ITEM 9A. CONTROLS AND PROCEDURES**                                                                         | ** ** |
| **ITEM 9B. OTHER INFORMATION**                                                                               | ** ** |
|                                                                                                         |       |
| **PART III**                                                                                            | ** ** |
|                                                                                                         |       |
| **ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS  OF THE REGISTRANT**                                             | ** ** |
| **ITEM 11. EXECUTIVE COMPENSATION**                                                                          | ** ** |
| **ITEM 12. SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** | ** ** |
| **ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS**                                                 | ** ** |
| **ITEM 14. PRINCIPAL ACCOUNTING FEES AND  SERVICES**                                                         | ** ** |
|                                                                                                         |       |
| **PART IV.**                                                                                            | ** ** |
|                                                                                                         |       |
| **ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES**                                                        | ** ** |
|                                                                                                         |       |
| **SIGNATURES**                                                                                               | ** ** |

 

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**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING STATEMENTS**

 

This annual report contains historical information,as well as forward-looking statements that involve known and unknown risks andrelate to future events, our future financial performance, or our expectedfuture operations and actions.  In somecases, you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,”“intend,” “could,” “hope,” “predict,”“target,” “potential,” or “continue” or the negative of these terms or other similarexpressions.  Theseforward-looking statements are only our predictions based upon current information and involve numerousassumptions, risks and uncertainties. Our actual results or actions may differ materially from theseforward-looking statements for many reasons, including the reasons described inthis report.  While it is impossible to identify all suchfactors, factors that could cause actual results to differ materially fromthose estimated by us include:

 

•                  Overcapacitywithin the ethanol industry;

 

•                  Actualethanol, distillers grains and corn oil production varying from expectations;

 

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

 

•                  Changesin the price and market for ethanol, distillers grains and corn oil;

 

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

 

•                  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 establishing a renewable fuelstandard or other legislation mandating the use of ethanol or other oxygenateadditives;

 

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

 

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

 

•                  Changes in the weather or general economicconditions impacting the availability and price of corn and natural gas;

 

•                  Total U.S. consumption of gasoline;

 

•                  Fluctuations in petroleum prices;

 

•                  Changes in plant production capacity ortechnical difficulties in operating the plant;

 

•                  Costs of construction and equipment;

 

•                  Changes in our business strategy, capitalimprovements or development plans;

 

•                  Results of our hedging strategies;

 

•                  Changes in interest rates or the availabilityof credit;

 

•                  Our ability to generate free cash flow toinvest in our business and service our debt;

 

•                  Our liability resulting from litigation;

 

•                  Our ability to retain key employees and maintainlabor relations;

 

•                  Changes and advances in ethanol productiontechnology;

 

•                  Competitionfrom alternative fuels and alternative fuel additives.

 

•                  Otherfactors described elsewhere in this report.

 

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The cautionary statementsreferred to in this section also should be considered in connection withany subsequent written or oral forward-looking statements that may be issued byus or persons acting on our behalf.  Weundertake no duty to update these forward-looking statements, even though oursituation may change in the future. Furthermore, we cannot guarantee futureresults, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we referencein this report and have filed as exhibits, completely and with theunderstanding that our actual future results may be materially different fromwhat we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

 

**AVAILABLEINFORMATION**

 

Information about us is alsoavailable at our website at*www.littlesiouxcornprocessors.com*,under “SEC Compliance,” which includes links to reports we have filed with theSecurities and Exchange Commission. The contents of our website are notincorporated by reference in this Annual Report on Form 10-K.

 

**PART I.**

 

**ITEM 1.  BUSINESS.**

 

**Overview**

 

Little Sioux Corn Processors, L.L.C. (the“Company”) is an Iowa limited liability company that owns the sole general partnership interest of LSCP, LLLP, (the“Partnership”) an Iowa limited liability limited partnership.  As general partner, we manage the businessand day-to-day operations of the Partnership’s 52 million gallon per year ethanolplant which produces ethanol, distillers grains and corn oil.  The Companyand its subsidiary, LSCP, LLLP, are collectively referred to in this report as “LSCP,”“we,” or “us.”

 

Since April 2003, we have been engaged in theproduction of ethanol and distillers grains at our ethanol plant.  Duringfiscal year 2005, we completed the expansion of our plant from an ethanolproduction capacity of 40 million gallons per year to 52 million gallons per yearand installed additional drier controls and maintenance system software.  Subsequent to our fiscal year end onSeptember 30, 2005, we installed a corn oil segregation unit.

 

Fuel grade ethanol is our primary product accounting for the majorityof our revenue.  We also sell distillers grains, a principal co-product ofthe ethanol production process, which may be sold as distillers dried grainsand distillers modified wet grains.   In 2005, we processed approximately17.6 million bushels of corn into approximately 49 million gallons ofethanol.  We also processed approximately 247,000 tons of distillersgrains in 2005.  In addition in October 2005, we began selling cornoil.  In 2006, we anticipate producing approximately52 million gallons of ethanol, 248,000 tons of distillers grains, and 12million pounds of corn oil from approximately 18.3 million bushels of corn.  However, there is no assurance that we willbe able to operate at these anticipated levels.

 

**General Development of Business since October 1,2004**

 

We were formed as an Iowa limited liability companyon September 28, 2000.  On March 6,2002, we purchased the sole generalpartnership interest in an Iowa limited partnership, LSCP, LP.  On June 26, 2003, LSCP, LP elected tobecome a limited liability limited partnership and is referred to as LSCP, LLLP.

 

Ourgeneral partnership interest in the Partnership represents substantially all ofour assets.  The Partnership owns andoperates a 52 million-gallon per year ethanol plant near Marcus, Iowa.  The plant commenced operations in April 2003.  In July 2005, the Partnership completedan expansion, from a 40 million gallon per year plant to a 52 million gallonper year plant.

 

ThePartnership consists of the Company, which is the sole general partner, andvarious limited partners, which own the limited partnership interests.  There are six classes of limited partnershipinterests of which only three classes are currently outstanding.  Limited partnership interests are designatedin units.  The following diagramillustrates the relationship between the Company and the Partnership:

 

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**DIAGRAM OF THEREGISTRANT’S RELATIONSHIP TO LSCP, LLLP**

 

 

As generalpartner of LSCP, LLLP, we have the complete and exclusive power to manage andcontrol the affairs of the Partnership including the day-to-day business andoperations of the ethanol plant.  Asgeneral partner of a limited liability limited partnership, we have limitedliability for the payment of debts and liabilities of the Partnership.  Under the limited partnership agreement, wecan only be removed as general partner if a court has determined that we havebeen grossly negligent in performing our duties as general partner and theholders of at least 66 2/3% of the outstanding limited partnership units voteto remove us.

 

The limitedpartnership agreement allows each class of limited partnership interests theright to appoint one director to our board of directors.  This means that the three classes of limitedpartnership interests can elect three of the thirteen directors on ourboard.  Our board of directors is dividedinto two classes known as Class A and Class B.  Class A directors are elected by theCompany’s members.  Class Bdirectors are elected by the limited partners of the limited partnership.  Both Class A and Class B directorscan take action with respect to any matters relating to the ownership andoperation of the ethanol plant.  However,only Class A directors can take action with respect to any mattersrelating to the Company and not also directly relating to the ethanolplant.  For example, Class Bdirectors may not vote on a motion regarding any distributions we may make toour members.  No limited partner or classof limited partnership interests has the right to appoint a majority of theCompany’s directors or control the business of the limited partnership.

 

Our power tomanage LSCP, LLLP is restricted in three cases. First, we cannot dispose of or encumber substantially all of the assetsof the limited partnership without first obtaining the consent of the holdersof a majority of the limited partnership interests.  Second, we cannot remove or appoint a generalmanager responsible for managing the limited partnership’s business withoutfirst obtaining the consent of the holders of a majority of the limitedpartnership interests and our primary lending institution.  Finally, we cannot admit additional generalor limited partners without first obtaining the approval of the holders of atleast 75% of the limited partnership units.

 

Under thelimited partnership agreement, distributions of the limited partnership’srevenues (as defined below) are made to the general and limited partners inproportion to the units held, however, distributions are also limited by loancovenants contained in our loan agreements executed with our lenders.  For example, our loan agreements require usto maintain various financial ratios and make additional loan payments based onexcess cash flow, including payments received from the USDA’s Commodity CreditCorporation Bioenergy Program, as discussed below in “**Item 7 – Management’s Discussion and Analysis of Financial Conditionand Results of Operations****- Liquidity andCapital Resources.**”

 

The Partnership’srevenues are defined by the limited partnership agreement as “net cash flow”meaning the gross cash proceeds of the limited partnership less the amount ofproceeds used for expenses, debt payments, capital improvements, replacements,contingencies and reserves, all as reasonably determined by the Company, as

 

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general partner. Distributions are made in proportion to the units held by the generaland limited partners, which means that a partner’s distribution is calculated basedon the number of units such partner owns in proportion to the number of totalunits outstanding.  For example, theCompany currently owns 2,189 limited partnership units of the 3,639 limitedpartnership units outstanding. Therefore, the Company is entitled to distributions equaling 60.15% ofthe limited partnership’s net cash flow (2,189 units divided by 3,639units).  No partner is entitled to aminimum distribution amount.  However,the limited partnership agreement provides that the Company, as generalpartner, will endeavor to provide for cash distributions at the times andamounts necessary to allow the partners to make timely payment of incometaxes.  Distributions are not prioritizedamong the partners.

 

After givingeffect to certain special allocations, such as adjustments for partners whobear the risk of economic loss for certain partnership debts, profits andlosses are generally allocated in the same manner as distributions of thelimited partnership’s net cash flow. Therefore, the Company, as general partner, is generally allocated60.15% of the limited partnership’s profits and losses and the limited partnersare generally allocated 39.85% of the limited partnership’s profits and losses.

 

The limited partnership agreement can only be amended if theamendment is approved by our board of directors and is approved by holders of amajority of the limited partnership interests.

 

**FinancialInformation**

 

Thefinancial statements of the Partnership have been consolidated with the Companysince the Partnership was formed on October 16, 2001.  The Partnership did not have any assets untilthe partners of the Partnership contributed assets in March 2002.  The net assets contributed by the Companywere less than the proportional limited partnership interest received in returnas compared to the net assets contributed by the other partners in the Partnership.  The other limited partners contributed atotal of $7,750,000 in return for 1,550 units in the limited partnership($5,000 per unit).  The Company contributedall of its net assets, approximately $10,198,000, in return for 2,189 units inthe limited partnership ($4,658 per unit). Due to the Company’s previous efforts to begin the ethanol plant, theCompany was given credit for value in addition to the net assets transferred.  Please refer to “**Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations”** for information about ourrevenues, profit and loss measurements and total assets and “**Item 8 - Financial Statements and Supplementary Data**”for our consolidated financial statements.

 

**Principal Productsand Their Markets**

 

The principal products weproduce at our plant are fuel grade ethanol and distillers grains.  Subsequent to our fiscal year end on September 30,2005, we began producing corn oil at our plant.

 

***Ethanol***

 

Ethanol isethyl alcohol, a fuel component made primarily from corn and various othergrains.  According tothe Renewable Fuels Association, approximately 85 percent of ethanol inthe United States today is produced from corn, and approximately90 percent of ethanol is produced from a corn and other input mix. Cornproduces large quantities of carbohydrates, which convert into glucose moreeasily than most other kinds of biomass. The Renewable Fuels Associationestimates current domestic ethanol production at approximately 4.28 billiongallons as of December 2005.

 

An ethanolplant is essentially a fermentation plant. Ground corn and water are mixed with enzymes and yeast to produce asubstance called “beer,” which contains about 10% alcohol and 90% water.  The “beer” is boiled to separate the water,resulting in ethyl alcohol, which is then dehydrated to increase the alcoholcontent.  This product is then mixed witha certified denaturant to make the product unfit for human consumption andcommercially saleable.

 

Ethanol canbe used as: (i) an octane enhancer in fuels; (ii) an oxygenated fueladditive for the purpose of reducing ozone and carbon monoxide vehicleemissions; and (iii) a non-petroleum-based gasoline substitute.  Approximately 95% of all ethanol is used inits primary form for blending with unleaded gasoline and other fuelproducts.  The implementation of theFederal Clean Air act has made ethanol fuels an important domestic renewable

 

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fuel additive.  Used as afuel oxygenate, ethanol provides a means to control carbon monoxide emissionsin large metropolitan areas.  Theprincipal purchasers of ethanol are generally the wholesale gasoline marketeror blender.  The principal markets forour ethanol are petroleum terminals in the continental United States.

 

For ourfiscal year ended September 30, 2005, revenues from sales of ethanol wereapproximately 86.1% of total revenues. For our fiscal year ended September 30, 2004, revenues from salesof ethanol were approximately 85.7% of total revenues.  For our fiscal year ended September 30,2003, revenues from sales of ethanol were approximately 82.7% of totalrevenues.  We began operations in April 2003.

 

***DistillersGrains***

 

A principal co-productof the ethanol production process is distillers grains, a high protein,high-energy animal feed supplement primarily marketed to the dairy and beefindustry.  Distillers grains containby-pass protein that is superior to other protein supplements such ascottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generatinggreater lactation in milk cows and greater weight gain in beef cattle.  Dry mill ethanol processing creates threeforms of distiller grains: Distillers Wet Grains (“DWS”), Modified Wet DistillersGrains with Solubles (“MWDGS”) and Distillers Dried Grains with Solubles (“DDGS”).  DWS is processed corn mash that containsapproximately 70% moisture.  DWS has ashelf life of approximately three days and can be sold only to farms within theimmediate vicinity of an ethanol plant. DMWS is DWS that has been dried to approximately 50% moisture.  DMWS have a slightly longer shelf life ofapproximately ten days and are often sold to nearby markets.  DDGS is DWS that has been dried to 10% to 12%moisture.  DDGS has an almost indefiniteshelf life and may be sold and shipped to any market regardless of its vicinityto an ethanol plant.  At our plant, thecomposition of the distillers grains we produce is approximately 31.1% DDGS and68.9% MWDGS.

 

For ourfiscal year ended September 30, 2005, revenues from sales of distillersgrains were approximately 12.0% of total revenues.  For our fiscal year ended September 30,2004, revenues from sales of distillers grains were approximately 14.1% oftotal revenues.  For our fiscal yearended September 30, 2003, revenues from sales of distillers grains wereapproximately 17.2% of total revenues. We began operations in April 2003.

 

***NewProduct of the Company - Corn Oil***

 

Corn oil canbe produced as a co-product of ethanol production by installing equipment toseparate the oil from the distillers grains during the production process.  On March 15, 2005, the Board ofDirectors approved a $1,850,000 capital expenditure to install a corn oilsegregation unit.  In October 2005,installation of the equipment was completed and we began producing cornoil.  Prior to installation of the cornoil segregation unit, the corn oil had been sold as an energy component of ourdistillers grains.  We project thisinvestment will increase our revenues by approximately $1,200,000 millionannually, but the actual impact on our revenues could vary due to a variety offactors such as production problems, decline in the demand and price for cornoil.

 

Corn oil inits raw form can be used as livestock feed, as a fuel under certain operatingconditions, refined into bio-diesel fuel, or refined for humanconsumption.  We intend to initiallymarket the unrefined corn oil to the animal feed and bio-diesel markets toassure that quality specifications can be maintained.  In the long term, the corn oil co-productcould be marketed for human consumption. Specific details regarding market penetration into human food are unknownat this time since corn oil extraction in a dry mill situation such as ours hasnot yet been proven, nor has its suitability for human consumption beendetermined.

 

**Distribution of Principal Products**

 

Our ethanolplant is located near Marcus, Iowa in Cherokee County, in the northwestern section ofIowa.  We selected the Marcus sitebecause of its location to existing grain production, accessibility to road andrail transportation and its proximity to major population centers.  It is also served by the Canadian NationalRailroad Company.  It is in closeproximity to major highways that connect to major population centers such asMinneapolis, Minnesota; Omaha, Nebraska; and Chicago, Illinois.

 

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***EthanolDistribution***

 

As generalpartner of the Partnership, we entered into a marketing agreement withMinnesota Corn Processors, L.L.C., (“MCP”) in 2003 for the purposes ofmarketing and distributing all of the ethanol we produce at the plant.  This marketing agreement was subsequentlyassigned by MCP to Archer Daniels Midland Company (“ADM”) following ADM’sacquisition of MCP.  Pursuant toour ethanol marketing agreement with ADM, the price ADM pays us for our ethanolis calculated by averaging the price ADM receives for all the ethanol it sellsoriginating from (i) our plant, (ii) ADM’s plant in Marshall,Minnesota and (iii) ADM’s plant in Columbus, Nebraska.  Inexchange for ADM’s marketing, sales, storage and transportation services, wepay ADM a fixed price per gallon of ethanol sold.  The initial term of the marketing agreementwith ADM expires in 2007 but the agreement is automatically renewed forsuccessive one-year periods at the end of the initial term unless the partiesagree otherwise.

 

***DistillersGrains Distribution***

 

As generalpartner of the Partnership, we entered into a marketing agreement withCommodity Specialist Company (“CSC”), a Delaware corporation, in 2003 for thepurpose of marketing and selling all the distillers grains we produce, exceptdistillers grains we produce and sell directly to local farmers.  Approximately, 15% of the distillers grainsproduced at the plant are marketed and sold by CSC all over the continentalUnited States.  For our distillersgrains, we receive a percentage of the selling price actually received by CSCin marketing the distillers grains to its customers.  The balance of our distillers grains arelocally marketed primarily to nearby livestock producers.  As additional ethanol plants begin productionexcess capacity could result in the local markets.  If excess capacity in the local markets occurs,we may be forced to dry more of our distillers grains for marketing by CSCrather than directly selling in the local markets.  As a result, our natural gas costs willlikely increase due to increased drying and our profits may decrease.

 

***CornOil Marketing and Distribution***

 

As general partner of the Partnership, weentered into a marketing agreement with United Bio Energy, LLC in October 2005for the purpose of marketing and selling all the corn oil we produce.  In exchange for United Bio Energy’s marketing services, we payUnited Bio Energy a fixed price per pound of corn oil sold. Either party may terminate the agreement at any time with one month writtennotice.

 

**Seasonal Factors in Business**

 

In an effort to improve airquality in regions where carbon monoxide and ozone are a problem, theFederal Oxygen Program of the Clean Air Act requires the sale of oxygenatedmotor fuels during the winter months in certain major metropolitan areas toreduce carbon monoxide pollution.  Gasoline that is blended with ethanol has ahigher oxygen content than gasoline that does not contain ethanol.  As aresult, we expect fairly light seasonality with respect to our gross profitmargins on our ethanol allowing us to, potentially, be able to sell our ethanolat a slight premium during the mandated oxygenate period.  Conversely, weexpect our average sales price for fuel grade ethanol during the summer, whenfuel grade ethanol is primarily used as an octane enhancer or a fuel supplyextender, to be a little lower.

 

**Sources andAvailability of Raw Materials**

 

***CornFeedstock Supply***

 

The major raw materialrequired for our ethanol plant to produce ethanol, distiller’s grain and cornoil is corn.  To operate at a name-plate capacity of 52 million gallons,the plant requires a supply of approximately 18 to 19 million bushels millionbushels of corn annually.  The plant’s location in Marcus,Iowa in Cherokee Countycurrently provides an ample supply of corn to meet and exceed the name-plateproduction capacity of the plant.  Iowa’s calendar year 2004 final cornfor grain production was estimated in January 2005 at 2.24 billionbushels.  The 2004 corn crop was thelargest corn crop on record with national production at approximately 11.8billion bushels and Iowa production at approximately 2.4 billion bushels.  The 2005 national corn crop is projected tobe the second largest on record exceeded only the 2004 crop which is thelargest ever recorded.

 

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We haveobtained a grain dealers license and have established our own grain sourcingstaff to acquire the corn we need.  Wehave also identified a number of grain dealers as potential sources of grain innorthwestern Iowa for additional corn delivery. The grain required for operation of the ethanol plant is readilyavailable through our own grain sourcing staff, which purchases the corndirectly from local producers or from secondary markets.  During the fiscal year ending September 30,2005, we purchased approximately $4,416,000 in corn from some of the Company’smembers who are local grain producers.

 

***NaturalGas***

 

Natural gas is also an important input to ourmanufacturing process.  We estimate that our natural gas usage isapproximately 110,000 million British thermal units (“MMBTU”) per month. We use natural gas to dry our distillers grains products to moisture contentsat which they can be stored for long periods and transported greater distances,so that we can market them to broader livestock markets, including poultry andswine markets in the continental United States. We contract with various natural gas vendors to supply the natural gasnecessary to operate the plant.  U.S.Energy Services, Inc. assists us with sourcing natural gas through variousvendors. We determined that sourcing our natural gas from a variety of vendorsmay prove more cost-efficient than using an exclusive supplier.

 

**Federal Ethanol Supports**

 

The ethanolindustry is heavily dependent on several economic incentives to produceethanol, including federal ethanol supports. The most recent ethanol supports are contained in the Energy Policy Actof 2005.  Most notably, the Act creates a7.5 billion gallon Renewable Fuels Standard (RFS). The RFS requiresrefiners to use 4 billion gallons of renewable fuels in 2006, increasingto 7.5 billion gallons by 2012.

 

Historically,ethanol sales have also been favorably affected by the Clean Air Act amendmentsof 1990, particularly the Federal Oxygen Program which became effective November 1,1992.  The Federal Oxygen Programrequires the sale of oxygenated motor fuels during the winter months in certainmajor metropolitan areas to reduce carbon monoxide pollution.  Ethanol use has increased due to a secondClean Air Act program, the Reformulated Gasoline Program.  This program became effective January 1,1995, and requires the sale of reformulated gasoline in nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog.  The two majoroxygenates added to reformulated gasoline pursuant to these programs are MTBEand ethanol, however MTBE has caused groundwater contamination and has beenbanned from use by many states.  AlthoughtheEnergy Policy Act of 2005 did not impose a national ban of MTBE, its failure toinclude liability protection for manufacturers of MTBE is expected to result inrefiners and blenders using ethanol as an oxygenate rather than MTBE to satisfythe reformulated gasoline oxygenate requirement.  While this may create increased demand in theshort-term, we do not expect this to have a long term impact on the demand forethanol as the Act repeals the Clean Air Act’s 2% oxygenate requirement forreformulated gasoline immediately in California and 270 days after enactmentelsewhere.  However, the Act did notrepeal the 2.7% oxygenate requirement for carbon monoxide non-attainment areaswhich are required to use oxygenated fuels in the winter months.  While we expect ethanol to be the oxygenateof choice in these areas, there is no assurance that ethanol will in fact beused.

 

Theuse of ethanol as an alternative fuel source has been aided by federal taxpolicy.  On October 22, 2004, President Bushsigned H.R. 4520, which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”)and amended the federal excise tax structure effective as of January 1,2005.  Prior to VEETC, ethanol-blendedfuel was taxed at a lower rate than regular gasoline (13.2 cents on a 10%blend).  Under VEETC, the ethanol excisetax exemption has been eliminated, thereby allowing the full federal excise taxof 18.4 cents per gallon of gasoline to be collected on all gasoline andallocated to the highway trust fund. This is expected to add approximately $1.4 billion to the highway trustfund revenue annually.  In place of theexemption, the bill creates a new volumetric ethanol excise tax credit of 5.1cents per gallon of ethanol blended at 10%. Refiners and gasoline blenders apply for this credit on the same tax formas before only it is a credit from general revenue, not the highway trustfund.  Based on volume, the VEETC isexpected to allow much greater refinery flexibility in blending ethanol sinceit makes the tax credit available on all ethanol blended with all gasoline,diesel and ethyl tertiary butyl ether (“ETBE”), including ethanol in E-85 andthe E-20 in Minnesota.  The VEETC isscheduled to expire on December 31, 2010.

 

The Energy Policy Act of2005 expands who qualifies for the small ethanol producer tax credit.  Historically, small ethanol producers wereallowed a 10-cents-per-gallon production income tax credit on up to 15

 

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million gallons of production annually.  The size of the plant eligible for the taxcredit was limited to 30 million gallons. Under the Energy Policy Act of 2005 the size limitation on theproduction capacity for small ethanol producers increases from 30 million to 60million gallons.  The credit can be takenon the first 15 million gallons of production. The tax credit is capped at $1.5 million per year per producer.  The credit is effective for taxable yearsending after the date of enactment.

 

In addition,the Energy Policy Act of 2005 creates a new tax credit that permits taxpayersto claim a 30% credit (up to $30,000) for the cost of installing clean-fuelvehicle refueling equipment, such as an E85 fuel pump, to be used in a trade orbusiness of the taxpayer or installed at the principal residence of thetaxpayer. Under the provision, clean fuels are any fuel of at least 85% of thevolume of which consists of ethanol, natural gas, compressed natural gas,liquefied natural gas, liquefied petroleum gas, and hydrogen and any mixture ofdiesel fuel and biodiesel containing at least 20% biodiesel.  The provision is effective for equipmentplaced in service December 31, 2005 and before January 1, 2010. Whileit is unclear how this credit will affect the demand for ethanol in the shortterm, we expect it will help raise consumer awareness of alternative sources offuel and could positively impact future demand for ethanol.

 

Additionally, Congressprovides an ethanol production incentive to ethanol producers through theUnited States Department of Agriculture Commodity Credit Corporation’s BioenergyProgram.  Under the program, incentive payments are allocated to ethanolproducers based primarily on an increase in gallons of ethanol producedcompared to the prior year’s production.  These payments are based upon increases in ethanol production relative toprevious years.  Since we increased our production capacity through ourplant expansion from 40 to 52 million gallons per year, we will be eligible toreceive additional Bioenergy Program payments.  However, due to the sizeof the expansion, any program payments we receive in the future will besignificantly less than our original payments. The receipt of these additional program payments is subject to thecontinued availability of program funds, which may be reduced as a result ofincreased participation in the program by new and expanding plants as well asdecreased federal funding.  The Bioenergy Program is scheduled to expireat the end of the federal government’s 2006 fiscal year.

 

The ethanolindustry and our business depend upon continuation of the federal ethanolsupports discussed above.  Theseincentives have supported a market for ethanol that might disappear without theincentives.  Alternatively, the incentivesmay be continued at lower levels than at which they currently exist.  The elimination or reduction of such federalethanol supports would make it more costly for us to sell our ethanol and wouldlikely reduce our net income.

 

**Our Competition**

 

We will be in direct competition with numerousother ethanol producers, many of whom have greater resources than we do. Wealso expect that additional ethanol producers will enter the market if thedemand for ethanol continues to increase.  Ethanol is a commodity product, like corn,which means our ethanol plantcompetes with other ethanol producers on the basis of price and, to a lesserextent, delivery service.  We believe wecompete favorably with other ethanol producers due to our proximity to amplegrain supplies and multiple modes of transportation.  In addition, we believe our plant’s locationoffers an advantage over other ethanol producers in that it has ready access byrail to growing ethanol markets, which reduces our cost of sales.

 

The ethanol industry has grown to over 90production facilities in the United States. There are also numerous other producer and privately owned ethanolplants planned and operating throughout the Midwest and elsewhere in the UnitedStates.  The largestethanol producers include Abengoa Bioenergy Corp., ADM, Aventine RenewableEnergy, Inc., Cargill, Inc., New Energy Corp. and VeraSun EnergyCorporation, all of which are each capable of producing more ethanol than weexpect to produce.  ADM, one of ourlimited partners and our sole ethanol marketer, recently announced its plan toadd approximately 500 million gallons per year of additional ethanolproduction capacity in the United States. ADM is currently the largest ethanolproducer in the U.S. and controls a significant portion of the ethanol market.ADM’s plan to produce an additional 500 million gallons of ethanol peryear will strengthen its position in the ethanol industry and cause asignificant increase in domestic ethanol supply.

 

10

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Excludingour facility, Iowa currently has 27 ethanol plants in various stages ofdevelopment or operation.  Plants nearGalva and Sioux Center produce or will produce approximately 26 million gallonsper year per facility.  A plant nearSteamboat Rock produces 20 million gallons per year per year.  A Plant near Fort Dodge produces 100 milliongallons per year and plants near Fairbank and Albert City will each produce 100million gallons per year when they become operational.  Plants near Lakota and Iowa Falls currentlyproduce approximately 50 million gallons per year and have begun constructionon a 50 million gallon expansion for total capacity of 100 million gallons peryear each.  The remaining plants willproduce or are producing approximately 50 million gallons per year.  Total annual ethanol production capacity inIowa currently exceeds 1 billion gallons. In addition, a nearby plant in Hudson, South Dakota, producesapproximately 45 million gallons per year and a 40 million gallons per year plantis being developed near South Sioux City, Nebraska.  If organizational efforts are successful,this plant would add an additional 40 million gallons per year of production inclose proximity to our facility.

 

The following table identifies most ofthe ethanol producers in the United States along with their production capacities.

 

**U.S. FUELETHANOL PRODUCTION CAPACITY**million gallons per year (mmgy)

 
| **Company**                        | ** ** | **Location**         | ** ** | **Feedstock** | ** ** | **Current Capacity** | ** ** | **Under Construction/  Expansions** | ** ** |
|------------------------------------|------------|----------------------|------------|---------------|------------|----------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | ** **           | ** ** | ** **    | ** ** | **(mmgy)**           | ** ** | **(mmgy)**                          | ** ** |
| Abingdon  Bioenergy Corp.          |       | York,  NE            |       | Corn/milo     |       | 55                   |       |                                |       |
|                               |       | Colwich,  KS         |       |          |       | 25                   |       |                                |       |
|                               |       | Portales, NM         |       |          |       | 30                   |       |                                |       |
|                               |       | Ravenna, NE          |       |          |       |                 |       | 88                                  |       |
| ACE Ethanol, LLC                   |       | Stanley,  WI         |       | Corn          |       | 39                   |       |                                |       |
| Adkins Energy,  LLC*               |       | Lena,  IL            |       | Corn          |       | 40                   |       |                                |       |
| Advanced  Bioenergy                |       | Fairmont,  NE        |       | Corn          |       |                 |       | 100                                 |       |
| AGP*                               |       | Hastings,  NE        |       | Corn          |       | 52                   |       |                                |       |
| Agra Resources  Coop. d.b.a. EXOL* |       | Albert  Lea, MN      |       | Corn          |       | 40                   |       | 8                                   |       |
| Agri-Energy, LLC*                  |       | Luverne,  MN         |       | Corn          |       | 21                   |       |                                |       |
| Alchem Ltd. LLLP                   |       | Grafton,  ND         |       | Corn          |       | 10.5                 |       |                                |       |
| Al-Corn Clean  Fuel*               |       | Claremont,  MN       |       | Corn          |       | 35                   |       |                                |       |
| Amaizing Energy,  LLC*             |       | Denison,  IA         |       | Corn          |       | 40                   |       |                                |       |
| Archer Daniels  Midland            |       | Decatur,  IL         |       | Corn          |       | 1,070                |       |                                |       |
|                               |       | Cedar  Rapids, IA    |       | Corn          |       |                 |       |                                |       |
|                               |       | Clinton,  IA         |       | Corn          |       |                 |       |                                |       |
|                               |       | Columbus,  NE        |       | Corn          |       |                 |       |                                |       |
|                               |       | Marshall,  MN        |       | Corn          |       |                 |       |                                |       |
|                               |       | Peoria,  IL          |       | Corn          |       |                 |       |                                |       |
|                               |       | Wallhalla,  ND       |       | Corn/barley   |       |                 |       |                                |       |
| Aventine  Renewable Energy, LLC    |       | Pekin,  IL           |       | Corn          |       | 100                  |       | 57                                  |       |
|                               |       | Aurora,  NE          |       | Corn          |       | 50                   |       |                                |       |
| Badger State  Ethanol, LLC*        |       | Monroe,  WI          |       | Corn          |       | 48                   |       |                                |       |
| Big River  Resources, LLC*         |       | West  Burlington, IA |       | Corn          |       | 40                   |       |                                |       |

 

11

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| Broin  Enterprises, Inc.         |   | Scotland,  SD      |   | Corn        |   | 9      |   |   |   |
|---------------------------------------|--------|--------------------|--------|-------------|--------|--------|--------|--------|--------|
| Bushmills Ethanol, Inc.*         |   | Atwater,  MN       |   | Corn        |   |   |   | 40     |   |
| Cargill, Inc.                    |   | Blair,  NE         |   | Corn        |   | 85     |   |   |   |
|                                  |   | Eddyville, IA      |   | Corn        |   | 35     |   |   |   |
| Central Indiana  Ethanol, LLC         |   | Marion,  IN        |   | Corn        |   |   |   | 40     |   |
| Central MN  Ethanol Coop*             |   | Little  Falls, MN  |   | Corn        |   | 21.5   |   |   |   |
| Central Wisconsin  Alcohol            |   | Plover,  WI        |   | Seed corn   |   | 4      |   |   |   |
| Chief Ethanol                         |   | Hastings,  NE      |   | Corn        |   | 62     |   |   |   |
| Chippewa Valley  Ethanol Co.*         |   | Benson,  MN        |   | Corn        |   | 45     |   |   |   |
| Commonwealth  Agri-Energy, LLC*       |   | Hopkinsville,  KY  |   | Corn        |   | 24     |   | 9      |   |
| Corn, LP*                             |   | Goldfield,  IA     |   | Corn        |   |   |   | 50     |   |
| Cornhusker Energy  Lexington, LLC     |   | Lexington,  NE     |   | Corn        |   |   |   | 40     |   |
| Corn Plus, LLP*                       |   | Winnebago,  MN     |   | Corn        |   | 44     |   |   |   |
| Dakota Ethanol,  LLC*                 |   | Wentworth,  SD     |   | Corn        |   | 50     |   |   |   |
| DENCO, LLC*                           |   | Morris,  MN        |   | Corn        |   | 21.5   |   |   |   |
| E3 Biofuels                           |   | Mead,  NE          |   | Corn        |   |   |   | 24     |   |
| East Kansas  Agri-Energy, LLC*        |   | Garnett,  KS       |   | Corn        |   | 35     |   |   |   |
| ESE Alcohol Inc.                      |   | Leoti,  KS         |   | Seed corn   |   | 1.5    |   |   |   |
| Ethanol2000, LLP*                     |   | Bingham  Lake, MN  |   | Corn        |   | 32     |   |   |   |
| Frontier Ethanol,  LLC                |   | Gowrie,  IA        |   | Corn        |   |   |   | 60     |   |
| Front Range  Energy, LLC              |   | Windsor,  CO       |   | Corn        |   |   |   | 40     |   |
| Glacial Lakes  Energy, LLC*           |   | Watertown,  SD     |   | Corn        |   | 50     |   |   |   |
| Golden Cheese  Company of California* |   | Corona,  CA        |   | Cheese whey |   | 5      |   |   |   |
| Golden Grain  Energy, LLC*            |   | Mason  City, IA    |   | Corn        |   | 40     |   |   |   |
| Golden Triangle  Energy, LLC*         |   | Craig,  MO         |   | Corn        |   | 20     |   |   |   |
| Grain Processing  Corp.               |   | Muscatine,  IA     |   | Corn        |   | 20     |   |   |   |
| Granite Falls  Energy, LLC            |   | Granite  Falls, MN |   | Corn        |   | 45     |   |   |   |
| Great Plains  Ethanol, LLC*           |   | Chancellor,  SD    |   | Corn        |   | 50     |   |   |   |
| Green Plains  Renewable Energy        |   | Shenandoah,  IA    |   | Corn        |   |   |   | 50     |   |
| Hawkeye  Renewables, LLC              |   | Iowa  Falls, IA    |   | Corn        |   | 50     |   | 50     |   |
|                                  |   | Fairbank, IA       |   | Corn        |   |   |   | 100    |   |
| Heartland Corn  Products*             |   | Winthrop,  MN      |   | Corn        |   | 36     |   |   |   |
| Heartland Grain  Fuels, LP*           |   | Aberdeen,  SD      |   | Corn        |   | 9      |   |   |   |
|                                  |   | Huron, SD          |   | Corn        |   | 12     |   | 18     |   |
| Heron Lake BioEnergy,  LLC            |   | Heron  Lake, MN    |   | Corn        |   |   |   | 50     |   |
| Horizon Ethanol,  LLC                 |   | Jewell,  IA        |   | Corn        |   |   |   | 60     |   |
| Husker Ag, LLC*                       |   | Plainview,  NE     |   | Corn        |   | 26.5   |   |   |   |
| Illinois River  Energy, LLC           |   | Rochelle,  IL      |   | Corn        |   |   |   | 50     |   |
| Iowa Ethanol,  LLC*                   |   | Hanlontown,  IA    |   | Corn        |   | 50     |   |   |   |
| Iroquois  Bio-Energy Company, LLC     |   | Rensselaer,  IN    |   | Corn        |   |   |   | 40     |   |
| James Valley  Ethanol, LLC            |   | Groton,  SD        |   | Corn        |   | 50     |   |   |   |

 

12

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| KAAPA Ethanol,  LLC*                         |   | Minden,  NE         |   | Corn                       |   | 40     |   |   |   |
|----------------------------------------------|--------|---------------------|--------|----------------------------|--------|--------|--------|--------|--------|
| Land O’ Lakes*                          |   | Melrose,  MN        |   | Cheese whey                |   | 2.6    |   |   |   |
| Lincolnland  Agri-Energy, LLC*               |   | Palestine,  IL      |   | Corn                       |   | 48     |   |   |   |
| Lincolnway  Energy, LLC*                     |   | Nevada,  IA         |   | Corn                       |   |   |   | 50     |   |
| Liquid Resources  of Ohio                    |   | Medina,  OH         |   | Waste Beverage             |   | 3      |   |   |   |
| Little Sioux Corn  Processors, LP*           |   | Marcus,  IA         |   | Corn                       |   | 52     |   |   |   |
| Merrick/Coors                                |   | Golden,  CO         |   | Waste beer                 |   | 1.5    |   | 1.5    |   |
| MGP  Ingredients, Inc.                  |   | Pekin,  IL          |   | Corn/wheat starch          |   | 78     |   |   |   |
|                                         |   | Atchison,  KS       |   |                       |   |   |   |   |   |
| Michigan Ethanol,  LLC                       |   | Caro,  MI           |   | Corn                       |   | 50     |   |   |   |
| Mid-Missouri  Energy, Inc.*             |   | Malta  Bend, MO     |   | Corn                       |   | 45     |   |   |   |
| Midwest Grain  Processors*                   |   | Lakota,  IA         |   | Corn                       |   | 50     |   | 45     |   |
|                                         |   | Riga,  MI           |   | Corn                       |   |   |   | 57     |   |
| Midwest Renewable  Energy, LLC               |   | Sutherland,  NE     |   | Corn                       |   | 17.5   |   | 4.5    |   |
| Minnesota Energy*                            |   | Buffalo  Lake, MN   |   | Corn                       |   | 18     |   |   |   |
| Missouri Ethanol                             |   | Laddonia,  MO       |   | Corn                       |   |   |   | 45     |   |
| New Energy Corp.                             |   | South  Bend, IN     |   | Corn                       |   | 102    |   |   |   |
| North Country  Ethanol, LLC*                 |   | Rosholt,  SD        |   | Corn                       |   | 20     |   |   |   |
| Northeast  Missouri Grain, LLC*              |   | Macon,  MO          |   | Corn                       |   | 45     |   |   |   |
| Northern Lights  Ethanol, LLC*               |   | Big  Stone City, SD |   | Corn                       |   | 50     |   |   |   |
| Northstar  Ethanol, LLC                      |   | Lake  Crystal, MN   |   | Corn                       |   | 52     |   |   |   |
| Otter Creek  Ethanol, LLC*                   |   | Ashton,  IA         |   | Corn                       |   | 55     |   |   |   |
| Panhandle  Energies of Dumas, LP             |   | Dumas,  TX          |   | Corn/Grain Sorghum         |   |   |   | 30     |   |
| Parallel Products                            |   | Louisville,  KY     |   | Beverage waste             |   | 5.4    |   |   |   |
|                                         |   | R.  Cucamonga, CA   |   |                       |   |   |   |   |   |
| Permeate Refining                            |   | Hopkinton,  IA      |   | Sugars & starches |   | 1.5    |   |   |   |
| Phoenix Biofuels                             |   | Goshen,  CA         |   | Corn                       |   | 25     |   |   |   |
| Pine Lake Corn  Processors, LLC*             |   | Steamboat  Rock, IA |   | Corn                       |   | 20     |   |   |   |
| Platte Valley  Fuel Ethanol, LLC             |   | Central  City, NE   |   | Corn                       |   | 40     |   |   |   |
| Prairie Ethanol,  LLC                        |   | Loomis,  SD         |   | Corn                       |   |   |   | 60     |   |
| Prairie Horizon  Agri-Energy, LLC            |   | Phillipsburg,  KS   |   | Corn                       |   |   |   | 40     |   |
| Pro-Corn, LLC*                               |   | Preston,  MN        |   | Corn                       |   | 42     |   |   |   |
| Quad-County Corn  Processors*                |   | Galva,  IA          |   | Corn                       |   | 27     |   |   |   |
| Red Trail Energy,  LLC                       |   | Richardton,  ND     |   | Corn                       |   |   |   | 50     |   |
| Redfield Energy, LLC                         |   | Redfield,  SD       |   | Corn                       |   |   |   | 50     |   |
| Reeve Agri-Energy                            |   | Garden  City, KS    |   | Corn/milo                  |   | 12     |   |   |   |
| Siouxland  Energy & Livestock Coop* |   | Sioux  Center, IA   |   | Corn                       |   | 25     |   |   |   |

 

13

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| Siouxland  Ethanol, LLC                      |       | Jackson,  NE     |   | Corn              |   |       |   | 50       |   |
|----------------------------------------------|------------|------------------|--------|-------------------|--------|------------|--------|----------|--------|
| Sioux River  Ethanol, LLC*                   |       | Hudson,  SD      |   | Corn              |   | 55         |   |     |   |
| Sterling Ethanol,  LLC                       |       | Sterling,  CO    |   | Corn              |   | 42         |   |     |   |
| Tall Corn  Ethanol, LLC*                     |       | Coon  Rapids, IA |   | Corn              |   | 49         |   |     |   |
| Tate &  Lyle                        |       | Loudon,  TN      |   | Corn              |   | 67         |   |     |   |
| The Andersons  Albion Ethanol LLC            |       | Albion,  MI      |   | Corn              |   |       |   | 55       |   |
| Trenton Agri  Products, LLC                  |       | Trenton,  NE     |   | Corn              |   | 35         |   | 10       |   |
| United WI Grain  Producers, LLC*             |       | Friesland,  WI   |   | Corn              |   | 49         |   |     |   |
| US BioEnergy  Corp.                          |       | Albert  City, IA |   | Corn              |   |       |   | 100      |   |
|                                         |       | Lake  Odessa, MI |   | Corn              |   |       |   | 45       |   |
| U.S. Energy  Partners, LLC                   |       | Russell,  KS     |   | Milo/wheat starch |   | 48         |   |     |   |
| Utica Energy, LLC                            |       | Oshkosh,  WI     |   | Corn              |   | 48         |   |     |   |
| Val-E Ethanol, LLC                           |       | Ord,  NE         |   | Corn              |   |       |   | 45       |   |
| VeraSun Energy  Corporation                  |       | Aurora,  SD      |   | Corn              |   | 230        |   |     |   |
|                                         |       | Ft.  Dodge, IA   |   | Corn              |   |       |   |     |   |
| Voyager Ethanol,  LLC*                       |       | Emmetsburg,  IA  |   | Corn              |   | 52         |   |     |   |
| Western Plains  Energy, LLC*                 |       | Campus,  KS      |   | Corn              |   | 45         |   |     |   |
| Western Wisconsin  Renewable Energy, LLC*    |       | Boyceville,  WI  |   | Corn              |   |       |   | 40       |   |
| Wind Gap Farms                               |       | Baconton,  GA    |   | Brewery waste     |   | 0.4        |   |     |   |
| Wyoming Ethanol                              |       | Torrington,  WY  |   | Corn              |   | 5          |   |     |   |
| Xethanol  BioFuels, LLC                      |       | Blairstown,  IA  |   | Corn              |   | 5          |   |     |   |
| ****Total  Current Capacity****              | ** ** |             |   |              |   | **4286.4** |   |     |   |
| ****Total  Under Construction/Expansions**** | ** ** |             |   |              |   |       |   | **1752** |   |
| **Total  Capacity**                          | ** ** |             |   |              |   | **6038.4** |   |     |   |

 

----

| * farmer-owned |   |   |   | Source:  Renewable Fuels Association  Last Updated: December 2005 |
|----------------|--------|--------|--------|------------------------------------------------------------------------|

 

***Competition from Alternative Fuels***

 

Our ethanolplant also competes with producers of other gasoline additives having similar octaneand oxygenate values as ethanol, such as producers of MTBE, a petrochemicalderived from methanol that costs less to produce than ethanol.  Although currently the subject of several statebans, many major oil companies can produce MTBE and because it ispetroleum-based, its use is strongly supported by major oil companies.

 

Alternative fuels, gasoline oxygenates andalternative ethanol production methods are also continually under development by ethanol and oil companies with fargreater resources. The major oil companies have significantly greater resourcesthan we have to develop alternative products and to influence legislation andpublic perception of MTBE and ethanol. New ethanol products or methods of ethanol production developed bylarger and better-financed competitors could provide them competitiveadvantages and harm our business.

 

***Distillers Grains Competition***

 

Our plant primarily competes with other ethanolproducers in the production and sales of distillers grains.  According to the University of Minnesota’sDDGS—General Information website (November 28, 2005)

 

14

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approximately 3,200,000to 3,500,000 tons of distillers grains are produced annually in North America,approximately 98% of which are produced by ethanol plants. The remaining 1 to2% of DDGS is produced by the alcohol beverage industry.  Ethanol plants in South Dakota and Minnesotaproduce about 25% of this amount. The amount of distillers grains produced isexpected to increase significantly as the number of ethanol plants increase.  In addition, our distillers grains competewith other livestock feed products such as soybean meal, corn gluten feed, drybrewers grain and mill feeds.

 

**General Ethanol Demand and Supply**

 

Ethanol has important applications,primarily as a high-quality octane enhancer and an oxygenate capable ofreducing air pollution and improving automobile performance.  Ethanolcontains 35% oxygen by weight.  Whencombined with gasoline, ethanol acts as an oxygenate.  As a result, the gasoline burns cleaner, andreleases less carbon monoxide and other exhaust emissions into the atmosphere.

 

Accordingto the Renewable Fuels Association, demand for fuel ethanol in the UnitedStates reached a new high in 2004 of 3.57 billion gallons per year. In itsreport titled, “Ethanol Industry Outlook 2005,” the Renewable Fuels Associationanticipates demand for ethanol to remain strong. The passage of the VolumetricEthanol Excise Tax Credit (“VEETC”), is expected to provide the flexibilitynecessary to expand ethanol blending into higher blends of ethanol such as E85,E diesel and fuel cell markets. In addition, the recent implementation of aRenewable Fuels Standard contained in the Energy Policy Act of 2005, which wassigned into law on August 8, 2005 is expected to favorably impact theethanol industry by enhancing both the production and use of ethanol.

 

Theprovision of the Energy Policy Act of 2005 likely to have the greatest impacton the ethanol industry is the creation of a 7.5 billion gallon Renewable FuelsStandard (RFS). The RFS will begin at 4 billion gallons in 2006, increasing to7.5 billion gallons by 2012. The RFS is a national flexible program that doesnot require that any renewable fuels be used in any particular area or state,allowing refiners to use renewable fuel blends in those areas where it is mostcost-effective. According to the Renewable Fuels Association, the bill isexpected to lead to about $6 billion in new investment in ethanol plants acrossthe country. An increase in the number of new plants will bring an increase inthe supply of ethanol. Thus, while this bill may cause ethanol prices toincrease in the short term due to additional demand, future supply couldoutweigh the demand for ethanol in the future. This would have a negativeimpact on our earnings. Alternatively, since the RFS begins at 4 billiongallons in 2006 and national production is expected to exceed this amount,there could be a short-term oversupply until the RFS requirements exceed nationalproduction. This would have an immediate adverse effect on our earnings.

 

In addition, demand forethanol may also increase as a result of increased consumption of E85 fuel. E85fuel is a blend of 70% to 85% ethanol and gasoline. According to the EnergyInformation Administration, E85 consumption is projected to increase from anational total of 11 million gallons in 2003 to 47 million gallons in2025. E85 is used as an aviation fuel and as a hydrogen source for fuel cells.According to the National Ethanol Vehicle Coalition, there are currently about4.5 million flexible fuel vehicles capable of operating on E85 in the U.S.and 400 retail stations supplying it. Automakers have indicated plans toproduce an estimated 2 million more flexible fuel vehicles per year.

 

Thesupply of domestically produced ethanol is at an all-time high. In 2004, 81ethanol plants located in 20 states produce a record 3.41 billion gallons, a21% increase from 2003 and 109% increase from 2000. At the end of 2004, 16plants and 2 major expansions were under construction, representing anadditional 750 million gallons of production capacity. The following tableshows 2005 U.S. ethanol production capacity by state as of December 2005:

 

15

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**EthanolProduction Capacity Ranked by State**(Largest to Smallest Production Capacity as of December 2005)

 

| **Rank**   | ** ** | **State**           | ** ** | **Ethanol Production Capacity** |       |
|------------|------------|---------------------|------------|---------------------------------|------------|
| ** ** | ** ** | ** **          | ** ** | **(Million Gallons Per Year)**  |       |
| ** ** | ** ** | ** **          | ** ** | ** **                      |       |
| **1**      | ** ** | **Iowa**            | ** ** | **1,699.5**                     | ** ** |
| 2          |       | Illinois            |       | 881.0                           |       |
| 3          |       | Nebraska            |       | 771.5                           |       |
| 4          |       | South Dakota        |       | 603.0                           |       |
| 5          |       | Minnesota           |       | 593.6                           |       |
| 6          |       | Wisconsin           |       | 228.0                           |       |
| 7          |       | Kansas              |       | 212.5                           |       |
| 8          |       | Michigan            |       | 207.0                           |       |
| 9          |       | Indiana             |       | 182.0                           |       |
| 10         |       | Missouri            |       | 155.0                           |       |
| 11         |       | Colorado            |       | 85.0                            |       |
| 11         |       | North Dakota        |       | 83.5                            |       |
| 12         |       | Tennessee           |       | 67.0                            |       |
| 13         |       | Kentucky            |       | 35.4                            |       |
| 14         |       | California          |       | 33.0                            |       |
| 15         |       | New Mexico          |       | 30.0                            |       |
| 15         |       | Texas               |       | 30.0                            |       |
| 16         |       | Wyoming             |       | 5.0                             |       |
| 17         |       | Ohio                |       | 3.0                             |       |
| 18         |       | Georgia             |       | 0.4                             |       |
|       |       | United States Total |       | 5,905.4                         |       |

 

Sources: Renewable Fuels Association, Washington, DC.

NebraskaEnergy Office, Lincoln, NE

 

Ethanolsupply is also affected by ethanol produced or processed in certain countriesin Central America and the Caribbean region. Ethanol produced in thesecountries is eligible for tariff reduction or elimination upon importation tothe United States under a program known as the Caribbean Basin Initiative (“CBI”).Large ethanol producers, such as Cargill, have expressed interest in buildingdehydration plants in participating Caribbean Basin countries, such as ElSalvador, which would convert ethanol into fuel-grade ethanol for shipment tothe United States. Ethanol imported from Caribbean Basin countries may be aless expensive alternative to domestically produced ethanol. The InternationalTrade Commission recently announced the 2005 CBI import quota of 240.4 milliongallons of ethanol. Last year, legislation was introduced in the Senate thatwould limit the transshipment of ethanol through the CBI. No similarlegislation has been introduced this year, however, there is no assurance orguarantee that such legislation will be introduced or that it will besuccessfully passed during 2006.

 

**Research andDevelopment**

 

We do not conduct any research and developmentactivities associated with the development of new technologies for use inproducing ethanol and distillers grains.

 

**Dependence on One ora Few Major Customers**

 

As discussedabove, we have entered into marketing agreements with ADM and CSC for thepurposes of marketing and distributing our principal products, ethanol anddistillers grains, respectively.  We relyon ADM and CSC for the sale and distribution of almost all of our products,except for those distillers grains that we market locally.  Therefore, we are highly dependent on ADM andCSC for the successful marketing of our products.  As a large ethanol producer, ADM is also asource of competition.   Any loss of ADM or CSC as our marketing agentfor our ethanol and distillers grains could have a significant negative impacton our revenues.

 

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**Costs and Effects ofCompliance with Environmental Laws**

 

We aresubject to extensive air, water and other environmental regulations and we havebeen required to obtain a number of environmental permits to construct andoperate the plant.  We have obtained allof the necessary permits to operate the plant including, air pollutionconstruction permits, a pollutant discharge elimination system general permit,storm water discharge permits, a water withdrawal permit, and an alcohol fuelproducer’s permit.  In addition, we havecompleted a spill prevention control and countermeasures plan.  Although we have been successful in obtainingall of the permits currently required, any retroactive change in environmentalregulations, either at the federal or state level, could require us to obtainadditional or new permits or spend considerable resources on complying withsuch regulations.

 

We are subject to ongoingenvironmental regulations and testing.  The plant passed emissions testingin December 2003 and we received renewed operating permits in April 2004. The operating permits allow us to operate in excess of 40 million gallons peryear.  Subsequent to installation of the regenerative thermal oxidizer, weretested critical emissions points in November 2004 to further enhance ourability to operate at peak efficiencies.  We are pleased with the resultsof these tests, and final permitting was granted by the regulatory agency in November 2005. Our capacity to operate at lower temperatures while maintaining compliance isexpected to increase efficiency and may reduce costs of operations.  Weare required by federal regulations to conduct a Relative Accuracy Test Audit(RATA) once per 12-month period.  We passed the RATA testing in February 2005. By installing hard surfacing on the plant road, we expect to reduce our dustemissions, which should aid our continued compliance with environmentalstandards.

 

On August 9, 2005, theBoard of Directors approved plans to proceed with a 40 million gallon per yearexpansion to our plant.  However, beforewe can begin expansion of our plant, we must obtain numerous regulatoryapprovals and permits.  While weanticipate receiving these approvals and permits, there is no assurance thatthese requirements can be satisfied in a timely manner or at all.  In addition, as a condition of receiving thepermits and approvals, we may be required to make significant capitalexpenditures to install additional pollution control equipment, which could have a material adverse effecton our results of operations and financial condition.

 

We aresubject to oversight activities by the EPA.  There is always a risk that the EPA mayenforce certain rules and regulations differently than Iowa’senvironmental administrators.  Iowa orEPA rules are subject to change, and any such changes could result ingreater regulatory burdens on plant operations. We could also be subject to environmental or nuisance claims fromadjacent property owners or residents in the area arising from possible foulsmells or other air or water discharges from the plant.  Such claims may result in an adverse resultin court if we are deemed to engage in a nuisance that substantially impairsthe fair use and enjoyment of real estate.

 

The government’sregulation of the environment changes constantly.  It is possible that more stringent federal orstate environmental rules or regulations could be adopted, which couldincrease our operating costs and expenses. It also is possible that federal or state environmental rules orregulations could be adopted that could have an adverse effect on the use ofethanol.  For example, changes in theenvironmental regulations regarding the required oxygen content of automobileemissions could have an adverse effect on the ethanol industry.  Furthermore, plant operations likely will begoverned by the Occupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that thecosts of the operation of the plant may increase.  Any of these regulatory factors may result inhigher costs or other materially adverse conditions effecting our operations,cash flows and financial performance.

 

**Employees**

 

As of September 30, 2005, we had a totalof 36 full-time employees. We have 29 full-time employees in ethanol production operations and 7full-time employees in general management and administration.  Atthe current plant size of 52 MGY, we do not expect to hire a significant numberof employees in the next 12 months.  However, significant expansion of theplant may require us to hire several new employees.

 

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**ITEM 1A.               RISKFACTORS.**

 

*You should carefully read and consider the risks and uncertaintiesbelow and the other information contained in this report.  The risks and uncertainties described beloware not the only ones we may face.  Thefollowing risks, together with additional risks and uncertainties not currentlyknown to us or that we currently deem immaterial could impair our financialcondition and results of operation.*

 

**Risks Relating to Our Business**

 

***We have a limitedoperating history and our business may not be as successful as weanticipate. ***We began our business in 2000 and commencedproduction of ethanol at our plant in April 2003.  Accordingly, we have a limited operatinghistory from which you can evaluate our business and prospects.  Our operating results could fluctuatesignificantly in the future as a result of a variety of factors, includingthose discussed through out these risk factors. Many of these factors are outside our control.   As a result of these factors, our operatingresults may not be indicative of future operating results and you should notrely on them as indications of our future performance.  In addition, our prospects must be consideredin light of the risks and uncertainties encountered by an early-stage companyand in rapidly growing industries, such as the ethanol industry, where supplyand demand may change substantially in a short amount of time.

 

***Our business isnot diversified.***  Our success depends largely upon our abilityto profitably operate our ethanol plant. We do not have any other lines ofbusiness or other sources of revenue if we are unable to operate our ethanolplant and manufacture ethanol, distillers grains and corn oil.  If economic or political factors adverselyaffect the market for ethanol, the Company has no other line of business tofall back on if the ethanol business declines. Our business would also besignificantly harmed if its ethanol plant could not operate at full capacityfor any extended period of time.

 

***Ourfinancial performance is significantly dependent on corn and natural gas pricesand generally we cannot pass on increases in input prices to our customers.**** *Our results of operations and financial condition are significantlyaffected by the cost and supply of corn and natural gas. Changes in the priceand supply of corn and natural gas are subject to and determined by marketforces over which we have no control

 

Ethanol production requiressubstantial amounts of corn. Corn, as with most other crops, is affected byweather, disease and other environmental conditions.  The price of corn is also influenced bygeneral economic, market and government factors.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand and supply and quality. Changes in the price of corn can significantly affect our business.Generally, higher corn prices will produce lower profit margins and, therefore,represent unfavorable market conditions. This is especially true if market conditions do not allow us to passalong increased corn costs to our customers. The price of corn has fluctuated significantly in the past and mayfluctuate significantly in the future.  If a period of high corn prices were to be sustained for sometime, such pricing may reduce our ability to generate revenues because of thehigher cost of operating and may make ethanol uneconomical to use in fuelmarkets.  We cannot offer any assurancethat we will be able to offset any increase in the price of corn by increasingthe price of our products.  If we cannotoffset increases in the price of corn, our financial performance may bematerially and adversely affected.

 

Natural gas has recentlybeen available only at prices exceeding historical averages.  These pricesare increasing our costs of production.  The prices for and availability of naturalgas are subject to volatile market conditions. These market conditions often are affected by factors beyond our controlsuch as higher prices as a result of colder than average weather conditions,overall economic conditions and foreign and domestic governmental regulationsand relations.  Significant disruptionsin the supply of natural gas could impair our ability to manufacture ethanolfor our customers.  Furthermore,increases in natural gas prices or changes in our natural gas costs relative tonatural gas costs paid by competitors may adversely affect our results ofoperations and financial condition.

 

Weseek to minimize the risks from fluctuations in the prices of corn and naturalgas through the use of hedging instruments. However, these hedging transactions also involve risks to ourbusiness.  See “**Risks Relating to Our Business -*****We engage in hedging transaction which involverisks that can harm our business***.”

 

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***The spread between ethanol and corn prices can vary significantly andwe do not expect the spread to remain at recent high levels. ***Corn costs significantly impact our cost of goods sold.  Our grossmargins are principally dependent upon the spread between ethanol and cornprices.  Recently, the spread betweenethanol and corn prices has been at historically high level, due in large partto high oil prices and low corn prices. However, this spread has fluctuated significantly in 2005 and mayfluctuate significantly in the future. Any reduction in the spread between ethanol and corn prices, whether asa result of an increase in corn prices or a reduction in ethanol prices, wouldadversely affect our results of operations and financial condition

 

***Our revenues will be greatly affected by the price at which we can sellour ethanol and distillers grains.*** These prices can be volatile as a result of a number of factors. Thesefactors include the overall supply and demand, the price of gasoline, level ofgovernment support, and the availability and price of competing products. Forinstance, the price of ethanol tends to increase as the price of gasolineincreases, and the price of ethanol tends to decrease as the price of gasolinedecreases. Any lowering of gasoline prices will likely also lead to lowerprices for ethanol, which may decrease our ethanol sales and reduce revenues.

 

Theprice of ethanol has recently been much higher than its 10-year average. We donot expect these prices to be sustainable as supply from new and existingethanol plants increases to meet increased demand. Increased production ofethanol may lead to lower prices. The increased production of ethanol couldhave other adverse effects. For example, the increased production could lead toincreased supplies of co-products from the production of ethanol, such asdistillers grains. Those increased supplies could outpace demand, which wouldlead to lower prices for those by-products. Also, the increased production ofethanol could result in increased demand for corn. This could result in higherprices for corn and corn production creating lower profits. There can be noassurance as to the price of ethanol or distillers grains in the future. Anydownward changes in the price of ethanol and/or distillers grains may result inless income which would decrease our revenues and profitability.

 

***We sell all of the ethanolwe produce to ADM in accordance with an ethanol marketing agreement.***** **ADM, a significantcompetitor of ours, is the sole buyer of all of our ethanol and we rely heavilyon its marketing efforts to successfully sell our product.  Because ADM sells ethanol for itself and anumber of other producers, we have limited control over its sales efforts.  Our financial performance is dependent uponthe financial health of ADM, as a significant portion of our accountsreceivable are attributable to ADM.  IfADM breaches the ethanol marketing agreement or is not in the financialposition to purchase all of the ethanol we produce, we could experience amaterial loss and we may not have any readily available means to sell ourethanol and our financial performance will be adversely and materiallyaffected.  If our agreement with ADMterminates, we may seek other arrangements to sell our ethanol, includingselling our own product, but we give no assurance that our sales efforts wouldachieve results comparable to those achieved by ADM.

 

***We engage in hedging transactions which involve risks that can harm ourbusiness.***  We are exposed to market risk from changes incommodity prices.  Exposure to commodity price risk results from ourdependence on corn and natural gas in the ethanol production process.  Weseek to minimize the risks from fluctuations in the prices of corn and naturalgas through the use of hedging instruments.  The effectiveness of ourhedging strategies is dependent upon, the cost of corn and natural gas and ourability to sell sufficient products to use all of the corn and natural gas forwhich we have futures contracts.  Thereis no assurance that our hedging activities will successfully reduce the riskcaused by price fluctuation which may leave us vulnerable to high corn andnatural prices. Alternatively, we may choose not to engage in hedgingtransactions in the future.  As a result,our results of operations and financial conditions may also be adverselyaffected during periods in which corn and/or natural gas prices increase.

 

Hedging activities themselvescan result in costs because price movements in corn and natural gas contractsare highly volatile and are influenced by many factors that are beyond ourcontrol.  There are several variablesthat could affect the extent to which our derivative instruments are impactedby price fluctuations in the cost of corn or natural gas.  However, it islikely that commodity cash prices will have the greatest impact on thederivatives instruments with delivery dates nearest the current cash price.  We may incur such costs and they may besignificant.

 

***Changes and advances in ethanol productiontechnology could require us to incur******costs to update our plant or could otherwise hinder our ability to**compete in the ethanol industry or operateprofitably.***  Advances and changes in the technology ofethanol production are expected to occur. Such advances and changes may make the ethanol production technologyinstalled in our plant less desirable or obsolete.  These advances could also allow ourcompetitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporatetechnological advances, our ethanol production methods and processes could beless efficient than our competitors, which could cause our plant to becomeuncompetitive or completely obsolete.  Ifour competitors develop, obtain or license technology that is superior to oursor that makes our technology obsolete, we may be required to incur significantcosts to enhance or acquire new technology so that our ethanol productionremains competitive.  Alternatively, wemay be required to seek third-party licenses, which could also result insignificant expenditures.  We cannotguarantee or assure you that third-party licenses will be available or, onceobtained, will continue to be available on commercially reasonable terms, if atall.  These costs could negatively impactour financial performance by increasing our operating costs and reducing ournet income.

 

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**Risks Related to Ethanol Industry**

 

***New plants under construction or decreases in the demand for ethanolmay result in excess production capacity in our industry.***  Thesupply of domestically produced ethanol is at an all-time high. In 2004, 81ethanol plants located in 20 states produce a record 3.41 billion gallons, a21% increase from 2003 and 109% increase from 2000. At the end of 2004, 16plants and 2 major expansions were under construction, representing anadditional 750 million gallons of production capacity.  The ethanol industry has grown to over 90production facilities in the United States. Excluding our facility, Iowacurrently has 27 ethanol plants in various stages of development oroperation.  Excess capacity in the ethanol industry wouldhave an adverse impact on our results of operations, cash flows and generalfinancial condition.  Excesscapacity may also result or intensify from increases in production capacitycoupled with insufficient demand.  If the demand for ethanol does not grow atthe same pace as increases in supply, we would expect the price for ethanol todecline.  If excess capacity in the ethanolindustry occurs, the market price of ethanol may decline to a level that isinadequate to generate sufficient cash flow to cover our costs.

 

***Weoperate in a competitive industry******and compete with larger,better financed entities which could impact our ability to operate profitably.***  There issignificant competition among ethanol producers with numerous producer and privately owned ethanol plants planned andoperating throughout the Midwest and elsewhere in the United States.  The number of ethanol plants beingdeveloped and constructed in the United States continues to increase at a rapidpace. The recent passage of the Energy Policy Act of 2005 included a renewablefuels mandate that we expect will further increase the number of domesticethanol production facilities.  Thelargest ethanol producers include Abengoa Bioenergy Corp., Archer DanielsMidland, Aventine Renewable Energy, Inc., Cargill, Inc., New EnergyCorp. and VeraSun Energy Corporation, all of which are each capable ofproducing more ethanol than we expect to produce.  Archer Daniels Midland, one of our limitedpartners and our sole ethanol marketer, recently announced its plan to addapproximately 500 million gallons per year of additional ethanolproduction capacity in the United States. ADM is currently the largest ethanolproducer in the U.S. and controls a significant portion of the ethanol market.ADM’s plan to produce an additional 500 million gallons of ethanol peryear will strengthen its position in the ethanol industry and cause asignificant increase in domestic ethanol supply.  If the demand for ethanol does not grow atthe same pace as increases in supply, we expect that lower prices for ethanolwill result which may adversely affect our ability to generate profits and ourfinancial condition.

 

Our ethanol plant also competes with producers ofother gasoline additives made from raw materials other than corn having similaroctane and oxygenate values as ethanol, such as producers of methyl tertiarybutyl ether (MTBE). MTBE is a petrochemical derived from methanol whichgenerally costs less to produce than ethanol. Many major oil companies produceMTBE and strongly favor its use because it is petroleum-based. Alternativefuels, gasoline oxygenates and alternative ethanol production methods are alsocontinually under development. The major oil companies have significantlygreater resources than we have to market MTBE, to develop alternative products,and to influence legislation and public perception of MTBE and ethanol. Thesecompanies also have significant resources to begin production of ethanol shouldthey choose to do so.

 

***Competition from the advancement ofalternative fuels may lessen the demand for******ethanol.***  Alternative fuels, gasoline oxygenates andethanol production methods are continually under development. A number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean burning gaseousfuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns. Fuel cells have emerged as apotential alternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the

 

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transportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions. If the fuel cell and hydrogen industries continue to expand and gainbroad acceptance, and hydrogen becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively. This additionalcompetition could reduce the demand for ethanol, resulting in lower ethanolprices that might adversely affect our results of operations and financialcondition.

 

***Corn-based ethanol may compete withcellulose-based ethanol in the future,******which could make it more difficult for us to produce ethanol on a**cost-effective basis****.*  Mostethanol is currently produced from corn and other raw grains, such as milo orsorghum - especially in the Midwest. The current trend in ethanol productionresearch is to develop an efficient method of producing ethanol fromcellulose-based biomass, such as agricultural waste, forest residue, municipalsolid waste, and energy crops. This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas which are unable to grow corn. Although current technology is notsufficiently efficient to be competitive, a recent report by the U.S.Department of Energy entitled “Outlook for Biomass Ethanol Production andDemand” indicates that new conversion technologies may be developed in thefuture. If an efficient method of producing ethanol from cellulose-basedbiomass is developed, we may not be able to compete effectively. We do notbelieve it will be cost-effective to convert the ethanol plant we are proposinginto a plant which will use cellulose-based biomass to produce ethanol. If weare unable to produce ethanol as cost-effectively as cellulose-based producers,our ability to generate revenue and financial condition will be negativelyimpacted.

 

**C*ompetitionfrom ethanol imported from Caribbean basin countries may be a less**expensive alternative to our ethanol.*** Ethanol produced or processed in certain countries in Central Americaand the Caribbean region is eligible for tariff reduction or elimination uponimportation to the United States under a program known as the Caribbean BasinInitiative. Large ethanol producers, such as Cargill, have expressed interestin building dehydration plants in participating Caribbean Basin countries, suchas El Salvador, which would convert ethanol into fuel-grade ethanol forshipment to the United States. Ethanol imported from Caribbean Basin countriesmay be a less expensive alternative to domestically produced ethanol.Competition from ethanol imported from Caribbean Basin countries may affect ourability to sell our ethanol profitably, adversely affect our results ofoperations and financial condition.

 

***Competition from ethanol imported fromBrazil may be a less expensive******alternative to ourethanol.***  Brazil is currently the world’s largestproducer and exporter of ethanol. In Brazil, ethanol is produced primarily fromsugarcane, which is also used to produce food-grade sugar. Brazil experienced adramatic increase in ethanol production and trade in 2004, exportingapproximately 112 million gallons to the U.S. alone. Ethanol imported fromBrazil may be a less expensive alternative to domestically produced ethanol,which is primarily made from corn. Tariffs presently protecting U.S. ethanolproducers may be reduced or eliminated. Competition from ethanol imported fromBrazil may affect our ability to sell our ethanol profitably and our financialcondition.

 

***Consumer resistance to the use of ethanolbased on the belief that ethanol is******expensive, adds to air pollution, harms engines and takes more energyto**produce that it contributesmay affect the demand for ethanol.***  Certain individuals believethat use of ethanol will have a negative impact on gasoline prices at the pump.Many also believe that ethanol adds to air pollution and harms car and truckengines. Still other consumers believe that the process of producing ethanolactually uses more fossil energy, such as oil and natural gas, than the amountof ethanol that is produced. These consumer beliefs could potentially bewide-spread. If consumers choose not to buy ethanol, it would affect the demandfor the ethanol we produce which could lower demand for our product andnegatively affect our profitability and financial condition.

 

**Risks Related to Regulation andGovernmental Action**

 

***A change in government policies favorableto ethanol may cause demand for******ethanol todecline.***  Growth and demand for ethanol may be drivenprimarily by federal and state government policies, such as state laws banning MTBEand the national renewable fuels standard. The continuation of these policiesis uncertain, which means that demand for ethanol may decline if these policieschange or are discontinued. A decline in the demand for ethanol is likely tocause lower ethanol prices which in turn will negatively affect our results ofoperations, financial condition and cash flows.

 

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***Government incentives for ethanolproduction, including federal tax incentives, may be eliminated in the future,******which could hinder our ability to operate at a profit.* **The ethanol industry and our business are assisted by various federalethanol tax incentives, including those included in the Energy Policy Act of2005. The provision of the Energy Policy Act of 2005 likely to have thegreatest impact on the ethanol industry is the creation of a 7.5 billion gallonRenewable Fuels Standard (RFS). The RFS will begin at 4 billion gallons in2006, increasing to 7.5 billion gallons by 2012. The RFS helps support a marketfor ethanol that might disappear without this incentive. The elimination or reductionof tax incentives to the ethanol industry could reduce the market for ethanol,which could reduce prices and our revenues by making it more costly ordifficult for us to produce and sell ethanol. If the federal tax incentives areeliminated or sharply curtailed, we believe that a decreased demand for ethanolwill result, which could negatively affect our profitability and financialcondition.

 

Anotherimportant provision involves an expansion in the definition of who qualifies asa small ethanol producer. Historically, small ethanol producers were allowed a10-cents-per-gallon production income tax credit on up to 15 million gallons ofproduction annually. The size of the plant eligible for the tax credit waslimited to 30 million gallons. Under the Energy Policy Act of 2005 the sizelimitation on the production capacity for small ethanol producers increasesfrom 30 million to 60 million gallons. This tax credit may foster additionalgrowth in ethanol plants of a larger size and increase competition in thisparticular plant size category.

 

***Changes in environmental regulations orviolations of the regulations could be******expensive and reduce our profitability.***  Weare subject to extensive air, water and other environmental laws andregulations.  In addition some of theselaws require our plant to operate under a number of environmental permits.These laws, regulations and permits can often require expensive pollutioncontrol equipment or operation changes to limit actual or potential impacts tothe environment.  A violation of theselaws and regulations or permit conditions can result in substantial fines,damages, criminal sanctions, permit revocations and/or plant shutdowns.  We do not assure you that we have been, areor will be at all times in complete compliance with these laws, regulations orpermits or that we have had or have all permits required to operate ourbusiness.  We do not assure you that wewill not be subject to legal actions brought by environmental advocacy groupsand other parties for actual or alleged violations of environmental laws or ourpermits.  Additionally, any changes inenvironmental laws and regulations, both at the federal and state level, couldrequire us to invest or spend considerable resources in order to comply withfuture environmental regulations. The expense of compliance could besignificant enough to reduce our profitability and negatively affect ourfinancial condition.

 

**Risks Related to Expansion of OurPlant**

 

***We give no assurances that we will be ableto implement our expansion strategy as planned or at all.*****We are planning toexpand our current production capacity (52 million gallons per year) by anadditional 40 million gallons annually.  The cost of the expansion is expected to beapproximately $50,000,000, which will be financed using both a portion of ourcash and additional debt to finance the required capital expenditure.  The use of cash to finance these expenditurescould impact our ability to make future distributions to our members.  We do not have contracts or commitments withany bank, lender, governmental entity, underwriter or financial institution fordebt financing.  If debt financing onacceptable terms is not available for any reason, we may be forced to abandonour expansion plans.

 

There is no assurance thatthe expansion will reduce our operating costs or increase our operatingincome.  Our expansion projections are based upon our historical operatingcosts and historical revenues and there is no guarantee or assurance that ourpast financial performance can accurately predict future results especially inconnection with expansion.  In addition, the expansion may cost more andmay present additional challenges and risks that negatively impact our futurefinancial performance.

 

***We will depend on Fagen, Inc. and ICM, Inc.to expand our plant, however, we currently have no binding agreement with them.***  Wewill be highly dependent upon Fagen, Inc. and ICM, Inc. to expand ourplant, but we have no letter of intent or definitive binding agreement with eithercompany.  Fagen, Inc. has indicatedits intention to deliver to us a proposed expansion design-build contract, inwhich it will serve as our general contractor and will engage ICM, Inc. toprovide design and engineering services. We anticipate that we will execute a definitive binding design-buildagreement with Fagen, Inc. to expand the plant. However, we have not yetnegotiated, reviewed or executed the design-build agreement and there is noassurance that such an agreement will

 

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be executed.

 

Ifwe do not execute a definitive, binding design-build agreement with Fagen, Inc.,or if Fagen, Inc. terminates its relationship with us after initiatingconstruction, there is no assurance that we would be able to obtain areplacement general contractor. Accordingly, we give no assurances that we willbe able to implement our expansion strategy as planned or at all.

 

***We may need to increase cost estimates forconstruction of the ethanol plant,******and such increase could reduce our revenue stream and make theexpansion unprofitable.**** *We anticipate that Fagen, Inc. willexpand our plant for a fixed contract price, based on the plans andspecifications in the anticipated design-build agreement.  We have based our capital needs on a designfor the plant expansion that will cost approximately $50,000,000.  The estimated cost of the expansion is basedon preliminary discussions, and there is no assurance that the final cost ofthe expansion will not be higher.  Thereis no assurance that there will not be design changes or cost overrunsassociated with the expansion of the plant. In addition, shortages of steelcould affect the final cost and final completion date of the project.  Any significant increase in the estimatedconstruction cost of the expansion may the expansion too expensive to completeor unprofitable to operate because our revenue stream may not be able toadequately support the increased cost and expense attributable to increasedconstruction costs.

 

***Construction delays could increase ourcosts.***  We anticipate construction of the expansionwill begin in July 2006 and will be completed by July 2007; however,construction projects often involve delays in obtaining permits, constructiondelays due to weather conditions, or other events that delay the constructionschedule. In addition, Fagen, Inc.’s involvement in the construction of anumber of other plants while constructing our plant could cause delays in ourconstruction schedule. Also, any changes in interest rates or the creditenvironment or any changes in political administrations at the federal, stateor local level that result in policy change towards ethanol, could also causeconstruction and operation delays. If it takes longer to construct the expansionthan we anticipate, it may substantially increase our costs, which could have amaterial adverse effect on our results of operations and financial condition.

 

***Defects in expansion construction couldimpair our ability to produce ethanol and its co-products.******* Thereis no assurance that defects in materials and/or workmanship in the plantexpansion will not occur.  Under theterms of the anticipated design-build agreement with Fagen, Inc., Fagen, Inc.would warrant that the material and equipment furnished to build the plant willbe new, of good quality, and free from material defects in material orworkmanship at the time of delivery. Though we expect the expansion design-build agreement to require Fagen, Inc.to correct all defects in material or workmanship for a period of one yearafter substantial completion of the expansion, material defects in material orworkmanship may still occur. Such defects could significantly impair operationsof the plant or cause us to interrupt or discontinue the plant’s operation.Interrupting or discontinuing plant operations could materially affect ourability to generate sufficient cash flow to cover our costs and force us to terminate our business.

 

***We have not received certain permits andfailure to obtain these permits would prevent expansion of the plant.***** **Before we can begin expansion of our plant, we must obtain numerousregulatory approvals and permits.  Whilewe anticipate receiving these approvals and permits, there is no assurance thatthese requirements can be satisfied in a timely manner or at all.  In addition, as described above under “**Risks Related to Regulation andGovernmental Action -*****Changes in environmental regulations orviolations of the regulations could be******expensive andreduce our profitability***,” governmental requirements maysubstantially increase our costs, which could have a material adverse effect onour results of operations and financial condition.

 

**ITEM 2.  PROPERTIES.**

 

We own the general partnership interestin the limited partnership that owns the ethanol plant.  The ethanol plant is located on anapproximately 80 acre rural site that is located approximately two miles eastof the City of Marcus, Iowa and approximately one mile north of Iowa StateHighway 3.  The plant’s address is 4808 FAvenue, Marcus, Iowa 51035.  The plantgrinds approximately 18 million to 19 million bushels of corn per year toproduce approximately 52 milliongallons of ethanol.  The original construction of theplant was completed in 2003 andconsists of the following buildings:

 

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•                  Aprocessing building, which contains processing equipment, laboratories, controlroom and offices;

•                  A grainreceiving and shipping building, which contains a control room and 1stand 2nd level mezzanine;

•                  Amechanical building, which contains maintenance offices, storage and a weldingshop; and

•                  Anadministrative building, along with furniture and fixtures, office equipmentand computer and telephone systems.

 

The plantincludes a fermenter walkway, gas dryer, evaporator and storage facilities forethanol and distiller grains.  The sitealso contains improvements such as rail tracks and a rail spur, landscaping,drainage systems and paved access roads.

 

In July, 2005, we completed an expansion to theplant which enabled us to increase our ethanol production from 40 million to 52million gallons per year.  This plantexpansion included an additional fermenter, slurry tank, additional watertreatment equipment, liquefaction tank, molecular sieves and additions to theprocess building, which will accommodate the additional fermenter and shoparea.  We also installed additional driercontrols and maintenance system software in fiscal year 2005.

 

In addition in October 2005,we completed the installation of a corn oil segregation unit which separatescorn oil from the distillers grains during the ethanol production process.

 

All of our tangible and intangible property,real and personal, serves as the collateral for the debt financing with FirstNational Bank of Omaha, which is described below under “**Item 7 –Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Indebtedness**.”

 

**ITEM 3.****                                                   LEGALPROCEEDINGS.**

 

From time to time in theordinary course of business, the Partnership or we may be named as a defendantin legal proceedings related to various issues, including without limitation,workers’ compensation claims, tort claims, or contractual disputes.  We are not currently involved in any materiallegal proceedings, directly or indirectly, and we are not aware of any claimspending or threatened against us or any of the directors that could result inthe commencement of legal proceedings.

 

**ITEM4.****                                                   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

We did not submit any matterto a vote of our unit holders through the solicitation of proxies or otherwiseduring the fourth quarter of 2005.

 

**PART II**

 

**ITEM 5.****                                                 MARKETFOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS AND ISSUER PURCHASES OF MEMBERSHIPUNITS.**

 

**Recent Sales of Unregistered Securities**

 

In 2002, we sold exclusively to residents ofthe State of Iowa, a total of 10,002 Class A membership units, which wereexempt from federal registration but were registered and offered in the Stateof Iowa.  We sold these membership unitswithout the use of an underwriter.  Wesold 7,812 Class A membership units at a price of $1,000 per unit and wesold 2,190 Class A membership units for a price of $1,100 per unit.  From our 2002 Class A membership unitsales we received total aggregate proceeds of approximately $10,226,000.

 

We claimed exemption from federalregistration with respect to our Class A membership unit sales due to theapplication of Section 3(a)(11) of the Securities Act of 1933 (regardingintra-state offerings).  The recipientsof securities in each such transaction represented their domicile as the Stateof Iowa, their intention to acquire the securities for investment only and notwith a view to, or for sale in connection with, any distribution thereof, andappropriate legends were affixed to unit certificates and instruments issued insuch transactions.  All recipients had

 

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adequate access through theirrelationships with us, to information about us. We have no Class B membership units outstanding.  On April 30, 2003, we registered our units with the U.S.Securities and Exchange Commission on Form 10-SB Registration Statementpursuant to Section 12(g) of the Securities Exchange Act of 1934.

 

**Market Information**

 

There is nopublic trading market for our units.  Wehave created a private qualified online matching service in order to facilitatetrading among our members.  Our onlinematching service consists of an electronic bulletin board that providesinformation to prospective sellers and buyers of our units.  We do not receive any compensation forcreating or maintaining the matching service. We do not become involved in any purchase or sale negotiations arisingfrom our qualified matching service.  Inadvertising our qualified matching service, we do not characterize the Companyas being a broker or dealer or an exchange. We do not give advice regarding the merits or shortcomings of anyparticular transaction.  We do notreceive, transfer or hold funds or securities as an incident of operating theonline matching service.  We do not usethe bulletin board to offer to buy or sell securities other than in compliancewith the securities laws, including any applicable registrationrequirements.  We have no role ineffecting the transactions beyond approval, as required under our operatingagreement and the issuance of new certificates. So long as we remain a Section 12 registrant and a publiclyreporting company, information about the Company will be publicly availablethrough the SEC’s filing system. However, if at any time we cease to be a Section 12 registrant orpublicly reporting company, we will continue to make information about theCompany publicly available on our website.

 

**Unit Holders**

 

As of thedate of filing of this report, the Company had 10,941 Class A membership unitsissued and outstanding and a total of 689 Class A membership unit holders.  There is no other class of membership unitissued or outstanding.

 

**Distributions**

 

***2005Distributions***

 

On January 18, 2005 ourBoard of Directors, acting as general partner of the Partnership, approved atotal cash distribution of $4,000,000 from the Partnership to all limitedpartners of record as of January 18, 2005. At January 18, 2005, we owned 60.1539% of the limited partnership unitsof the Partnership.  Accordingly theCompany received a cash distribution of $2,406,156. The distribution was madein February 2005.  On January 18,2005, our Board of Directors approved a cash distribution of $219.92 permembership unit or a total of $2,406,144.72 to the Company’s unit holders ofrecord as of January 18, 2005.

 

On March 15, 2005 our Board of Directors,acting as general partner of the Partnership, approved a total cashdistribution of $3,000,000 from the Partnership to all limited partners ofrecord as of March 15, 2005.  As aholder of 60.1539% of the limited partnership units of the Partnership, we receiveda cash distribution of $1,804,617.  Onthe same day, we approved a cash distribution of $159.96 per membership unit ora total of $1,750,122.36 to the Company’s unit holders of record as of March 15,2005.

 

On September 20, 2005 our Board ofDirectors, acting as general partner of the Partnership, approved a cashdistribution of $1,581,000 from the Partnership to all limited partners ofrecord as of September 20, 2005.  Asa holder of 60.1539% of the limited partnership units of the Partnership, wereceived a cash distribution of $951,033. On September 20, 2005, our Board of Directors approved a cashdistribution of $78.24 per membership unit or a total of $856,023.84 to theCompany’s unit holders of record as of September 20, 2005.

 

***2004Distributions***

 

On January 20,2004, our Board of Directors, as general partner of the limited partnership,approved a total cash distribution of $1,050,000 from the limited partnershipto all limited partners of record as of January 20, 2004.  At January 20, 2004, we owned 58.5% ofthe limited partnership units in the limited partnership.  Accordingly, the Company received a cashdistribution of $614,724.  Thedistribution was made in February 2004. Of the $614,724, we distributed $561,164 to our unit holders ($51.29 permembership unit) and used the remaining amount to reduce accounts payable forprofessional fees incurred on behalf of the Company by the limited partnership.

 

25

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On August 17, 2004, ourBoard of Directors, acting as general partner of the limited partnership,approved a total cash distribution of $1,200,000 to all limited partners ofrecord as of August 17, 2004.  Dueto our redemption of limited partnership units, our ownership interest in thelimited partnership increased from 58.5% to 60.15%.  As a holder of 60.15% of the limitedpartnership units on August 17, 2004, we received a cash distribution of$721,847 from the limited partnership. On the same day, we approved a cash distribution of $52.57 permembership unit or a total of $575,168 to the Company’s unit holders of recordas of August 17, 2004.

 

Distributionsto our unit holders are subject to certain loan covenants and restrictions thatrequire us to make additional loan payments based on excess cash flow.  These loan covenants and restrictions aredescribed in greater detail under “Item 7 – Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”  Revenues generated from plant operations aredistributed by the limited partnership to us in proportion to our equityownership in the limited partnership.  Wedistribute the revenues received from the limited partnership to our unitholders in proportion to the number of units held by each unit holder.  A unit holder’s distribution is determined bydividing the number of units owned by such unit holder by the total number ofunits outstanding.  Our Class Adirectors have complete discretion over the timing and amount of distributionsto our unit holders, however, our operating agreement requires the Class Adirectors to endeavor to make cash distributions at such times and in suchamounts as will permit our unit holders to satisfy their income tax liabilityin a timely fashion.  Our expectationswith respect to our ability to make future distributions are discussed ingreater detail in “**Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations****–****Indebtedness**.”

 

**ITEM 6.****  SELECTED FINANCIALDATA.**

 

The following table sets forthselected consolidated financial data of Little Sioux Corn Processors, LLC andour subsidiary, LSCP, LLLP for the periods indicated. The audited financialstatements included in Item 8 of this report have been audited by ourindependent auditors, Boulay, Heutmaker, Zibell & Co.,P.L.L.P.

 
| **Statement  of Operations Data:**     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003(1)** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|-------------|------------|
| Revenues                               |       | $        | 95,881,420 |     | $          | 85,540,934  |       | $ | 31,814,299 |   |
|                                   |       |     |       |     |       |        |       |
| Cost of Goods Sold                     |       | $        | 61,966,890 |     | $          | 71,244,909  |       | $ | 27,462,227 |   |
|                                   |       |     |       |     |       |        |       |
| Gross Profit                           |       | $        | 33,914,530 |     | $          | 14,296,025  |       | $ | 4,352,072 |   |
|                                   |       |     |       |     |       |        |       |
| Operating Expenses                     |       | $        | 5,924,998  |     | $          | 6,138,653   |       | $ | 2,660,909 |   |
|                                   |       |     |       |     |       |        |       |
| Operating Income                       |       | $        | 27,989,532 |     | $          | 8,157,372   |       | $ | 1,691,163 |   |
|                                   |       |     |       |     |       |        |       |
| Other Income (Expense)                 |       | $        | (4,469,066 | )        | $          | 5,360,140   |       | $ | 5,300,716 |   |
|                                   |       |     |       |     |       |        |       |
| Net Income Before Minority Interest    |       | $        | 23,520,466 |     | $          | 13,517,512  |       | $ | 6,991,879 |   |
|                                   |       |     |       |     |       |        |       |
| Minority Interest in Subsidiary Income |       | $        | 9,421,765  |     | $          | 5,663,681   |       | $ | 2,920,676 |   |
|                                   |       |     |       |     |       |        |       |
| Net Income                             |       | $        | 14,098,701 |     | $          | 7,853,831   |       | $ | 4,071,203 |   |
|                                   |       |     |       |     |       |        |       |
| Average Units Outstanding              |       | 10,941   |       | 10,941   |       | 10,941      |       |
| Net Income Per Unit                    |       | $        | 1,288.61   |     | $          | 717.83      |       | $ | 372.11 |   |
| Distributions Per Unit                 |       | $        | 458.12     |     | $          | 103.86      |       | $ | — |   |

 

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| **Balance Sheet Data:**        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003(1)** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|-------------|------------|
| Cash &  Equivalents   |       | $        | 14,135,954 |     | $          | 3,907,380   |       | $ | 536,483 |   |
| Current  Assets                |       | $        | 26,748,278 |     | $          | 11,946,926  |       | $ | 8,048,340 |   |
| Property &  Equipment |       | $        | 50,128,437 |     | $          | 47,536,127  |       | $ | 48,797,341 |   |
| Total Assets                   |       | $        | 77,162,356 |     | $          | 59,828,204  |       | $ | 57,308,872 |   |
| Current  Liabilities           |       | $        | 10,644,316 |     | $          | 4,966,448   |       | $ | 4,951,852 |   |
| Long Term  Debt                |       | $        | 16,092,315 |     | $          | 19,572,989  |       | $ | 28,157,443 |   |
| Deferred  Compensation         |       | $        | 48,000     |     | $          | —      |       | $ | — |   |
| Minority  Interest             |       | $        | 20,209,574 |     | $          | 14,207,003  |       | $ | 10,052,753 |   |
| Members’  Equity          |       | $        | 30,168,151 |     | $          | 21,081,764  |       | $ | 14,146,824 |   |
| Book Value  Per Unit           |       | $        | 2,757.35   |     | $          | 1,926.86    |       | $ | 1,293.01 |   |

 

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(1)           Fiscal year 2003 represents only a partial year of operations, as theethanol plant commenced production in April 2003.

 

**ITEM 7.****                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.**

 

Except for the historical information, the followingdiscussion contains forward-looking statements that are subject to risks anduncertainties.  We caution you not to put undue reliance on anyforward-looking statements, which speak only as of the date of thisreport.  Our actual results or actions may differ materially fromthese forward-looking statements for many reasons, including the risks described in “**Item 1A - Risk Factors**” and elsewhere inthis annual report.  Our discussion and analysis of our financialcondition and results of operations should be read in conjunction with thefinancial statements and related notes and with the understanding that our actualfuture results may be materially different from what we currently expect.

 

**Overview**

 

As general partner, we manage the business and day-to-day operations ofthe Partnership’s 52 million gallon per year ethanol plant in northwest Iowa. In July 2005, we completed the expansion of our plant from anethanol production capacity of 40 million gallons per year to 52 milliongallons per year.  We expect the increased capacity will increase ouroperating income as a result of increasing revenue and operatingefficiencies.  However, we can not provide any guarantee that theexpansion will reduce our operating costs or increase our operating income.

 

Our revenues are derivedfrom the sale and distribution of our ethanol and distillers grains throughoutthe continental United States.  Corn issupplied to us primarily from local agricultural producers and from purchasesof corn on the open market. After processing the corn, ethanol is sold to ADM,which subsequently markets and sells the ethanol to gasoline blenders andrefineries located throughout the continental United States.  The pricethat we receive from the sale of ethanol to ADM is based upon the price thatADM receives from the sale to its customers, minus a fee. Exceptdistillers grains we sell directly to local farmers, our distillers grains are sold through CommoditySpecialist Company which markets and sells the product to livestock feeders. For our distillers grains, we receive a percentage of the sellingprice actually received by CSC in marketing the distillers grains to itscustomers.

 

Our operating income orloss is significantly tied to the price at which ethanol and distillers grainsare sold.  Historically, the price ofethanol tends to fluctuate in the same direction as the price of unleaded gasolineand other petroleum products.  Surplusethanol supplies also tend to put downward price pressure on ethanol.  In contrast, the price of distillers grainsgenerally tends to fluctuate based on the price of substitute livestock feed,such as corn and soybean meal.  Surplusgrain supplies also tend to put downward price pressure on distillers grains.

 

Our cost of revenues,which includes production expenses, is significantly affected by the cost ofcorn and natural gas.  The cost of cornis affected primarily by supply and demand factors such as crop production,carryout, exports, risk management and weather, much of which we have nocontrol.  Natural gas prices fluctuatewith the energy complex in general.  Overthe last few years, natural gas prices have trended higher than average and appear will continue to trend higher due tothe high price of alternative fuels such as fuel oil.

 

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We are subjectto industry-wide factors that affect our revenues and profits.  These factors include, but are not limitedto, the available supply and cost of corn from which our ethanol and distillersgrains are made; the cost of natural gas, which we use in the production ofethanol and distillers grains; dependence on one or a few major customers whomarket and distribute our products; the intensely competitive nature of ourindustry; possible legislation at the federal, state, and/or local level;changes in federal ethanol tax incentives; and the cost of complying with theextensive environmental laws that regulate our industry.

 

#### **Results of Operations**

#### ** **

***Comparisonof Year Ended******September 30, 2005 and 2004*****.**

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our consolidatedstatements of operations for the fiscal years ended September 30, 2005 and2004:

 
| ** **                              | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|
| **Income  Statement Data**              | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $          | 95,881,420 |     | 100.0      |   | $ | 85,540,934 |   | 100.0 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Cost of  Goods Sold                     |       | $          | 61,966,890 |     | 64.6       |   | $ | 71,244,909 |   | 83.3 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Gross Profit                            |       | $          | 33,914,530 |     | 35.4       |   | $ | 14,296,025 |   | 16.7 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Operating  Expenses                     |       | $          | 5,924,998  |     | 6.2        |   | $ | 6,138,653 |   | 7.2 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Operating  Income                       |       | $          | 27,989,532 |     | 29.2       |   | $ | 8,157,372 |   | 9.5 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Other Income  (Expense)                 |       | $          | (4,469,066 | )        | (4.7       | ) | $ | 5,360,140 |   | 6.3 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Net Income  Before Minority Interest    |       | $          | 23,520,466 |     | 24.5       |   | $ | 13,517,512 |   | 15.8 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Minority  Interest in Subsidiary Income |       | $          | 9,421,765  |     | 9.8        |   | $ | 5,663,681 |   | 6.6 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Net Income                              |       | $          | 14,098,701 |     | 14.7       |   | $ | 7,853,831 |   | 9.2 |   |

 

*Revenues*

 

The increase in revenues from fiscal year 2005compared to fiscal year 2004 is due primarily to an increase in the price wereceived for our ethanol.  Net gallons ofdenatured ethanol sold totaled 49,183,000 in fiscal 2005 compared to 48,883,842in fiscal 2004.  The average per gallon price we received forour ethanol sold for 2005 increased approximately 12% compared to the twelvemonths ended September 30, 2004.  Wesold approximately the same quantity of ethanol in 2005 as compared 2004.  Sales of co-products increased byapproximately 7% in 2005 compared to co-products sales in 2004 due to a more favorablesales mix of wet and dry distillers grains sold.

 

In the third fiscal quarter and continuing throughthe first two thirds of the forth fiscal quarter, the demand for ethanolincreased relative to supply causing upward pressure on ethanol market prices. In the last month of the quarter some of those gains have been reduced, butprices remain historically strong.  Increased demand, firm crude oil andgas markets, public acceptance, and positive political signals have allcontributed to a strengthening of ethanol prices.  In order to sustainthese higher price levels however, management believes the industry will needto continue to grow demand to offset the increased supply brought to the marketplace by additional production.

 

While weanticipate continued strong demand for ethanol, we are uncertain as to thesustainability of current ethanol prices given the increasing ethanol supply asnew plants begin production and existing plants continue to expand.  Ethanolproduction continues to grow as additional plants become operational.  According to the Renewable Fuels Association,there are currently 88 ethanol plants in operation nationwide that have thecapacity to annually produce 4.2 billion gallons.  In addition, there are21 new ethanol plants and 8 expansions of existing ethanol plants underconstruction constituting another 1.4 billion gallons of annual capacity. In addition, ADM has recently announced its plan to add 500 million gallons ofethanol production, clearly indicating its desire to maintain a significantshare of the ethanol market.

 

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We also expect to benefit from federal ethanolsupports and federal tax incentives. Changes to these supports or incentivescould significantly impact demand for ethanol.  On August 8, 2005,President George W. Bush signed into law the Energy Policy Act of 2005 (the “Act”). The Act contains numerous provisions that are expected to favorably impact theethanol industry by enhancing both the production and use of ethanol. Most notably, the Act created a 7.5 billion gallon renewable fuels standard(the “RFS”).  The RFS is a national renewable fuels mandate as to thetotal amount of national renewable fuels usage but allows flexibility torefiners by allowing them to use renewable fuel blends in those areas where itis most cost-effective rather than requiring renewable fuels to be used in anyparticular area or state.  The RFS will begin at 4 billion gallons in2006, and increase to 7.5 billion gallons by 2012.  According to theRenewable Fuels Association, the Act is expected to lead to about $6 billion innew investment in ethanol plants across the country.

 

Since our current nationalethanol production capacity exceeds the 2006 RFS requirement, it is management’sbelief that other market factors are primarily responsible for current ethanolprices.  Accordingly, it is possible that the RFS requirements may notsignificantly impact ethanol prices in the short-term.  For instance, ifgasoline prices continue to trend higher, consumers will look for lower pricedalternative fuels. The Consumer Federation of America recently published areport that states that consumers could save up to eight cents per gallon atthe pump if ethanol were blended at 10 percent.  Since ethanol blendedfuel is a cheaper alternative for consumers, the demand for such ethanolblended fuel could increase thus increasing the overall demand forethanol.  This could positively affect our earnings.  However, the increased requirement of 7.5 billionby 2012 is expected to support ethanol prices in the long term.  A greatersupply of ethanol on the market from these additional plants and plantexpansions could reduce the price we are able to charge for our ethanol. This may have a negative impact on our revenues.

 

Demand for ethanol may also increase as a result ofincreased consumption of E85 fuel.  E85 fuel is a blend of 70% to 85%ethanol and gasoline.  According to the Energy Information Administration,E85 consumption is projected to increase from a national total of 11 milliongallons in 2003 to 47 million gallons in 2025.  E85 is used as an aviationfuel and as a hydrogen source for fuel cells.  In the U.S., there arecurrently about 3 million flexible fuel vehicles capable of operating on E85and 400 retail stations supplying it.  Automakers have indicated plans toproduce an estimated 2 million more flexible fuel vehicles per year.

 

Although the Energy Policy Act of 2005 did notimpose a national ban of methyl tertiary butyl ether (“MTBE”), the primarycompetitor of ethanol as a fuel oxygenate, the Act’s failure to includeliability protection for manufacturers of MTBE could result in refiners andblenders using ethanol as an oxygenate rather than MTBE to satisfy the CleanAir Act’s reformulated gasoline oxygenate requirement.  While this maycreate some additional demand in the short term, the Act repeals the Clean AirAct’s 2% oxygenate requirement for reformulated gasoline immediately inCalifornia and 270 days after enactment elsewhere.  However, the Clean AirAct also contains an oxygenated fuel requirement for areas classified as carbonmonoxide non-attainment areas.  These areas are required to establish anoxygenated fuels program for a period of no less than three months each winter. The minimum oxygen requirement for gasoline sold in these areas is 2.7% byweight.  This is the equivalent of 7.7% ethanol by volume in a gasolineblend.  This requirement was unaffected by the Act and a number of states,including California, participate in this program.

 

Consumer resistance to the use of ethanol may affectthe demand for ethanol which could affect our ability to market our product andreduce our revenues.  Certain individuals believe that use of ethanol willhave a negative impact on prices at the pump.  Many also believe thatethanol adds to air pollution and harms car and truck engines.  Stillother consumers believe that the process of producing ethanol actually usesmore fossil energy, such as oil and natural gas, than the amount of ethanolthat is produced.  These consumer beliefs could potentially bewide-spread.  If consumers choose not to buy ethanol, it would affect thedemand for the ethanol we produce which could negatively affect our abilitysell our product and negatively affect our profitability.

 

On March 15, 2005,the board of directors approved a $1,850,000 capital expenditure to install acorn oil segregation unit.  Corn oil is a co-product of the ethanolindustry and until recently has been sold as an energy component of ourdistillers grains.  Corn oil in its raw form can be used as livestockfeed, as a fuel under certain operating conditions, refined into bio-dieselfuel, or refined for human consumption.  We project this investment willincrease our revenues by approximately $1,200,000 million annually, but theactual impact on our revenues could vary.  The equipment was installed in October 2005. Weintend to initially market the unrefined corn oil to the animal feed andbio-diesel markets after startup to assure that quality specifications can bemaintained.  In the long term, the corn oil co-product could be marketedfor human consumption.  Specific details regarding market penetration intohuman food are unknown at this time since corn oil extraction in a dry mill situationsuch as ours has not yet been proven, nor has its suitability for humanconsumption been determined.

 

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*Cost of Goods Sold*

 

Our cost of goods sold as a percentage ofrevenues were 64.6% and 83.3% for the twelve months ended September 30,2005 and 2004 respectively.  The decreasein our cost of goods sold from period to period is primarily due to our reducedcorn costs.  Our average per bushel pricewe paid for our corn decreased approximately 34% for the twelve months ended September 30,2005 compared to the twelve months ended September 30, 2004.  Although we can give no assurances,the plant expansion may increase our operating efficiency which would maintainor lower our cost of goods sold as a percentage of our revenues.

 

We recognize the gainsor losses that result from the changes in the value of our derivativeinstruments in cost of goods sold as the changes occur.  As corn andnatural gas prices fluctuate, the value of our derivative instruments areimpacted, which affects our financial performance.  We partially offsetthese losses with the cash price we paid for corn.  We anticipatecontinued volatility in our cost of goods sold due to the timing of the changesin value of the derivative instruments relative to the cost and use of thecommodity being hedged.

 

Corn costs significantly impact our cost of goodssold.  The 2004 corn crop was the largest corn crop on record withnational production at approximately 11.8 billion bushels and Iowa productionat approximately 2.24 billion bushels. This allowed ethanol plants to purchasecorn cheaply throughout 2005, which widened profit margins for many ethanolplants in the current year. Nevertheless, the 2005 national corn crop is projected to be the secondlargest on record exceeded only by the 2004 crop which is the largest everrecorded. As a result, we expect corn prices to remain at relatively low levelsinto the 2005-2006 marketing year.

 

We expect the grain marketto begin focusing on prospects for the 2006 crop.  Variables such as rainfall, planting dates, and temperatures willlikely cause market uncertainty and create corn price volatility as the growingseason begins. Domestic and export demand for US corn is at an all time high.  Although carryout supplies for 2006 marketingyear appear adequate, any production shortfall during the 2006 growing seasonwill create volatility and may increase our cost of corn.

 

Natural gas has recentlybeen available only at prices exceeding historical averages.  These pricesare increasing our costs of production.  In late August 2005, Hurricane Katrinacaused dramatic damage to areas of Louisiana, which is the location of one ofthe largest natural gas hubs in the United States. As the damage from thehurricane became apparent, natural gas prices substantially increased. It iscurrently unknown how the damage will affect intermediate and long term pricesof natural gas. Hurricane Rita also impacted the Gulf Coast and causedshutdowns at several Texas refineries, which further increased natural gasprices. Future hurricanes in the Gulf of Mexico could cause similar or greateruncertainty. We expect continued volatility in the natural gas market. Globaldemand for natural gas is expected to continue to increase, which may furtherdrive up prices.  Any ongoing increases in the price of natural gas willincrease our cost of production and may negatively impact our future profitmargins.   We expect natural gas pricesto remain high or increase at least through the 2005-2006 winter months.

 

*Operating Expenses*

 

Our operating expenses as a percentage of revenuewere approximately 6.2% and 7.2% for fiscal year 2005 and 2004respectively.  This reduction isprimarily due to our increased revenues. Our operating expense amounts have remained fairly level from period toperiod.  Although we can give noassurances, the plant expansion may increase our operating efficiency whichwould maintain or lower our operating expenses as a percentage of our revenues.

 

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On May 1, 2005, weestablished a deferred compensation plan for certain key employees providingsupplemental benefits.  For the first year of the plan, the board granteda discretionary deferred bonus of 20 percent of each plan participant’s basesalary for the prior calendar year.  Costs of the plan were recognizedduring the period so that the benefits automatically accrue when paymentsbegin.  We will transfer the amount of the deferred compensation to atrust established under the deferred bonus compensation plan.  The benefitwill vest on January 15th of the sixth calendar year following the yearthe participant is awarded the benefit, provided the participant is employedfull-time by us throughout the entire six-year period.

 

*Operating Income*

 

Our income from operations for fiscal year2005 totaled $27,989,532 compared to $8,157,372 for fiscal year 2004.  This was a result of the increase in salesrevenue for fiscal year 2005 combined with the decrease in cost of goods soldfor the same period.  We expect the expansion of our plant from 40 milliongallon annual production capacity to 52 million gallon annual productioncapacity will increase our annual operating income by approximately $3,200,000as a result of an increase in revenue and operating efficiency.  There isno assurance, however, that the expansionwill reduce our operating costs or increase our operating income.  Ourexpansion projections are based upon our historical operating costs andhistorical revenues and there is no guarantee or assurance that our pastfinancial performance can accurately predict future results especially inconnection with expansion.  In addition, the expansion may presentadditional challenges and risks that negatively impact our future financialperformance.

 

*Other Income and Expense*

 

Our other income and expense for the twelvemonths ended September 30, 2005 was an expense of $4,469,066 compared toincome of $5,360,140 for the twelve months ended September 30, 2004.  This resulted from lower CCC Bio-Energypayments and a settlement of a dispute with ADM.

 

Our CCC Bioenergy payments were $172,850 forthe twelve months ended September 30, 2005 compared to $6,645,512 for thetwelve months ended September 30, 2004. We have seen a large fluctuation in other income due in large part to areduction in the payments from the USDA Commodity Credit Corporation BioenergyProgram.   These payments are based upon increases in ethanolproduction relative to previous years.  Since we increased our productioncapacity from 40 to 52 million gallons per year through our plant expansion, wewill be eligible to receive additional Bioenergy Program payments.  However,due to the size of the expansion, any program payments we receive in the futurewill be significantly less than our original payments and we do not expectfuture program payments to have the same impact on cash flow as they have inthe past.  In addition, theaccrued income from the Bioenergy Program is significantly less than the amountwe are eligible for based on our production. This reduction is attributed to an increase in the number of eligibleparticipants in the program, which reduces our share of the payments.  We do not anticipate receiving unpaid amountsfor past pro rata reductions.  Thereceipt of these additional program payments is subject to the continuedavailability of program funds, which may be reduced as a result of increasedparticipation in the program by new and expanding plants as well as decreasedfederal funding.  The Bioenergy Program is scheduled to expire at the endof the federal government’s 2006 fiscal year.

 

Subsequent to the periodcovered by this report, we were involved in a dispute with ADM regarding the actual priceADM is required to pay for the ethanol it purchases from us under the ethanolmarketing agreement.  Pursuant to ourethanol marketing agreement with ADM, the price ADM pays us for our ethanol iscalculated by averaging the price ADM receives for all the ethanol it sellsoriginating from (i) our plant, (ii) ADM’s plant in Marshall,Minnesota and (iii) ADM’s plant in Columbus, Nebraska.  In October 2005, ADM contacted us and claimedthat that since the inception ofthe ethanol marketing agreement, ADM has mistakenly failed to factor in itshedging costs for the ethanol sold from Marshall and Columbus, which resultedin an overpayment to us of approximately $3.9 million.  In support of its claim, ADM provided us withdocumentation demonstrating how the hedging costs incurred by ADM when it soldMarshall and Columbus ethanol would affect the price received by us forethanol.  After engaging independentaccountants to review ADM’s claimed overpayment, we orally offered in December 2005 to settle the claim by paying ADMapproximately $3,900,000 less actual legal and accounting expenses incurred inconnection with investigation and settlement of the claimed overpayment.  ADM has orally agreed to accept oursettlement offer.  We have not yetexecuted a written settlement agreement. We recorded the $3.9 million settlement as a loss as of September 30,2005 in other income (expense).

 

31

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***Comparisonof Year Ended******September 30, 2004 and 2003*****.**

 

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 fiscal years ended September 30, 2004 and2003:

 
| ** **                              | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|
| **Income  Statement Data**              | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $          | 85,540,934 |     | 100.0      |   | $ | 31,814,299 |   | 100.0 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Cost of  Goods Sold                     |       | $          | 71,244,909 |     | 83.3       |   | $ | 27,462,227 |   | 86.3 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Gross Profit                            |       | $          | 14,296,025 |     | 16.7       |   | $ | 4,352,072 |   | 13.7 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Operating  Expenses                     |       | $          | 6,138,653  |     | 7.2        |   | $ | 2,660,909 |   | 8.4 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Operating  Income                       |       | $          | 8,157,372  |     | 9.5        |   | $ | 1,691,163 |   | 5.3 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Other Income                            |       | $          | 5,360,140  |     | 6.3        |   | $ | 5,300,716 |   | 16.7 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Net Income  Before Minority Interest    |       | $          | 13,517,512 |     | 15.8       |   | $ | 6,991,879 |   | 22.0 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Minority  Interest in Subsidiary Income |       | $          | 5,663,681  |     | 6.6        |   | $ | 2,920,676 |   | 9.2 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Net Income                              |       | $          | 7,853,831  |     | 9.2        |   | $ | 4,071,203 |   | 12.8 |   |

 

*Revenues*

 

Revenues from operationsin fiscal 2004 totaled $85,540,934, up from $31,814,299 in fiscal 2003. Net gallons of denatured ethanol sold totaled 48,883,842 in fiscal 2004compared to 20,673,634 gallons in fiscal 2003.  Increased revenues infiscal 2004 resulted from an increase in the total number of gallons of ethanolsold and higher ethanol prices.

 

*Cost of Goods Sold*

 

Our cost of goods soldfor fiscal 2004 totaled $71,244,909, up from $27,462,227 in fiscal 2003. In addition to the short fiscal year in 2003, the average per bushel cost ofcorn increased from $2.24 in fiscal 2003 to $2.56 in fiscal 2004.  Cost ofgood sold includes losses of $3,851,340 in fiscal 2004 related to our corn andnatural gas derivative instruments, up from $648,714 in fiscal 2003.  These losses were caused by the fluctuations in the price of corn in2004. At the end of 2003, we increased our use of corn derivative instrumentsand positions to protect against the market price forecasts for corn. Thoseforecasts predicted higher prices for corn because of low world carryout priorto the growing season, decreased production, and drought. As the yearprogressed, however, and it became apparent that corn production would be muchhigher than expected, the original market forecasts proved incorrect and themarket price of corn actually declined. When the market price declined, the value of the corn derivativeinstruments fell which led to an increase in cost of goods sold.

 

*Operating Expenses*

 

Operating expenses forfiscal 2004 totaled $6,138,653, up from $2,660,909 reported in fiscal 2003, dueto the short operating year in 2003.

 

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*Operating Income*

 

For the fiscal year 2004, incomefrom operations was $8,157,372 as compared to $1,691,163 in fiscal year2003.  The increase primarily results fromfiscal 2003 containing only six months of operations since the plant beganoperations in April 2003 and the fiscal year ended on September 30,2003.

 

*Other Income and Expense*

 

Other income and expenseconsisted of income of $5,360,140 in fiscal 2004 compared to income of$5,300,526 reported in fiscal 2003.  Payments under the USDA CommodityCredit Corporation Bioenergy Program make up a majority of this category. Fiscal 2004 payments totaled $6,645,512 compared to $5,535,733 in fiscal2003.  Since the Bioenergy Program is based on increases in production,fiscal 2004 program payments were calculated based upon increases in productionover 2003.  Because2003 was our first year of production, the plant had the largest increase inproduction from the prior year. Between 2004 and 2003, the plant had a farsmaller increase in production which, accordingly, led to less incentiverevenue being earned.  In addition, fundingfor this program was reduced in 2004 and the number of eligible participants inthe program increased significantly, resulting in pro-rata reductions inpayments to all program participants.  Wealso do not anticipate receiving unpaid amounts for past pro rata reductions.

 

**Plant Operations and Expansion**

 

We plan to continue tooperate the ethanol plant for the next 12 months. During fiscal year 2005, weunderwent a plant expansion which increased the ethanol production capacity ofour plant from 40 million gallons per year to 52 million gallons annually.

 

In connection with theexpansion, we entered into an Agreement Between Owner and Design/Builder on theBasis of a Stipulated Price with ICM, Inc. on December 6, 2004. The expansion was completed in July 2005and the plant is currently operating at a rate of 52 million gallons annualproduction, the design capacity guaranteed in the construction contract withICM, Inc.  Pursuant to the construction contract withICM, Inc., we paid$4,600,000 to ICM, Inc. forthe design and construction of this expansion.  ICM, Inc. has agreedto provide a one year warranty period for correction of defectiveconstruction.  The amount of damages that we can recover against ICM, Inc.for any breach of its obligations under the agreement, including, withoutlimitation, damages related to ICM Inc.’s correction of defective constructionis limited to $1,000,000.  We waive all claims for any consequentialdamages that may arise out of or relate to the agreement or the performance ofthe construction of the expansion of the ethanol plant.

 

Also in connection with financing the expansionof our plant, we entered into a Sixth Amendment to Construction Loan Agreementwith First National Bank of Omaha.  Under this amendment, First NationalBank of Omaha agreed to loan us up to $5,400,000 to finance the construction ofthe expansion of our existing ethanolplant.  Upon completion of theconstruction, the outstanding balance of this new expansion loan will be addedto the principal balance of our Term Note #3 with First National Bank of Omaharelating to the original construction of our ethanol plant.  We wererequired to pay First National Bank of Omaha an origination fee of $40,500 inconnection with this new loan.  This loan is subject to all terms andconditions of our existing Construction Loan Agreement with First National Bankof Omaha, including the specific provisions regarding events of default and thegranting of liens to secure our performance.  In the event of default,First National Bank of Omaha may accelerate the due date of the new loan anddeclare all obligations immediately due and payable.  Additionalinformation regarding this loan may be found at “**Item 7 –Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Indebtedness**.”

 

In addition, we installed acorn oil segregation unit, additional drier controls, and maintenance systemsoftware in fiscal year 2005.  We believe that installing this equipmenthas allowed the plant to continue producing 52 million gallons of ethanol peryear while continuing to satisfy certain emission standards and maintainefficiencies.  We may implement additional design improvements as they aredeveloped.  The plant may be shut down from time to time over the next 12months to incorporate any design improvements.

 

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On July 19, 2005 theBoard of Directors determined that it is in the best interests of the Companyto explore further expansion of our ethanol production capacity.  TheBoard of Directors authorized studies to determine the financial impact ofexpanding the present plant beyond 52 million gallons per year, and/or buildinga new plant at a different location, and/or investing in other ethanolplants.  On August 9, 2005, the Board of Directors approved plans toproceed with a 40 million gallon per year expansion to our plant.  The cost of the expansion is expected to beapproximately $50,000,000, which will be financed using both a portion of ourcash and additional debt to finance the required capital expenditure.  The use of cash to finance these expenditurescould impact our ability to make future distributions to our members.  Weexpect the expansion will nearly double our operating revenue and operatingefficiencies.  There is no assurance that the expansion will reduce ouroperating costs or increase our operating income.  Our expansionprojections are based upon our historical operating costs and historicalrevenues and there is no guarantee or assurance that our past financialperformance can accurately predict future results especially in connection withexpansion.  In addition, the expansion may cost more and may presentadditional challenges and risks that negatively impact our future financialperformance.  We anticipate construction of the expansion will begin in July 2006and will be completed by July 2007.  The expansion may be delayed fora number of reasons and there is no assurance that the expansion will not bedelayed beyond the anticipated completion date.

 

We have entered into negotiations with Fagen, Inc.of Granite Falls, Minnesota to expand our plant’s annual ethanol productioncapacity by 40 million gallons per year. We expect that as our expansion design-builder, Fagen, Inc.will engage ICM, Inc. toprovide design and engineering services and design and construct expansion for a fixed contract price.  However, we have not executed a letter of intent or definitive agreement withFagen, Inc. and there is no assurance that we will be able to do so orthat the terms will be as anticipated.  Ifour negotiations with Fagen, Inc. are successful, we will be dependentupon Fagen, Inc. and ICM, Inc. for their expertise in integratingprocess and facility design into a construction and operationally efficientfacility is very important to the success of the expansion.  We will depend on our consultants for timelycompletion of the expansion of our plant, however, our consultants’ involvementin other projects could delay the commencement and start-up operation of our expansion.  If we are unable to finalize a letter ofintent or definitive agreement with Fagen, Inc., we will explore otheroptions to expand the plant.  However,there is no assurance that we will be able to obtain a replacement generalcontractor.  If we are unable to retain areplacement general contractor, we may be forced to abandon our expansion plans.

 

Management anticipates thatthe plant will continue to operate at or above name-plate capacity of 52 MGYfor the next twelve months.  We expect to have sufficient cash from cashflow generated by continuing operations, anticipated additional debt financingsecured to fund plant expansion, current lines of credit through our revolvingpromissory note, and cash reserves to cover the costs of expansion as well asour usual operating costs over the next 12 months, which consist primarily of cornsupply, natural gas supply, staffing, office, audit, legal, compliance, workingcapital costs and debt service obligations.

 

The following is ourestimate of our costs for the next 12 months for the plant as it currentlyoperates (52 MGY production capacity):

 

| Corn Costs                        |   | $      | 34,750,000 |   |
|-----------------------------------|--------|--------|------------|--------|
| General and  Administrative Costs |   | $      | 8,100,000  |   |
| Natural Gas  Costs                |   | $      | 13,900,000 |   |
| Chemical  Costs                   |   | $      | 4,900,000  |   |
| Other  Production Costs           |   | $      | 14,800,000 |   |
|                              |   |   |       |
| Total  Operating Costs:           |   | $      | 76,450,000 |   |

 

After the expansion, ourtotal operating costs have increased because of the increase in our productioncapacity.  We expect to offset the increase in operating costs byincreased ethanol revenues, however, a variety of market factors can affectboth operating costs and revenues.  These factors include:

 

•      Changes in the availability and price ofcorn;

•      Changes in the environmental regulations thatapply to our plant operations;

•      Increased competition in the ethanol and oilindustries;

 

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•      Changes in interest rates or the availabilityof credit;

•      Changes in our business strategy, capitalimprovements or development plans;

•      Changes in plant production capacity ortechnical difficulties in operating the plant;

•      Changes in general economic conditions or theoccurrence of certain events causing an economic impact in the agriculture, oilor automobile industries;

•      Changes in the availability and price ofnatural gas and the market for distillers grains; and

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

 

**Application of Critical Accounting Policies**

 

Managementuses estimates and assumptions in preparing our consolidated financialstatements in accordance with generally accepted accounting principles.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  Of the significant accounting policiesdescribed in the notes to our consolidated financial statements, we believethat the following are the most critical:

 

***Derivative Instruments***

 

We enter into derivative instruments to hedgethe variability of expected future cash flows related to forecasted corn andnatural gas purchases, forward purchase contracts, and interest rates.  We do not typically enter into derivativeinstruments other than for hedging purposes. All derivative instruments are recognized on our September 30, 2005and September 30, 2004 balance sheet at their fair market value.  Currently, none of our derivative instrumentsis classified as cash-flow hedges for accounting purposes.  On the date the derivative instrument isentered into, we will designate the derivative as either a hedge of thevariability of cash flows of a forecasted transaction or will not designate thederivative as a hedge.  Changes in thefair value of a derivative that is designated as, and meets all of the requiredcriteria for, a cash flow hedge are recorded in accumulated other comprehensiveincome and reclassified into earnings as the hedged items affect earnings.  Changes in the fair value of a derivativethat is not designated as a hedge are recorded in current period earnings.  Although certain derivative instruments maynot be designated as, and accounted for, as a cash flow hedge, they areeffective economic hedges of specified risks.

 

At September 30, 2005 and 2004, we hadrecorded an asset for our derivative instruments related to corn and naturalgas options and future positions of $496,853 and $212,319, respectively.  We have recorded a loss on derivativeinstruments of approximately $2,697,000 and $3,851,340 in cost of goods soldfor the fiscal years ended September 30, 2005 and 2004, respectively.

 

During the nine month fiscal year ended September 30,2003, the Company dedesignated as cash flow hedges its option contractpositions, although they continue to be effective economic hedges of specifiedrisks.  The Company recorded a loss in cost of goods sold of approximately$648,000 for the nine month fiscal year ended September 30, 2003.

 

At September 30, 2005 and 2004, we had an interest rate cap, asdescribed in note 6 in the notes to our financial statements, with a fair valueof $69,756 and $30,740, respectively recorded as an asset with derivativeinstruments.  The interest rate cap wasnot designated as a cash flow hedge.  Weoffset interest expense with a gain of approximately $39,000 on the interestrate cap for fiscal year ended September 30, 2005.  We charged interest expense with the $50,484loss in the fair value of the interest rate cap for the fiscal year ended September 30,2004.  We offset interest expense withthe gain of $81,224 on the interest rate cap for the nine month fiscal yearending September 30, 2003.

 

**Liquidity and Capital Resources**

 

The following tableshows cash flows for the last two years:

 

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| ** **                              | ** ** | **Year ended September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net cash  from operating activities     |       | $                                 | 34,093,417 |   | $ | 17,479,109 |   |
| Net cash  used for investing activities |       | (7,409,870                        | )          | (2,230,069 | ) |
| Net cash  used for financing activities |       | (16,454,973                       | )          | (11,878,143 | ) |
|                                         |            |                                   |            |  |  |  |  |

 

*CashFlow From Operations**. *The increase in net cash flow provided fromoperating activities between 2005 and 2004 was primarily due to a favorablespread between the price of corn and the price of ethanol.  Ourcapital needs are being adequately met through cash from our operatingactivities and our current credit facilities.

 

*Cash FlowFrom Investing Activities**. *We used cash provided by operatingactivities as well as cash provided by a construction note, Term Note #5,totaling $5,400,000 for capital expenditures which totaled $5,774,450 forfiscal 2005 compared to $2,230,069 for fiscal 2004.  This increaseprimarily reflects expenditures for the expansion of the plant productioncapacity from 40 MPY to 52 MPY.

 

Management estimatesthat approximately $1,000,000 in capital expenditures will be made in the next twelvemonths for general improvements and expansion of the plant, all of which areexpected to be financed from a portion of cash flows from operations and additionaldebt financing.

 

On August 9, 2005, theBoard of Directors approved plans to proceed with a 40 million gallon per yearexpansion to our plant.  The cost of theexpansion is expected to be approximately $50,000,000, which will be financedusing both a portion of our cash and additional debt to finance the requiredcapital expenditure.  Our expansionprojections are based upon our historical operating costs and historicalrevenues and there is no guarantee or assurance that our past financialperformance can accurately predict future results especially in connection withexpansion.  In addition, the expansion may cost more and may presentadditional challenges and risks that negatively impact our future financialperformance.  We anticipate construction of the expansion will begin in July 2006and will be completed by July 2007.

 

*CashFlow From Financing Activities**.*We used cash topay down our debt by $8,023,465 in fiscal 2005 compared to $9,078,381 in fiscal 2004.  Additionally, thetotal amount of cash we distributed to partners and members totaled $8,431,508 in 2005 compared to $2,049,762in 2004.  In addition, $750,000 was used to redeem limitedpartnership units (minority interest) in 2004.

 

The following table showscash flows for 2004 and 2003:

 
| ** **                              | ** ** | **Year ended September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| Net cash  from operating activities     |       | $                                 | 17,479,109 |   | $ | 2,197,583 |   |
| Net cash used  for investing activities |       | (2,230,069                        | )          | (293,274 | ) |
| Net cash  used for financing activities |       | (11,878,143                       | )          | (1,636,988 | ) |
|                                         |            |                                   |            |  |  |  |  |

 

*CashFlow From Operations**. *The increase in net cash flow provided fromoperating activities between 2004 and 2003 was primarily due to a partialoperating year in 2003 as plant operations did not commence until April 2003.

 

*CashFlow From Investing Activities**. *We used cash provided by operatingactivities was used for $2,230,069 of capital expenditures in 2004 compared to$7,033,842 in 2003 which were primarily financed through the construction note. This decrease primarily reflects expenditures for plant construction andequipment during fiscal 2003.

 

*CashFlow From Financing Activities**.*We used cash topay down our debt by $9,078,381 in fiscal 2004 comparedto $1,627,802.  Additionally, the total amount of cash we distributed to partners and members totaled $2,049,762 in2004.  No distributions were paid infiscal 2003.

 

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**Indebtedness**

 

### ***Short-TermDebt Sources***

### ** **

We have a revolvingpromissory note of up to $3,500,000 with First National Bank of Omaha through March 2006.  The interest payable on the revolvingpromissory note is due monthly at the one month LIBOR plus 2.80%, which totaled6.49% at September 30, 2005.  Therevolving promissory note is our operating line of credit.  We pay acommitment fee of 0.125% on the unused portion of the line.  We did nothave an outstanding balance at September 30, 2005.  The outstanding balance as of September 30,2004, was $38,829.  The maximum available credit under this note is basedon receivable and inventory balances.  As the balances in these accountsfluctuate, the amount of available credit on this note may be reduced orincreased subject to the maximum of $3,500,000. The operating line of credit is subject to protective covenantsrequiring us to maintain various financial ratios.  The operating line ofcredit is secured by all business assets.

 

#### ***Long-Term Debt Sources***

#### ** **

We have long-term debtfinancing consisting of four term notes held by First National Bank of Omahaand referred to as Term Notes #2, #3, #4 and #5.  At September 30,2005, the principal balance on Term Note #2 was $12,732,447.  Term Note #2is payable in quarterly installments.  Interest on Term Note #2 is at thethree month LIBOR plus 2.80%, which totaled 6.67% as of September 30,2005.  Term Note #2 is payable in full on June 1, 2008.  Inorder to achieve a fixed interest rate on Term Note #2, we entered into aninterest rate swap which helps protect our exposure to increases in interestrates and the swap effectively fixes the interest rate on Term Note #2 at 5.79%until June 1, 2008.

 

At September 30, 2005,the principal balance on Term Note #3 is $1,293,643.  Term Note #3 ispayable in quarterly installments.  Interest on Term Note #3 is at thethree month LIBOR plus 2.80%, which totaled 6.67% as of September 30, 2005. Term Note #3 is payable in full on June 1, 2008.  In order to protectour interest rate exposure on Term Note #3, we entered into an interest ratecap agreement based on a principal amount of $10,000,000.  The financingagreement caps our interest rate at 6.80% for Term Note #3 until June 1,2006.  As part of the financingagreement, we have agreed to an annual servicing fee of $50,000 for five years.

 

At September 30,2005, there was no principal balance on Term Note #4.  Term Note #4 ispayable in quarterly installments.  Interest on Term Note #4 is at the onemonth LIBOR plus 2.80%.  Term Note #4 is payable in full on June 1,2008.  Term Note #4 allows borrowings up to the original principal of$5,000,000 to the extent of principal payments made until maturity and requiresa commitment fee of 0.375% on any unused portion.

 

In connection withfinancing the expansion of our plant on December 2, 2004, we entered into a Sixth Amendment toConstruction Loan Agreement with First National Bank of Omaha.  Under thisamendment, First National Bank of Omaha agreed to loan us up to $5,400,000 tofinance the construction of the expansion of our ethanol plant (Term Note#5).  At September 30, 2005, the principal balance on Term Note #5was $5,400,000.  Term Note #5 bears interest at the one month LIBOR plus330 basis points, which totaled 6.99% at September 30, 2005.  Subsequentto the period covered by this report on October 1, 2005, the outstandingbalance of Term Note #5 was added to the principal balance of Term Note#3.  Prior to the conversion to Term Note #3, we were required to makeinterest only payments quarterly.  At September 30, 2005, theaggregate indebtedness represented by Term Notes #2, #3, #4 and #5 was $19,426,090.

 

The revolving promissorynote and Term Notes #2, #3, #4 and #5 are subject to numerous protectivecovenants requiring us to maintain various financial ratios.  During thethird quarter of fiscal year 2005, we renegotiated our covenants with FirstNational Bank of Omaha to reflect our current operating structure.  Ourfailure to comply with the protective loan covenants or maintain the required financialratios may cause acceleration of the outstanding principal balances on therevolving promissory note and terms notes and/or the imposition of fees,charges or penalties.

 

We expect our interest rateswap and cap agreement to adequately protect us in the event of changes ininterest rates.  However, we may not be fully protected in the event oflarge movements in interest rates.

 

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We have a capital leaseobligation in the amount of $190,564 on which we initially pay monthlyinstallments totaling $6,658, with an implicit interest rate at 3.67%. This obligation is secured by the leased equipment and runs through March 1,2008.

 

We have a note in theamount of $138,889 payable to the Iowa Energy Center on which we pay monthlyinstallments of $3,472 without interest.  This note is secured by realestate, but is subordinated to the term notes.  It matures on January 29,2009.

 

We have a note withFarmers State Bank of Marcus, Iowa in the amount of $149,986 on which we paymonthly installments of $5,921, including interest at 6%.  This note issecured by real estate, but is subordinated to the term notes.  Itmatures on January 29, 2009.

 

We have a note totaling$192,500 payable to the Iowa Department of Economic Development on which we paymonthly installments of $1,167 without interest. This note is secured by allequipment and matures on July 1, 2009.

 

In addition to ourlong-term debt obligations, we have certain other contractual cash obligationsand commitments.  The following tables provide information regarding ourconsolidated contractual obligations and commitments as of September 30,2005:

 
| ** **                          | ** ** | **Payment Due By Period** | ** ** |
|-------------------------------------|------------|---------------------------|------------|
| **Contractual  Cash Obligations**   | ** ** | **Total**                 | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|                                |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term  Debt Obligations         |       | $                         | 20,098,029 |   | $ | 4,005,714 |   | $ | 16,092,315 |   | $ | 0 |   | $ | 0 |   |
| Operating  Lease Obligations        |       | 482,807                   |       | 187,371 |   | 295,436 |   | 0 |   | 0 |   |
| Purchase  Obligations               |       | 20,940,486                |       | 20,102,837 |   | 837,649 |   | 0 |   | 0 |   |
| Other  Long-Term Liabilities        |       | 0                         |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Total  Contractual Cash Obligations |       | $                         | 41,521,322 |   | $ | 24,295,922 |   | $ | 17,225,400 |   | $ | 0 |   | $ | 0 |   |

 

**Off-Balance Sheet Arrangements.**

 

We do not have anyoff-balance sheet arrangements.

 

**ITEM7A.****              ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

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

 

**Interest Rate Risk**

 

We are exposed to marketrisk from changes in interest rates. Exposure to interest rate risk resultsfrom holding a revolving promissory note and four term notes which bearvariable interest rates.  Specifically, we have $19,426,090 outstanding invariable rate, long-term debt as of September 30, 2005.  Thespecifics of each note are discussed in greater detail in “**Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Indebtedness**.”

 

In order to achieve a fixedinterest rate on Term Note #2, we entered into an interest rate swap whichhelps protect our exposure to increases in interest rates and the swapeffectively fixes the interest rate on Term Note #2 at 5.79% until June 1,2008.  When thethree month LIBOR plus 2.80% exceeds 5.79%, the Company receives paymentsfor the difference between the market rate and the swap rate.  Conversely,when the three-month LIBOR plus 2.80% is below 5.79%, the Company makespayments for the difference between the market rate and the swap rate.  While our exposure is now greatly reduced,there can be no assurance that interest rate swap agreement will provide uswith protection in all scenarios.

 

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

 

At September 30,2005 and 2004, the fair value of the interest rate cap was $69,756 and $30,740,respectively, recorded as an asset with derivative instruments.  Theinterest rate cap was not designated as a cash flow hedge.  The Companyoffset interest expense with a gain of approximately $39,000 on the interestrate cap for fiscal year ending September 30, 2005.  The Companycharged interest expense with the loss on the interest rate cap ofapproximately $50,000 for the fiscal year ending September 30, 2004. The Company offset interest expense with a gain of approximately $81,000 on theinterest rate cap for the nine month fiscal year ending September 30,2003.

 

**Commodity Price Risk**

 

We are also exposed tomarket risk from changes in commodity prices.  Exposure to commodity pricerisk results from our dependence on corn and natural gas in the ethanolproduction process.  We seek to minimize the risks from fluctuations inthe prices of corn and natural gas through the use of hedginginstruments.  In practice, as markets move, we actively manage our riskand adjust hedging strategies as appropriate.  Although we believe ourhedge positions accomplish an economic hedge against our future purchases, theyare not designated as such for hedge accounting purposes, which would match thegain or loss on our hedge positions to the specific commodity purchase beinghedged.  We are marking to market our hedge positions, which means as thecurrent market price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of goods sold.  For example, it islikely and we would generally expect that a 10% increase in the cash price ofcorn would produce an increase in the fair value of our derivative instrumentsequal to approximately $49,700 based on our positions at September 30,2005.

 

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.  As of September 30,2005, the fair value of our derivative instruments for corn is an asset in theamount of $496,853.  There are several variables that could affect theextent to which our derivative instruments are impacted by price fluctuationsin the cost of corn or natural gas.  However, it is likely that commoditycash prices will have the greatest impact on the derivatives instruments withdelivery dates nearest the current cash price.

 

To manage our corn pricerisk, our hedging strategy is designed to establish a price ceiling and floorfor our corn purchases.  We have taken a net long position on our exchangetraded futures and options contracts, which allows us to offset increases ordecreases in the market price of corn.  The upper limit of loss on ourfutures contracts is the difference between the contract price and the cashmarket price of corn at the time of the execution of the contract. The upperlimit of loss on our exchange traded and over-the-counter option contracts islimited to the 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 46% of our expected corn usage for fiscal year ended September 30,2006 using CBOT futures and options and Over the Counter optioncontracts.  As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends and information,our income statement will be affected depending on the impact such marketmovements have on the value of our derivative instruments.  As we moveforward, additional price protection may be required to solidify our marginsinto fiscal year 2007.  Depending on market movements, crop prospects andweather, these price protection positions may cause immediate adverse effects,but are expected to produce long-term positive growth for us.

 

39

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To manage our natural gasprice risk, we entered into a natural gas purchase agreement with our supplierto supply us with natural gas.  Thispurchase agreement fixes the price at which we purchase natural gas.  Weestimate that we have forward contracts in place for approximately 100% of ournatural gas needs through March 2006.  The forward contracts providefor approximately 50% higher gas prices for the 2005-2006 winter months thanfor the 2004-2005 winter months.  In addition to procuring natural gasrequirements for winter 2005-2006, we have purchased approximately 100% of oursummer and fall 2005 natural gas requirements utilizing both cash, futures andoptions contracts  We may also purchase natural gas requirements for thewinter 2006 months and  2007 calendaryears as we attempt to further reduce our susceptibility to price increases.

 

At the time we purchasedprice protection for natural gas, the market was experiencing a great deal ofprice uncertainty.  Due to this uncertainty, we purchased amounts for mostof the plant’s needs and implemented derivative instruments on a portion of ourrequirements to allow us to benefit in the event natural gas prices declined. Energy sector prices have increased and natural gas, as a portion of the totalenergy market, has responded with higher prices to be cost competitive with itsalternatives.  In the future, we may not be able to secure naturalgas for prices less than current market price and we may not recover high costsof production resulting from high natural gas prices, which may raise our costsof production.

 

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 September 30,2005 and September 30, 2004 and the potential loss in fair value resultingfrom a hypothetical 10% adverse change in such prices. The fair value of thepositions is a summation of the fair values calculated by valuing each netposition at quoted market prices as of the applicable date. The results of thisanalysis, which may differ from actual results, are as follows:

 
| **Year Ended**           | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse  Change— Market Risk** | ** ** |
|--------------------------|------------|----------------|------------|---------------------------------------------------------------|------------|
| September 30,  2005 |       | $              | 496,853    |                                                          | $          | 49,685 |   |
| September 30,  2004 |       | $              | 212,319    |                                                          | $          | 21,232 |   |

 

**ITEM 8.****                ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.**

 

40

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** **

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Consolidated FinancialStatements September 30, 2005 and 2004

 

CONTENTS

 
| **Report of Independent Registered Public Accounting Firm**                                |   |
|--------------------------------------------------------------------------------------------|--------|
|                                                                                       |   |
| **Consolidated Financial Statements**                                                      |   |
|                                                                                       |   |
| Consolidated  Balance Sheet                                                                |   |
|                                                                                       |   |
| Consolidated Statement of Operations                                                       |   |
|                                                                                       |   |
| Consolidated Statement of Members’ Equity and Accumulated Other  Comprehensive Income |   |
|                                                                                       |   |
| Consolidated Statement of Cash Flows                                                       |   |
|                                                                                       |   |
| Notes to Consolidated Financial Statements                                                 |   |
|                                                                                       |   |
| **Report of  Independent Registered Public Accounting Firm on Supplementary Information**  |   |
|                                                                                       |   |
| Consolidating  Balance Sheet                                                               |   |
|                                                                                       |   |
| Consolidating  Statement of Operations                                                     |   |
|                                                                                       |   |
| Consolidated  Schedule of Grain Purchases                                             |   |
|                                                                                       |   |
| Consolidated Schedule of Corn Payables                                                     |   |

 

41

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Little Sioux Corn Processors, LLC and Subsidiary

Marcus, Iowa

 

We have audited the accompanying consolidated balance sheet of LittleSioux Corn Processors, LLC and Subsidiary as of September 30, 2005 and2004, and the related consolidated statements of operations, changes in members’equity and accumulated other comprehensive income, and cash flows for thefiscal years ended September 30, 2005, 2004, and 2003.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of LittleSioux Corn Processors, LLC and Subsidiary as of September 30, 2005 and2004, and the results of their operations and their cash flows for the fiscalyears ended September 30, 2005, 2004, and 2003, in conformity with U.S.generally accepted accounting principles.

 

 
|                   | /s/ Boulay,  Heutmaker, Zibell & Co. P.L.L.P. |                         |
|------------------------|--------------------------------------------------------|------------------------------|
|                   |                                                   |
|                   |                                                   | Certified Public Accountants |
| Minneapolis, Minnesota |                                                   |
| October 28, 2005  |                                                   |
|                        |                                                        |                              |  |

 

42

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

ConsolidatedBalance Sheet

 
| ** **                                                                  | ** ** | **September 30** | ** ** | **September 30** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                  | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Current Assets**                                                          | ** ** | ** **            | ** ** | ** **            | ** ** |
| Cash and equivalents                                                        |       | $                     | 14,135,954 |                  | $          | 3,907,380 |   |
| Restricted cash                                                             |       | —                |       | 2,730,481             |       |
| Short-term investments                                                      |       | 6,987,420             |       | —                |       |
| Trade accounts receivable, less allowance  for doubtful accounts of $20,000 |       | 2,518,278             |       | 2,335,023             |       |
| Other receivables                                                           |       | 185,046               |       | 400,553               |       |
| Inventory                                                                   |       | 1,346,217             |       | 2,084,604             |       |
| Derivative instruments                                                      |       | 566,609               |       | —                |       |
| Prepaid expenses                                                            |       | 1,008,754             |       | 488,885               |       |
| Total current assets                                                        |       | 26,748,278            |       | 11,946,926            |       |
|                                                                        |       |                  |       |                  |       |
| **Property and Equipment**                                                  |       |                  |       |                  |       |
| Land and improvements                                                       |       | 2,762,708             |       | 2,753,225             |       |
| Buildings                                                                   |       | 15,768,603            |       | 15,061,750            |       |
| Processing equipment                                                        |       | 32,910,303            |       | 28,226,013            |       |
| Grain handling equipment                                                    |       | 5,264,448             |       | 5,172,406             |       |
| Rail and other equipment                                                    |       | 1,342,950             |       | 1,214,322             |       |
| Furniture and fixtures                                                      |       | 195,298               |       | 160,042               |       |
| Construction in progress                                                    |       | 713,898               |       | —                |       |
|                                                                        |       | 58,958,208            |       | 52,587,758            |       |
| Less accumulated depreciation                                               |       | 8,829,771             |       | 5,051,631             |       |
| Net property and equipment                                                  |       | 50,128,437            |       | 47,536,127            |       |
|                                                                        |       |                  |       |                  |       |
| **Other Assets**                                                            |       |                  |       |                  |       |
| Long-term investments                                                       |       | 48,000                |       | —                |       |
| Deferred loan costs, net                                                    |       | 237,641               |       | 345,151               |       |
| Total other assets                                                          |       | 285,641               |       | 345,151               |       |
|                                                                        |       |                  |       |                  |       |
| **Total Assets**                                                            |       | $                     | 77,162,356 |                  | $          | 59,828,204 |   |

 

Notes toConsolidated Financial Statements are an integral part of this Statement.

 

43

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Consolidated Balance Sheet

 
| ** **                                                                          | ** ** | **September 30** | ** ** | **September 30** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| **LIABILITIES AND MEMBERS’ EQUITY**                                            | ** ** | ** **            | ** ** | ** **            | ** ** |
| ** **                                                                          | ** ** | ** **            | ** ** | ** **            | ** ** |
| **Current Liabilities**                                                             | ** ** | ** **            | ** ** | ** **            | ** ** |
| Revolving promissory note                                                           |       | $                     | —     |                  | $          | 38,829 |   |
| Current maturities of long-term debt                                                |       | 4,005,714             |       | 3,109,676             |       |
| Trade accounts payable                                                              |       | 968,667               |       | 1,337,513             |       |
| Derivative instruments                                                              |       | —                |       | 181,579               |       |
| Accrued liabilities                                                                 |       | 5,669,935             |       | 298,851               |       |
| Total current liabilities                                                           |       | 10,644,316            |       | 4,966,448             |       |
|                                                                                |       |                  |       |                  |       |
| **Long-Term Debt,**net  of current maturities                                       |       | 16,092,315            |       | 19,572,989            |       |
|                                                                                |       |                  |       |                  |       |
| **Deferred Compensation**                                                           |       | 48,000                |       | —                |       |
|                                                                                |       |                  |       |                  |       |
| **Commitments and Contingencies**                                                   |       |                  |       |                  |       |
|                                                                                |       |                  |       |                  |       |
| **Minority Interest**                                                               |       | 20,209,574            |       | 14,207,003            |       |
|                                                                                |       |                  |       |                  |       |
| **Members’ Equity**                                                            |       |                  |       |                  |       |
| Member contributions, 10,941 units  outstanding at September 30, 2005 and 2004 |       | 10,842,237            |       | 10,842,237            |       |
| Retained earnings                                                                   |       | 19,325,914            |       | 10,239,527            |       |
| Total members’ equity                                                          |       | 30,168,151            |       | 21,081,764            |       |
|                                                                                |       |                  |       |                  |       |
| **Total Liabilities and Members’ Equity**                                      |       | $                     | 77,162,356 |                  | $          | 59,828,204 |   |

 

Notes toConsolidated Financial Statements are an integral part of this Statement.

 

44

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

** **

Consolidated Statements of Operations

 
| ** **                                               | ** ** | **Twelve Months Ended** | ** ** | **Twelve Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **Septemeber 30**       | ** ** | **September 30**   | ** ** | **September 30** | ** ** |
| ** **                                               | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**              | ** ** |
|                                                     |       |                    |       |                    |       |                  |       |
| **Revenues**                                             |       | $                       | 95,881,420 |                    | $          | 85,540,934            |       | $ | 31,814,299 |   |
|                                                     |       |                    |       |                    |       |                  |       |
| **Cost of Goods Sold**                                   |       | 61,966,890              |       | 71,244,909              |       | 27,462,227            |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Gross Profit**                                         |       | 33,914,530              |       | 14,296,025              |       | 4,352,072             |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Operating Expenses**                                   |       | 5,924,998               |       | 6,138,653               |       | 2,660,909             |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Operating Income**                                     |       | 27,989,532              |       | 8,157,372               |       | 1,691,163             |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Other Income (Expense)**                               |       |                    |       |                    |       |                  |       |
| Interest income                                          |       | 158,761                 |       | 7,557                   |       | —                |       |
| Interest expense                                         |       | (1,126,101              | )          | (1,439,020              | )          | (847,223              | )          |
| CCC Bio-Energy income                                    |       | 172,850                 |       | 6,645,512               |       | 5,535,733             |       |
| Grants and other income (expense), net                   |       | (3,674,576              | )          | 146,091                 |       | 612,206               |       |
| Total other income (expense), net                        |       | (4,469,066              | )          | 5,360,140               |       | 5,300,716             |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Net Income Before Minority Interest**                  |       | 23,520,466              |       | 13,517,512              |       | 6,991,879             |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Minority Interest in Sudsidiary Income**               |       | 9,421,765               |       | 5,663,681               |       | 2,920,676             |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Net Income**                                           |       | $                       | 14,098,701 |                    | $          | 7,853,831             |       | $ | 4,071,203 |   |
|                                                     |       |                    |       |                    |       |                  |       |
| **Basic and Diluted Weighted Average Units Outstanding** |       | 10,941                  |       | 10,941                  |       | 10,941                |       |
|                                                     |       |                    |       |                    |       |                  |       |
| **Basic and Diluted Net Income Per Unit**                |       | $                       | 1,288.61   |                    | $          | 717.83                |       | $ | 372.11 |   |
|                                                     |       |                    |       |                    |       |                  |       |
| **Distributions Per Unit**                               |       | $                       | 458.12     |                    | $          | 103.86                |       | $ | — |   |

 

Notes toConsolidated Financial Statements are an integral part of this Statement.

 

45

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Consolidated Statement of Changes in Members’ Equity and AccumulatedOther Comprehensive Income

 
| ** **                                                            | ** ** | ** **        | ** ** | ** **    | ** ** | ** **        | ** ** | **Accumulated**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|---------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                            | ** ** | ** **        | ** ** | **Retained**  | ** ** | ** **        | ** ** | **Other**         | ** ** |
| ** **                                                            | ** ** | **Member**        | ** ** | **Earnings**  | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                                                            | ** ** | **Contributions** | ** ** | **(Deficit)** | ** ** | **Income**        | ** ** | **Income (Loss)** | ** ** |
|                                                                  |       |              |       |          |       |              |       |              |       |
| **Balance - December 31, 2002**                                  |       | $                 | 10,842,237 |          | $          | (549,175          | )          |              |       | $ | (438,257 | ) |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Net income                                                            |       |              |       | 4,071,203     |       | $                 | 4,071,203  |              |       |   |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Other comprehensive loss:                                             |       |              |       |          |       |              |       |              |       |
| Unrealized loss on derivative instruments                             |       |              |       |          |       | (46,629           | )          |              |       |
| Less: reclassification adjustement for  losses included in net income |       |              |       |          |       | 267,445           |       |              |       |
|                                                                  |       |              |       |          |       | 220,816           |       | 220,816           |       |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Comprehensive income                                                  |       |              |       |          |       | $                 | 4,292,019  |              |       |   |
|                                                                  |       |              |       |          |       |              |       |              |       |
| **Balance - September 30, 2003**                                 |       | 10,842,237        |       | 3,522,028     |       |              |       | (217,441          | )          |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Distributions                                                         |       |              |       | (1,136,332    | )          |              |       |              |       |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Net income                                                            |       |              |       | 7,853,831     |       | $                 | 7,853,831  |              |       |   |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Other comprehensive income:                                           |       |              |       |          |       |              |       |              |       |
| Less: reclassification adjustement for  losses included in net income |       |              |       |          |       | 217,441           |       | 217,441           |       |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Comprehensive income                                                  |       |              |       |          |       | $                 | 8,071,272  |              |       |   |
|                                                                  |       |              |       |          |       |              |       |              |       |
| **Balance - September 30, 2004**                                 |       | 10,842,237        |       | 10,239,527    |       |              |       | —            |       |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Distributions                                                         |       |              |       | (5,012,314    | )          |              |       |              |       |
|                                                                  |       |              |       |          |       |              |       |              |       |
| Net income                                                            |       |              |       | 14,098,701    |       |              |       |              |       |
|                                                                  |       |              |       |          |       |              |       |              |       |
| **Balance - September 30, 2005**                                 |       | $                 | 10,842,237 |          | $          | 19,325,914        |       |              |       | $ | — |   |

 

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

 

46

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**LITTLE SIOUX CORN PROCESSORS, LLCAND SUBSIDIARY**

 

CondensedConsolidated Statements of Cash Flows

 
| ** **                                                                 | ** ** | **Twelve Months**           | ** ** | **Twelve Months**           | ** ** | **Nine Months**             | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                 | ** ** | **Ended September 30** | ** ** | **Ended September 30** | ** ** | **Ended September 30** | ** ** |
| ** **                                                                 | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **2003**                    | ** ** |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Cash Flows from Operating Activities**                                   | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Net income                                                                 |       | $                           | 14,098,701 |                        | $          | 7,853,831                   |       | $ | 4,071,203 |   |
| Adjustments to reconcile net income to net cash  from operations:          |       |                        |       |                        |       |                        |       |
| Depreciation and amortization                                              |       | 3,885,650                   |       | 3,519,323                   |       | 1,669,610                   |       |
| Deferred compensation                                                      |       | 48,000                      |       |                        |       |                        |       |
| Minority interest in subsidiary’s income                              |       | 9,421,765                   |       | 5,663,681                   |       | 2,920,676                   |       |
| Provision for losses on recievables                                        |       | —                      |       | 20,000                      |       | —                      |       |
| Loss on hedging activity                                                   |       | —                      |       | 312,777                     |       | 567,490                     |       |
| Change in assets and liabilities:                                          |       |                        |       |                        |       |                        |       |
| Restricted cash                                                            |       | 2,730,481                   |       | (2,717,579                  | )          | 255,293                     |       |
| Receivables                                                                |       | 32,252                      |       | 2,360,756                   |       | (5,107,878                  | )          |
| Inventory                                                                  |       | 738,387                     |       | (664,360                    | )          | (1,420,244                  | )          |
| Derivative instruments                                                     |       | (748,188                    | )          | 638,192                     |       | (1,117,860                  | )          |
| Prepaid expenses                                                           |       | (519,869                    | )          | 75,544                      |       | (546,942                    | )          |
| Accounts payable                                                           |       | (964,846                    | )          | 578,272                     |       | 496,972                     |       |
| Accrued liabilities                                                        |       | 5,371,084                   |       | (161,328                    | )          | 409,263                     |       |
| Net cash provided by operating activities                                  |       | 34,093,417                  |       | 17,479,109                  |       | 2,197,583                   |       |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Cash Flows from Investing Activities**                                   |       |                        |       |                        |       |                        |       |
| Payments for investments                                                   |       | (7,035,420                  | )          | —                      |       | —                      |       |
| Capital expenditures                                                       |       | (374,450                    | )          | (2,230,069                  | )          | (293,274                    | )          |
| Net cash used in investing activities                                      |       | (7,409,870                  | )          | (2,230,069                  | )          | (293,274                    | )          |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Cash Flows from Financing Activities**                                   |       |                        |       |                        |       |                        |       |
| Bank overdraft                                                             |       | —                      |       | —                      |       | (220,354                    | )          |
| Payments on short-term debt                                                |       | (38,829                     | )          | (736,336                    | )          | 775,165                     |       |
| Payments of long-term debt                                                 |       | (7,984,636                  | )          | (8,342,045                  | )          | (2,182,613                  | )          |
| Loan costs                                                                 |       | —                      |       | —                      |       | (9,186                      | )          |
| Redemption of minority interest                                            |       | —                      |       | (750,000                    | )          | —                      |       |
| Distribution to minority interest                                          |       | (3,419,194                  | )          | (913,430                    | )          | —                      |       |
| Distribution to members                                                    |       | (5,012,314                  | )          | (1,136,332                  | )          | —                      |       |
| Net cash used in financing activities                                      |       | (16,454,973                 | )          | (11,878,143                 | )          | (1,636,988                  | )          |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Net increase in cash and equivalents**                                   |       | 10,228,574                  |       | 3,370,897                   |       | 267,321                     |       |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Cash and Equivalents – Beginning of Period**                        |       | 3,907,380                   |       | 536,483                     |       | 269,162                     |       |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Cash and Equivalents – End of Period**                              |       | $                           | 14,135,954 |                        | $          | 3,907,380                   |       | $ | 536,483 |   |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Supplemental Cash Flow Information**                                     | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Cash paid during the year for:                                             | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Interest                                                                   |       | $                           | 1,102,945  |                        | $          | 1,527,937                   |       | $ | 1,022,668 |   |
|                                                                       |       |                        |       |                        |       |                        |       |
| **Supplemental Disclosure of Noncash  Investing and Financing Activities** |       |                        |       |                        |       |                        |       |
| Construction in progress included in  accrued liabilities                  |       | $                           | 596,000    |                        | $          | —                      |       | $ | 250,000 |   |
| Property and equipment acquired through  construction note                 |       | $                           | 5,400,000  |                        | $          | —                      |       | $ | 6,490,568 |   |
| Reduction in property and equipment due to  debt forgiveness               |       | $                           | —     |                        | $          | 90,000                      |       | $ | — |   |
| Capital lease obligations incurred                                         |       | $                           | —     |                        | $          | —                      |       | $ | 4,337 |   |

 

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

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes to Consolidated Financial Statements

 

September 30,2005 and 2004

 

**1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*Principles of Consolidation*

 

The Consolidatedfinancial statements include the accounts of Little Sioux Corn Processors, LLC(the “LLC”) and its 60.15% owned subsidiary, LSCP, LLLP (the “LSCP”),collectively, the “Company.”  Allsignificant intercompany balances and transactions are eliminated inconsolidation.

 

*Minority Interest*

 

Amounts recorded asminority interest on the balance sheet relate to the net investment by limitedpartners in LSCP plus or minus any allocation of income or loss of LSCP.  After giving effect to certain special allocations,income and losses of LSCP will be allocated to the partners based upon theirrespective percentage of partnership units held.  The minority interest share of thecomprehensive income for the fiscal years ending September 30, 2005, 2004,and 2003, is $9,421,765, $5,817,680, and $3,077,001, respectively.

 

Minority interest hasbeen classified on the accompanying balance sheet to reflect it as a separateline item rather than including it as part of equity.  This classification has no impact on net incomeor earnings per unit.

 

*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 completed itsexpansion, from a 40 million gallon plant to 52 million gallon plant.  The Company sells its production of ethanol,distiller’s grains and solubles, and modified wet distillers grains withsolubles in the Continental United States.

 

*Fiscal Reporting Period*

 

On June 26, 2003,the Company adopted a fiscal year ending September 30 for reportingfinancial operations.  Prior to that, theCompany had a fiscal year ending December 31 for reporting financialoperations.

 

*Accounting Estimates*

 

Management uses estimates and assumptions inpreparing these consolidated financial statements in accordance with generallyaccepted accounting principles.  Thoseestimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported revenues and expenses. Commodity Credit Corporation Bio-Energy Program incentives includesignificant estimates.  Actual resultscould differ from those estimates.

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

*Revenue Recognition*

 

Revenue from the sale ofthe Company’s products is recognized at the time title of the goods and allrisks of ownership transfer to the customers. This generally occurs upon shipment to the customer or when the customerpicks up the goods.

 

The Company recordsrevenue from federal and state incentive programs related to the production ofethanol when the Company has sold the ethanol and completed all therequirements of the applicable incentive program.

 

*Commodity Credit CorporationBioenergy Program*

 

The Company is enrolled in the CommodityCredit Corporation Bioenergy Program (CCC), a department of the United StatesDepartment of Agriculture.  This programenables the Company to receive payments based on increases in production ofethanol over the previous year of up to $7,500,000 per year.  New production is eligible and is consideredincreased production.  Payments under theprogram are subject to pro rata reduction if aggregate payments to allproducers in any fiscal year exceed the maximum annual funding of theprogram.  For the fiscal years ended September 30,2005, 2004, and 2003, the Company recorded $172,850, $6,645,512, and$5,535,733, respectively, as other income from the CCC. At September 30,2005 and 2004, the Company had $23,000 and $262,246, respectively, recorded inother receivables.

 

*Cash and Equivalents*

 

The Company considers allhighly liquid debt instruments purchased with a maturity of three months orless to be cash and equivalents.

 

The Company maintains itsaccounts primarily at two financial institutions.  At times throughout the year, the Company’scash and equivalents balances, which include money market funds and debtinstrument with a maturity of less than three months, may exceed amountsinsured by the Federal Deposit Insurance Corporation.  At September 30, 2005, such money marketfunds and debt instruments approximated $11,779,000.  There were no money market funds or debtinstruments with maturities of three months or less at September 30,2004.  The Company does not believe it isexposed to any significant credit risk on cash and equivalents.

 

*Restricted Cash*

 

The Company is periodicallyrequired to maintain cash balances at its brokers related to derivativeinstrument positions.

 

*Investments*

 

The Company includes ininvestments certain debt instruments with maturities greater than three monthsand marketable securities, both classified as “available for sale”.  The debt instruments primarily consist oftreasury bills and certificates of deposit and are recorded as short terminvestments.  The Company maintainsmarketable securities as part of the deferred compensation plan and classifiesamounts as long-term investments. Accordingly, a corresponding liability has been recorded in deferredcompensation.

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

Investments are carriedat their estimated fair market value based on quoted mark prices.  There are no unrealized gains and losses oninvestments at September 30, 2005 and 2004.

 

*Trade Accounts Receivable*

 

Credit terms are extendedto customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’financial condition and, generally, requires no collateral.

 

Trade accounts receivableare recorded at their estimated net realizable value.  The Company follows a policy of providing anallowance for doubtful accounts.  TheCompany’s estimate of the allowance for doubtful accounts is based uponhistorical experience, its evaluation of the current status of receivables, andunusual circumstances, if any.  Accountsare considered past due if payment is not made on a timely basis in accordancewith the Company’s credit terms. Accounts considered uncollectible are written off.

 

*Inventory*

 

Inventory consists of rawmaterials, work in process, and finished goods. Corn is the primary raw material and, along with other raw materials, isstated at the lower of average cost or market. Finished goods consist of ethanol produced and DDGS and MWDGS, and arestated at the lower of first-in, first-out, (FIFO method) cost or market.

 

*Property and Equipment*

 

Property and equipmentare stated at the lower of cost or estimated value.  Depreciation is computed over estimateduseful lives by use of the straight-line method.  Maintenance and repairs are expensed asincurred; major improvements and betterments are capitalized.  The present value of capital leaseobligations is classified as long-term debt and the related assets are includedin equipment.  Amortization of equipmentunder capital lease is included in depreciation expense.

 

The Company reviews itsproperty and equipment for impairment whenever events indicate that thecarrying amount of the asset may not be recoverable.  An impairment loss is recorded when the sumof the future cash flows is less than the carrying amount of the asset.  An impairment loss is measured as the amountby which the carrying amount of the asset exceeds its fair value.

 

*Deferred Loan Costs*

 

Costs associated with theissuance of the construction loan discussed in Note 5 are recorded as deferredloan costs, net of accumulated amortization. Loan costs are amortized to operations over the life of term note #3using the effective interest method.

 

*Derivative Instruments*

 

The Company enters intoderivative instruments to hedge the variability of expected future cash flowsrelated to forecasted corn and natural gas purchases, forward purchasecontracts, and interest rates.  TheCompany does not typically enter into derivative instruments other than forhedging purposes.  All derivativeinstruments are recognized on the September 30, 2005 and September 30,2004 balance sheet at their fair market value. On the date the derivative instrument is entered into, the Company willdesignate the derivative as a hedge. Changes is the fair value of a derivative that is designated as, andmeets all of the

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

required criteria, for acash flow hedge are recorded in accumulated other comprehensive income andreclassified into earnings as the hedged items affect earnings.  Changes in the fair value of a derivativethat is not designated as a hedge are recorded in current period earnings.  Although certain derivative instruments maynot be designated as, and accounted for, as a cash flow hedge, they areeffective economic hedges of specified risks.

 

At September 30, 2005 and 2004, the Company hadrecorded an asset for derivative instruments related to corn options andfutures positions of $496,853 and $212,319, respectively, for forecastedpurchases.  None of the positions open weredesignated as cash flow hedges.  The Company has recorded a loss ofapproximately $2,697,000 and $3,851,000 in cost of goods sold for the fiscalyears ended September 30, 2005 and 2004, respectively.

 

During the nine month fiscal year ended September 30,2003, the Company dedesignated as cash flow hedges its option contractpositions, although they continue to be effective economic hedges of specifiedrisks.  The Company recorded a loss in cost of goods sold of approximately$648,000 for the nine month fiscal year ended September 30, 2003.

 

At September 30, 2005 and 2004, the Company hadan interest rate cap as described in Note 5 with a fair value of $69,756 and$30,740, respectively, recorded as an asset with derivative instruments. The interest rate cap was not designated as a cash flow hedge.  TheCompany offset interest expense with a gain of approximately $39,000 on theinterest rate cap for fiscal year ending September 30, 2005.  The Company charged interest expense with theloss on the interest rate cap of approximately $50,000 for the fiscal yearending September 30, 2004.  The Companyoffset interest expense with a gain of approximately $81,000 on the interestrate cap for the nine month fiscal year ending September 30, 2003.

 

*Benefit Plans*

 

The Company has a 401(k) plan covering substantiallyall employees who meet specified age and service requirements.  Under this plan, the Company makes a matchingcontribution of up to 4% of the participants’ eligible wages.

 

In May 2005 the Company established a deferredcompensation plan for certain employees providing supplemental benefits.  The Board may annually grant a discretionarydeferred bonus under the plan to each participant in an amount up to twentypercent of each participant’s base salary for the prior calendar year.  Costs of the plan are recognized during theemployee’s service period for the Company so that the benefits are accrued whenpayments begin.  Participants are fullyvested six years after the grant date provided that the participant is employedfull-time.

 

*Income Taxes*

 

Little Sioux Corn Processors, LLC and LSCP, LLLP aretreated as partnerships for federal and state income tax purposes and generallydo not incur income taxes.  Instead,their earnings and losses are included in the income tax returns of the membersand partners.  Therefore, no provision orliability for federal and state income taxes has been included in thesefinancial statements.  Differencesbetween consolidated financial statement basis of assets and tax basis ofassets is related to capitalization and amortization of organization andstart-up costs for tax purposes, whereas these costs are expensed for financialstatements purposes.  In addition, theCompany uses the modified accelerated cost recovery system method (MACRS) fortax depreciation instead of the straight-line method that is used for book depreciation,which also causes temporary differences.

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

*Fair Value of Financial Instruments*

 

The carrying value of cash and equivalents andrestricted cash approximates their fair value.

 

The Company believes thecarrying amount of investments at their estimated fair market value based onquoted mark prices.

 

The Company believes the carrying amount ofderivative instruments approximates fair value based on current market prices.

 

It is not currently practicable to estimate fairvalue of the line of credit and notes payable to the lending institution.  Because these agreements contain certainunique terms, covenants, and restrictions, as discussed in Note 4 and 5, theseare no readily determinable similar instruments on which to base an estimate offair value.

 

*Environmental Liabilities*

 

The Company’s operations are subject to environmentallaws and regulations adopted by various governmental entities in thejurisdiction in which it operates.  Theselaws require the Company to investigate and remediate the effects of therelease or disposal of materials at its location.  Accordingly, the Company has adoptedpolicies, practices, and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit thefinancial liability, which could result from such events.  Environmental liabilities are recorded whenthe liability is probable and the costs can reasonably estimated.

 

**2.  INVENTORY**

 

Inventories consist of the following:

 
| ** **      | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|-----------------|------------|-----------------------------|------------|-----------------------------|------------|
|            |       |                        |       |                        |       |
| Raw materials   |       | $                           | 579,568    |                        | $          | 1,279,912 |   |
| Work in process |       | 437,872                     |       | 346,749                     |       |
| Finished goods  |       | 328,777                     |       | 457,943                     |       |
|            |       |                        |       |                        |       |
| Totals          |       | $                           | 1,346,217  |                        | $          | 2,084,604 |   |

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

**3.****             ****CONSTRUCTION IN PROGRESS**

 

Amounts included inconstruction in progress as of September 30, 2005 are as follows

 
| Construction  costs |   | $      | 713,898 |   |
|---------------------|--------|--------|---------|--------|
|                |   |   |    |
| Total               |   | $      | 713,898 |   |

 

During fiscal 2005, theCompany capitalized interest of $26,526 during the expansion period prior tocompleting the expansion.  The Company estimates its costs to completethe construction of assets not yet placed in service to be approximately $1,631,000as of September 30, 2005.

 

**4.****             ****DEFERRED LOAN COSTS**

 

The Company had deferredloan costs of $487,060 with accumulated amortization of $240,460 at September 30,2005.  At September 30, 2004, theCompany has deferred loan costs of $487,060 with accumulated amortization of$141,909.  The amortization expenserelated to the deferred loan costs for fiscal years ended September 30,2005, 2004, and 2003 was $107,510, $118,040 and $23,869, respectively.

 

**5. REVOLVING PROMISSORY NOTE**

 

Under the terms of the financing agreement with the lendinginstitution, the Company has a revolving promissory note of up to $3,500,000,subject to borrowing base limitations. In July 2005, the lendinginstitution renewed the revolving promissory note until March 2006.  The revolving promissory note incurs interestmonthly at the one month LIBOR plus 280 basis points, which totaled 6.49% at September 30,2005.  The Company pays a commitment feeof .125% on the unused portion of the revolving promissory note.  The Company did not have an outstandingbalance on the revolving promissory note at       September 30, 2005.  The Company had an outstanding balance at September 30,2004 of $38,829.  The revolvingpromissory note as well as the term notes described in Note 6 are subject toprotective covenants under a common financing agreement requiring the Companyto maintain various financial ratios, including debt service coverage andminimum net worth and working capital requirements and secured by all businessassets.

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

**6.  LONG–TERM DEBT**

 

Long-term debt consists of the following:

 
| ** **                                                                                                                                                                                                              | ** ** | **September 30 2005** | ** **     | **September 30 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|----------------|----------------------------|------------|
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Term note #2  payable to lending institution, see terms below.                                                                                                                                                          | ** ** | **$**                      | **12,732,447** |                       | $          | 14,099,113 |   |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Term note #3  payable to lending institution, see terms below.                                                                                                                                                          | ** ** | **1,293,643**              |           | 3,177,819                  |       |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Term note #4  payable to lending institution, see terms below.                                                                                                                                                          |       |                       |           | 4,564,175                  |       |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| 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.                                       | ** ** | **138,889**                |           | 180,555                    |       |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Note payable  to bank due in monthly payments of $5,921 including interest at 6% maturing  on January 29, 2009, secured by real estate, subordinated to term notes.                                                | ** ** | **149,986**                |           | 189,406                    |       |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| 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. | ** ** | **192,500**                |           | 206,500                    |       |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Capital  lease obligation, due in monthly installments initially totaling $6,658  commencing April 1, 2003 including implicit interest at 3.67% through March 1,  2008, secured by leased equipment.          | ** ** | **190,564**                |           | 265,097                    |       |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Totals                                                                                                                                                                                                                  | ** ** | **$**                      | **20,098,029** |                       | $          | 22,682,665 |   |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Less amounts  due within one year                                                                                                                                                                                       | ** ** | **4,005,714**              |           | 3,109,676                  |       |
|                                                                                                                                                                                                                    |       |                       |           |                       |       |
| Totals                                                                                                                                                                                                                  | ** ** | **$**                      | **16,092,315** |                       | $          | 19,572,989 |   |

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

The Company obtained debt financing from a lendinginstitution in the form of a revolving promissory note and term notes, referredto by the lending institution as term notes #2, #3, and #4.  Term note #2has fixed principal payments due quarterly with interest at the three monthLIBOR plus 280 basis points, which totaled 6.67% at September 30, 2005,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 6.67% at September 30, 2005. Term note #4 bears interest at the one month LIBOR plus 280 basis points, whichtotaled 6.49% at September 30, 2005.  Term notes #3 and #4 arepayable 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 and then to principal until this note is repaid in full or untilmaturity.  After term note #3 is repaid, payments are applied first toaccrued interest and then to principal on the term note #4 until paid in fullor until maturity.  Term note #4 had no outstanding balance as of September 30,2005.  Term note #4 allows subsequentborrowings up to the original $5,000,000 to the extent of principal paymentsmade until maturity and requires a commitment fee of .375% on any used portion.

 

Term note #5 bears interest at the one month LIBORplus 330 basis points, which totaled 6.99% at September 30, 2005.  Prior to the conversion to term note #3 on October 1,2005, the Company was required to make interest only payments quarterly.  After October 1, 2005, the outstandingbalance of term note #5 was added to the principle balance of term note #3 withpayments as described above.

 

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. The financing agreement requires an annual servicing fee of $50,000 for fiveyears.  As described in Note 1, the Company entered into an interest ratecap agreement to reduce the risk of increases in interest rates.  Theinterest rate cap agreement is based on a notional amount of $10,000,000 andcaps increases in interest rates at 6.8% on this amount until June 1,2006.

 

At September 30, 2004, LSCP was in violation ofthe debt service covenant.  The lenderhas waived compliance with this violation at September 30, 2004 and forthe following year as it relates to this violation at September 30, 2004.

 

The estimated maturities of long-term debt at September 30,2005 are as follows:

 

| 2006                  |   | $          | 4,005,714  |   |
|-----------------------|--------|------------|------------|--------|
| 2007                  |   | 5,420,548  |       |
| 2008                  |   | 10,490,848 |       |
| 2009                  |   | 180,919    |       |
| Total  long-term debt |   | $          | 20,098,029 |   |

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

**7. LEASES**

 

The Company leases equipment under operating andcapital leases through 2008.  The Companyis generally responsible for maintenance, taxes, and utilities for leasedequipment.  Equipment under operatingleases includes rail cars and various other equipment.  Rent expense for operating leases wasapproximately $229,000, $312,000, and $172,000 for the fiscal years ended September 30,2005, 2004, and  2003, respectively.  During the fiscal 2005, the Company rentedrail cars on a month-to-month basis and recognized approximately $89,000 inother income.  The Company also recordedincome of approximately $90,000 on the permanent transfer of 30 rail cars of a50 rail car lease to a third party.  Thistransfer indemnified the Company from any liability and, as a result, theCompany transferred all rights and privileges to the 30 rail cars.

 

Equipment under capital leases is as follows at September 30:

 
| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Equipment                |       | $        | 451,437    |     | $          | 460,275 |   |
| Accumulated Amortization |       | 75,116   |       | 47,371   |       |
|                     |       |     |       |     |       |
| Total                    |       | $        | 376,321    |     | $          | 412,904 |   |

 

At September 30, 2005, the Company had thefollowing minimum commitments, which at inception had non-cancelable terms ofmore than one year:

 
| ** **                                                                             | ** ** | **Operating  Lease** | ** ** | **Capital  Lease** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
|                                                                                   |       |                 |       |               |       |
| 2006                                                                                   |       | $                    | 187,371    |               | $          | 79,893 |   |
| 2007                                                                                   |       | 187,371              |       | 79,893             |       |
| 2008                                                                                   |       | 108,065              |       | 39,946             |       |
| Total  minimum lease commitments                                                       |       | $                    | 482,807    |               | 199,732    |   |
| Less amount  representing interest                                                     |       |                 |       | 9,168              |       |
|                                                                                   |       |                 |       |               |       |
| Present  value of minimum lease commitments; included in the proceeding long-term debt |       |                 |       | $                  | 190,564    |   |

 

**8.  MEMBERS’ EQUITY**

 

On January 18, 2005, the Board of Directors declared a distributionof $4,000,000 from LSCP to the partners, which was paid in February 2005.  The LLC received approximately $2,406,000 ofthis distribution, which was paid to its members in February 2005.  On March 15, 2005, the Board ofDirectors, declared a distribution of $3,000,000 from LSCP to thepartners.  The cash distribution was made in April 2005.  TheLLC received approximately $1,805,000 of this distribution.  After payingexpenses of approximately $55,000, the LLC distributed approximately $1,750,000to its members in April 2005.  On

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

September 20, 2005, the Board of Directors, declared adistribution of $1,581,000 from LSCP to the partners.  The cash distribution was made in September 2005.  The LLC received approximately $951,000 ofthis distribution.  After paying expensesof approximately $95,000, the LLC distributed approximately $856,000 to itsmembers in September 2005.

 

**9.  RELATED PARTY TRANSACTIONS**

 

In addition to the related party transactionsdescribed previously, the Company also had the following related partytransactions:

 

The minority investors in LSCP include Archer DanielsMidland, Inc. (ADM), formerly MSCP Holdings Co., LLC, which owns 800 unitsof LSCP, Fagen, Inc (Fagen), the general contractor of the plant, which owns350 units, and Indeck Energy Services, LLC, which owns 300 units.  In July 2004 LSCP repurchased 100 unitsheld by David Vander Griend, the owner of ICM, the engineering firm for LSCP,for $750,000.  As a result, LSCP had3,639 units outstanding as of September 30, 2005 and 2004.  The LLC owns 2,189 LSCP units.

 

For the fiscal years ending September 30, 2005,2004, and 2003, revenues from the sale of ethanol to marketing agent asdescribed in Note 12 were approximately $82,549,000, $73,309,000, and$26,518,000, respectively.  ADM marketsall of the ethanol sold by LSCP as described in Note 9 and receives a marketingfee.  The Company incurred marketingexpenses of approximately $476,000, $489,000, and $205,000 to ADM for thefiscal years ended September 30, 2005, 2004, and 2003, respectively.  At September 30, 2005 and 2004, amountsdue from ADM approximated 82% and 90% of trade accounts receivable,respectively.

 

During the fiscal year ending September 30,2005, the Company paid approximately $69,000 for services rendered byFagen.  During the fiscal year ended September 30,2004, the note payable to Fagen, Inc., totaling $1,250,000, was repaidalong with accrued interest of approximately $98,000.  During the nine month fiscal year ended September 30,2003, the Company paid fees to Fagen and ICM of approximately $9,795,000.

 

During the fiscal years ending September 30,2005, 2004, 2003, LSCP purchased approximately $4,416,000, $8,781,000, and$2,504,000 in corn from members of the LLC.

 

**10. EMPLOYEE BENEFITPLANS**

 

The Company recorded contributions to the 401(k)plan of approximately $33,000 and $28,000 in fiscal 2005 and 2004,respectively.

 

Compensation expense related to the deferredcompensation plan was $48,000 in fiscal 2005.

 

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

**11.  INCOME TAXES**

 

Thedifferences between consolidated financial statement basis and tax basis ofassets are as follows:

 
| ** **                                                                                   | ** ** | **September 30  2005** | ** **     | **September 30  2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|----------------|-----------------------------|------------|
|                                                                                         |       |                        |           |                        |       |
| Consolidated  financial statement basis of assets                                            | ** ** | **$**                       | **77,162,356** |                        | $          | 59,828,204 |   |
| Plus:  organization and start-up costs capitalized, net                                      | ** ** | **397,163**                 |           | 556,116                     |       |
| Less:  accumulated tax depreciation and amortization greater than financial  statement basis | ** ** | **(18,585,418**             | **)**          | (15,359,862                 | )          |
|                                                                                         |       |                        |           |                        |       |
| Income tax  basis of assets                                                                  | ** ** | **$**                       | **58,974,101** |                        | $          | 45,024,458 |   |

 

Therewere no differences between the consolidated financial statement basis and taxbasis of the Company’s liabilities.

 

**12.  COMMITMENTS ANDCONTINGENCIES**

 

*Ethanol Marketing Agreement*

 

As discussed in Note 9, the Company has entered intoan ethanol marketing agreement with ADM. The Company agrees to pay ADM a fixed price per gallon for every gallonof ethanol produced by the Company and sold to ADM.  The initial term is until April 2007with renewal options thereafter in one-year increments.

 

*Legal Proceedings*

 

The Company was involved in a dispute with ADMinvolving the ethanol marketing agreement. Subsequent to year-end, the Company settled the claim by agreeing to payADM approximately $3,900,000, which the Company recorded as of September 30,2005 in other income and expense.

 

*Contractual Obligations*

 

The following table provides information regardingthe consolidated contractual obligations of the Company as of September 30,2005:

 
| ** **                         | ** ** | **Total** | ** ** | **Less than One Year** | ** ** | **One to Three Years** | ** ** |
|------------------------------------|------------|-----------|------------|------------------------|------------|------------------------|------------|
| Long-Term Debt Obligations         |       | $         | 20,098,029 |                   | $          | 4,005,714              |       | $ | 16,092,315 |   |
| Operating Lease Obligations        |       | $         | 482,807    |                   | $          | 187,371                |       | $ | 295,436 |   |
| Purchase Obligations               |       | $         | 20,940,486 |                   | $          | 20,102,837             |       | $ | 837,649 |   |
| Total Contractual Cash Obligations |       | $         | 41,521,322 |                   | $          | 24,295,922             |       | $ | 17,225,400 |   |

 

58

----

 

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARY**

 

Notes toConsolidated Financial Statements

 

September 30,2005 and 2004

 

**13.  QUARTERLY FINANCIAL DATA(UNAUDITED)**

 

Summary quarterly results are as follows:

 
| ** **                                | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Fiscal year ended September 30, 2005 |       |               |       |                |       |               |       |                |       |
| Revenues                                  |       | $                  | 22,975,735 |                | $          | 23,835,684         |       | $                   | 23,101,306 |   | $ | 25,968,695 |   |
| Gross profit                              |       | 6,675,503          |       | 8,882,833           |       | 8,666,583          |       | 9,689,611           |       |
| Operating income                          |       | 5,211,539          |       | 7,470,042           |       | 7,279,454          |       | 8,028,497           |       |
| Income before minority interest           |       | 4,993,564          |       | 7,375,228           |       | 7,146,738          |       | 4,004,936           |       |
| Minority interest in subsidiary income    |       | 1,992,348          |       | 2,965,331           |       | 2,858,942          |       | 1,605,144           |       |
| Net income                                |       | 3,001,216          |       | 4,409,897           |       | 4,287,796          |       | 2,399,792           |       |
| Basic and diluted earnings per unit       |       | 274.31             |       | 403.06              |       | 391.90             |       | 219.34              |       |
|                                           |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 
| ** **                                     | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Fiscal year ended September 30, 2004      |       |               |       |                |       |               |       |                |       |
| Revenues                                       |       | $                  | 19,266,908 |                | $          | 20,203,296         |       | $                   | 21,497,087 |   | $ | 24,573,643 |   |
| Gross profit (loss)                            |       | 3,864,420          |       | 8,891,404           |       | (1,740,138         | )          | 3,280,339           |       |
| Operating income (loss)                        |       | 2,295,699          |       | 7,387,346           |       | (3,223,140         | )          | 1,697,468           |       |
| Income (loss) before minority interest         |       | 4,529,123          |       | 11,295,095          |       | (3,900,172         | )          | 1,593,467           |       |
| Minority interest in subsidiary income  (loss) |       | 1,880,548          |       | 4,715,589           |       | (1,592,236         | )          | 659,782             |       |
| Net income (loss)                              |       | 2,648,575          |       | 6,579,506           |       | (2,307,936         | )          | 933,685             |       |
| Basic and diluted earnings (loss) per unit     |       | 242.08             |       | 601.36              |       | (210.94            | )          | 85.34               |       |
|                                                |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 
| ** **                                     | ** ** | **First  Quarter** | ** ** | **Second  |Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------|------------|--------------------|------------|----------------------|------------|--------------------|------------|---------------------|------------|
| Fiscal year ended September 30, 2003      |       |               |       |                 |       |               |       |                |       |
| Revenues                                       |       | $                  | —     |                 | $          | —             |       | $                   | 11,764,929 |   | $ | 20,049,370 |   |
| Gross profit                                   |       | —             |       |                 |       | 1,711,732          |       | 2,640,340           |       |
| Operating income (loss)                        |       | (31,028            | )          | (361,549             | )          | 633,242            |       | 1,450,498           |       |
| Income (loss) before minority interest         |       | (30,586            | )          | 90,202               |       | 3,185,779          |       | 3,746,484           |       |
| Minority interest in subsidiary income  (loss) |       | (12,694            | )          | 37,393               |       | 1,334,501          |       | 1,561,476           |       |
| Net income (loss)                              |       | (17,892            | )          | 52,809               |       | 1,851,278          |       | 2,185,008           |       |
| Basic and diluted earnings (loss) per unit     |       | (1.64              | )          | 4.83                 |       | 169.21             |       | 199.71              |       |
|                                                |            |                    |            |                      |            |                    |            |                     |            |  |  |  |  |

 

The above quarterly financial data is unaudited, butin the opinion of management, all adjustments necessary for a fair presentationof the selected data for these periods presented have been included.

 

59

----

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

SUPPLEMENTARY INFORMATION

 

Board of Directors

Little Sioux Corn Processors, LLC and Subsidiary

Marcus, Iowa

 

Our report on our audits of the consolidated financial statements ofLittle Sioux Corn Processors, LLC and Subsidiary for the fiscal years ended September 30,2005, 2004, and 2003 appears on page 42. Those audits were conducted for the purpose of forming an opinion on theconsolidated financial statements taken as a whole.  The supplementary information on pages 61through 65 is presented for the purposes of additional analysis and is not arequired part of the basic consolidated financial statements.  Such information has not been subjected tothe auditing procedures applied in the audits of the consolidated financialstatements and, accordingly, we express no opinion on it.

 

 
|                          | /s/ Boulay, Heutmaker, Zibell &  Co. P.L.L.P. |   |
|-------------------------------|--------------------------------------------------------|--------|
|                          |                                                   |
| Certified  Public Accountants |                                                   |

 

Minneapolis, Minnesota

October 28, 2005

 

60

----

 

**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

 

Consolidating Balance Sheet

 
| ** **                                                                  | ** ** | **September 30** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | **LSCP, LLLP**        | ** ** | **Little Sioux Corn  Processors, LLC** | ** ** | **Eliminations** |   | **Consolidated** | ** ** | **Consolidated** | ** ** |
| ** **                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| ** **                                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Current  Assets**                                                         |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and  equivalents                                                       |       | $                     | 14,132,434 |   | $ | 3,520 |   | $ | — |   | **$** | **14,135,954** |   | $ | 3,907,380 |   |
| Restricted  cash                                                            |       | —                |       | — |   | — |   | **—** |   | 2,730,481 |   |
| Short-term  investments                                                     |       | 6,987,420             |       | — |   | — |   | **6,987,420** |   | — |   |
| Trade  accounts receivable, less allowance for doubtful accounts of $20,000 |       | 2,518,278             |       | — |   | — |   | **2,518,278** |   | 2,335,023 |   |
| Other  receivables                                                          |       | 208,502               |       | — |   | (23,456 | ) | **185,046** |   | 400,553 |   |
| Inventory                                                                   |       | 1,346,217             |       | — |   | — |   | **1,346,217** |   | 2,084,604 |   |
| Derivative  instruments                                                     |       | 566,609               |       | — |   | — |   | **566,609** |   | — |   |
| Prepaid  expenses                                                           |       | 1,008,754             |       | — |   | — |   | **1,008,754** |   | 488,885 |   |
| Total current  assets                                                       |       | 26,768,214            |       | 3,520 |   | (23,456 | ) | **26,748,278** |   | 11,946,926 |   |
|                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| **Property  and Equipment**                                                 |       |                  |       |   |   |   |   |   |   |   |   |
| Land                                                                        |       | 2,762,708             |       | — |   | — |   | **2,762,708** |   | 2,753,225 |   |
| Building                                                                    |       | 15,768,603            |       | — |   | — |   | **15,768,603** |   | 15,061,750 |   |
| Processing  equipment                                                       |       | 32,910,303            |       | — |   | — |   | **32,910,303** |   | 28,226,013 |   |
| Grain  handling equipment                                                   |       | 5,264,448             |       | — |   | — |   | **5,264,448** |   | 5,172,406 |   |
| Rail and  other equipment                                                   |       | 1,342,950             |       | — |   | — |   | **1,342,950** |   | 1,214,322 |   |
| Furniture  and fixtures                                                     |       | 195,298               |       | — |   | — |   | **195,298** |   | 160,042 |   |
| Construction  in progress                                                   |       | 713,898               |       | — |   | — |   | **713,898** |   | — |   |
|                                                                        |       | 58,958,208            |       | — |   | — |   | **58,958,208** |   | 52,587,758 |   |
| Less  accumulated depreciation                                              |       | 8,829,771             |       | — |   | — |   | **8,829,771** |   | 5,051,631 |   |
| Net property  and equipment                                                 |       | 50,128,437            |       | — |   | — |   | **50,128,437** |   | 47,536,127 |   |
|                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| **Other  Assets**                                                           |       |                  |       |   |   |   |   |   |   |   |   |
| Long-term  investments                                                      |       | 48,000                |       | — |   | — |   | **48,000** |   | — |   |
| Investment  in LP                                                           |       | —                |       | 30,188,087 |   | (30,188,087 | ) | **—** |   | — |   |
| Loan costs                                                                  |       | 237,641               |       | — |   | — |   | **237,641** |   | 345,151 |   |
| Total other  assets                                                         |       | 285,641               |       | 30,188,087 |   | (30,188,087 | ) | **285,641** |   | 345,151 |   |
|                                                                        |       |                  |       |   |   |   |   |   |   |   |   |
| **Total  Assets**                                                           |       | $                     | 77,182,292 |   | $ | 30,191,607 |   | $ | (30,211,543 | ) | **$** | **77,162,356** |   | $ | 59,828,204 |   |

 

See Report ofIndependent Registered Public Accounting Firm on Supplementary Information.

 

61

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

 

Consolidating Balance Sheet

 
| ** **                                              | ** ** | **September 30** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **LSCP, LLLP**        | ** ** | **Little Sioux Corn  Processors, LLC** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Consolidated** | ** ** |
| ** **                                              | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LIABILITIES AND EQUITY**                              |       |                  |       |   |   |   |   |   |   |   |   |
|                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Current  Liabilities**                                |       |                  |       |   |   |   |   |   |   |   |   |
| Revolving  promissory note                              |       | $                     | —     |   | $ | — |   | $ | — |   | **$** | **—** |   | $ | 38,829 |   |
| Current  maturities of long-term debt                   |       | 4,005,714             |       | — |   | — |   | **4,005,714** |   | 3,109,676 |   |
| Trade  accounts payable                                 |       | 968,667               |       | 23,456 |   | (23,456 | ) | **968,667** |   | 1,337,513 |   |
| Derivative  instruments                                 |       | —                |       | — |   | — |   | **—** |   | 181,579 |   |
| Accrued  liabilities                                    |       | 5,669,935             |       | — |   | — |   | **5,669,935** |   | 298,851 |   |
| Total  current liabilities                              |       | 10,644,316            |       | 23,456 |   | (23,456 | ) | **10,644,316** |   | 4,966,448 |   |
|                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Long-Term Debt,**** **net  of current maturities |       | 16,092,315            |       | — |   | — |   | **16,092,315** |   | 19,572,989 |   |
|                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Deferred  compensation**                              |       | 48,000                |       | — |   | — |   | **48,000** |   | — |   |
|                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Commitments  and Contingencies**                      |       |                  |       |   |   |   |   |   |   |   |   |
|                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Minority  Interest**                                  |       | —                |       | — |   | 20,209,574 |   | **20,209,574** |   | 14,207,003 |   |
|                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Members’  Equity**                               |       |                  |       |   |   |   |   |   |   |   |   |
| Member  contributions                                   |       | 26,752,215            |       | 10,842,237 |   | (26,752,215 | ) | **10,842,237** |   | 10,842,237 |   |
| Retained  earnings                                      |       | 23,645,446            |       | 19,325,914 |   | (23,645,446 | ) | **19,325,914** |   | 10,239,527 |   |
|                                                    |       | 50,397,661            |       | 30,168,151 |   | (50,397,661 | ) | **30,168,151** |   | 21,081,764 |   |
|                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Total  Liabilities and Members’ Equity**         |       | $                     | 77,182,292 |   | $ | 30,191,607 |   | $ | (30,211,543 | ) | **$** | **77,162,356** |   | $ | 59,828,204 |   |

 

See Report ofIndependent Registered Public Accounting Firm on Supplementary Information.

 

62

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

 

Consolidating Statement of Operations

 
| ** **                                  | ** ** | **Years Ended September 30** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **LSCP, LLLP**                    | ** ** | **Little Sioux Corn  Processors, LLC** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Consolidated** | ** ** | **Consolidated** | ** ** |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Revenue**                                 |       | $                                 | 95,881,420 |   | $ | — |   | $ | — | ** ** | **$** | **95,881,420** | ** ** | $ | 85,540,934 |   | $ | 31,814,299 |   |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Cost of  Goods Sold**                     |       | 61,966,890                        |       | — |   | — | ** ** | **61,966,890** | ** ** | 71,244,909 |   | 27,462,277 |   |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Gross  Profit**                           |       | 33,914,530                        |       | — |   | — |   | **33,914,530** | ** ** | 14,296,025 |   | 4,352,022 | ** ** |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Operating  Expenses**                     |       | 5,800,000                         |       | 124,998 |   | — | ** ** | **5,924,998** | ** ** | 6,138,653 |   | 2,660,909 |   |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Operating  Income**                       |       | 28,114,530                        |       | (124,998 | ) | — | ** ** | **27,989,532** | ** ** | 8,157,372 |   | 1,691,113 |   |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Other  Income (Expense)**                 |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| Income from subsidiary                      |       | —                            |       | 14,223,681 |   | (14,223,681 | ) | **—** | ** ** | — |   | — |   |
| Interest income and other                   |       | 158,761                           |       | — |   | — |   | **158,761** | ** ** | 7,557 |   | — |   |
| Interest expense                            |       | (1,126,101                        | )          | — |   | — |   | **(1,126,101** | **)** | (1,439,020 | ) | (847,223 | ) |
| CCC Bio-Energy income                       |       | 172,850                           |       | — |   | — |   | **172,850** | ** ** | 6,645,512 |   | 5,535,733 |   |
| Grants and other income (expense), net      |       | (3,674,594                        | )          | 18 |   | — |   | **(3,674,576** | **)** | 146,091 |   | 612,206 |   |
| Total other income (expense), net           |       | (4,469,084                        | )          | 14,223,699 |   | (14,223,681 | ) | **(4,469,066** | **)** | 5,360,140 |   | 5,300,716 |   |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Net  Income Before Minority Interest**    |       | 23,645,446                        |       | 14,098,701 |   | (14,223,681 | ) | **23,520,466** | ** ** | 13,517,512 |   | 6,991,829 |   |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Minority  Interest in Subsidiary Income** |       | —                            |       | — |   | 9,421,765 |   | **9,421,765** | ** ** | 5,663,681 |   | 2,920,676 |   |
|                                        |       |                              |       |   |   |   |   |   | ** ** |   |   |   |   |
| **Net  Income**                             |       | $                                 | 23,645,446 |   | $ | 14,098,701 |   | $ | (23,645,446 | ) | **$** | **14,098,701** | ** ** | $ | 7,853,831 |   | $ | 4,071,153 |   |

 

See Report ofIndependent Registered Public Accounting Firm on Supplementary Information.

 

63

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

 

Consolidated Schedule of Grain Purchases

 

License No. GD-5050

 
| ** **                   | ** ** | **September 30  2005** | ** ** | **September 30  2004** | ** ** |
|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                         |       |                        |       |                        |       |
| Grain purchases (in bushels) |       | 17,450,845                  |       | 17,294,817                  |       |

 

64

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**LITTLE SIOUX CORN PROCESSORS, LLC ANDSUBSIDIARY**

 

Consolidated Schedule of Corn Payables

 

License No. GD-5050

 
| ** **                        | ** ** | **September 30, 2005** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **Bushels**            | ** ** | **Price** | ** ** |
|                              |       |                   |       |   |   |
| Deferred  payment contract - corn |       | 7,037                  |       |   |   |
|                              |       |                   |       |   |   |
| Corn payables                     |       | 311,999                |       | $ | 1.71 |   |
|                                   |            |                        |            |  |  |  |

 

See Report ofIndependent Registered Public Accounting Firm on Supplementary Information.

 

65

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**ITEM 9.****                                               ****CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

 

Boulay,Heutmaker, Zibell & Co., P.L.L.P. has been our independent auditorsince the Company’s inception and is the Company’s independent auditor at thepresent time.  The Company has had nodisagreements with its auditors.

 

**ITEM 9A.****                                      ****CONTROLS ANDPROCEDURES.**

 

Our management, including our President andChief Executive Officer (the principal executive officer), Stephen Roe, alongwith our Chief Financial Officer (the principal financial officer), GaryGrotjohn, have reviewed and evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended) as of September 30,2005.  Based upon this review and evaluation, these officers haveconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed in the reports that we file or submitunder the Exchange Act  is recorded,processed, summarized and reported within the time periods required by theforms and rules of the Securities and Exchange Commission; and to ensurethat the information required to be disclosed by an issuer in the reports thatit files or submits under the Exchange Act is accumulated and communicated toour management including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

Our management, including our principalexecutive officer and principal financial officer, have reviewed and evaluatedany changes in our internal control over financial reporting that occurred asof September 30, 2005 and there has been no change that has materiallyaffected or is reasonably likely to materially affect our internal control overfinancial reporting.

 

**ITEM 9B.****                                       OTHERINFORMATION.**

 

None.

 

**PART III****.**

 

**ITEM****10.****                                        ****DIRECTORS****AND****EXECUTIVE OFFICERS OF THE****REGISTRANT**

 

The information required bythis Item is incorporated by reference to the definitive proxy statement forour 2006 Annual Meeting of Members to be filed with the Securities and ExchangeCommission within 120 days after the end of our 2005 fiscal year.  This proxy statement is referred to in thisreport as the 2006 Proxy Statement.

 

**ITEM 11.****                                        ****EXECUTIVE COMPENSATION**

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

**ITEM 12.****                                        ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS**

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

**ITEM 13.****                                        ****CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

66

----

 

**ITEM 14.****                                        ****PRINCIPAL ACCOUNTING FEESAND SERVICES**

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

**PART IV.**

 

**ITEM 15.****                                        ****EXHIBITS****, FINANCIAL STATEMENT SCHEDULES****.**

 

The following exhibits andfinancial statements are filed as part of, or are incorporated by referenceinto, this report:

 

(1)              Financial Statements – Reference is made tothe “Index to Financial Statements” of Little Sioux Corn Processors, LLClocated under Part II Item 8 of this report for a list of the financialstatements and schedules for the fiscal year ended September 30, 2005included herein.

 

(2)              All supplemental schedules are omittedbecause of the absence of conditions under which they are required or becausethe information is shown in the Consolidated Financial Statements or notesthereto.

 

(3)              The exhibits we have filed herewith orincorporated by reference herein are identified in the Exhibit Index setforth below.

 

(b)         SeeItem 15(a)(3).

 

(c)          Notapplicable.

 

The following exhibits are filed as part of thisreport.  Exhibits previously filed areincorporated by reference, as noted.

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                       |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                        |
| 3.1                  |       | Articles of Organization of the registrant. Filed as Exhibit 2.1  to the registrant’s registration statement on Form 10-SB (Commission  File 0001229899) and incorporated by reference herein.                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 3.2                  |       | Second Amended and Restated Operating Agreement of the registrant.  Filed as Exhibit 2.2 to the registrant’s registrations statement on Form 10-SB  (Commission File 0001229899) and incorporated by reference herein.                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 3.3                  |       | Certificate of Limited Partnership. Filed as Exhibit 2.3 to the  registrant’s registration statement on Form 10-SB (Commission File  0001229899) and incorporated by reference herein.                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 3.4                  |       | Limited Partnership Agreement. Filed as Exhibit 2.4 to the  registrant’s registration statement on Form 10-SB (Commission File  0001229899) and incorporated by reference herein.                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 10.1                 |       | Ethanol Marketing Agreement between Little Sioux Corn Processors,  L.P. and Minnesota Corn Processors, L.L.C.* Filed as Exhibit 6.1 to the  registrant’s registration statement on Form 10-SB (Commission File  0001229899) and incorporated by reference herein.                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 10.2                 |       | Assignment of Ethanol Marketing Agreement between Little Sioux Corn  Processors, L.P. and Minnesota Corn Processors, L.L.C. to Archer Daniels  Midland Company. Filed as Exhibit 6.2 to the registrant’s registration  statement on Form 10-SB (Commission File 0001229899) and incorporated by  reference herein. |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 10.3                 |       | Distillers Grain Marketing Agreement between Little Sioux Corn  Processors, L.P. and                                                                                                                                                                                                                                              |

 

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|   |   | Commodity Specialist Company*. Filed as Exhibit 6.3 to the  registrant’s registration statement on Form 10-SB (Commission File  0001229899) and incorporated by reference herein.                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                               |
| 10.4   |   | Design/Build Contract between Little Sioux Corn Processors, L.P. and  Fagen, Inc.* Filed as Exhibit 6.4 to the registrant’s registration  statement on Form 10-SB (Commission File 0001229899) and incorporated by  reference herein.                          |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.5   |   | Construction Loan Agreement dated July 25, 2002 by and between  LSCP, L.P. and First National Bank of Omaha. Filed as Exhibit 10.5 to  the registrant’s Form 10-KSB filed on December 29, 2003 and  incorporated by reference herein.                     |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.6   |   | First Amendment to Construction Loan Agreement dated April 29,  2003 by and between LSCP, L.P. and First National Bank of Omaha. Filed as Exhibit 10.6  to the registrant’s Form 10-KSB filed on December 29, 2003 and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.7   |   | Second Amendment to Construction Loan Agreement dated June 1,  2003 by and between LCSP, L.P. and First National Bank of Omaha. Filed as Exhibit 10.7  to the registrant’s Form 10-KSB filed on December 29, 2003 and  incorporated by reference herein.  |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.8   |   | Third Amendment to Construction Loan Agreement dated June 23,  2003 by and between LCSP, L.P. and First National Bank of Omaha. Filed as Exhibit 10.9  to the registrant’s Form 10-KSB filed on December 29, 2003 and  incorporated by reference herein.  |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.9   |   | Revolving Promissory Note dated June 23, 2003 between LSCP, L.P.  and First National Bank of Omaha. Filed as Exhibit 10.9 to the  registrant’s Form 10-KSB filed on December 29, 2003 and  incorporated by reference herein.                              |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.10  |   | Term Note #2 dated June 23, 2003 between LSCP, L.P. and First  National Bank of Omaha. Filed as Exhibit 10.10 to the registrant’s Form 10-KSB  filed on December 29, 2003 and incorporated by reference herein.                                           |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.11  |   | Term Note #3 dated June 23, 2003 between LSCP, L.P. and First  National Bank of Omaha. Filed as Exhibit 10.11 to the registrant’s Form 10-KSB  filed on December 29, 2003 and incorporated by reference herein.                                           |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.12  |   | Term Note #4 dated June 23, 2003 between LSCP, L.P. and First  National Bank of Omaha. Filed as Exhibit 10.12 to the registrant’s Form 10-KSB  filed on December 29, 2003 and incorporated by reference herein.                                           |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.13  |   | Agreement Between Owner and Design/Builder on the Basis of a  Stipulated Price. Filed as Exhibit 10.2 to the registrant’s Form 10-Q  filed on February 14, 2005 and incorporated by reference herein.                                                          |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.14  |   | Sixth Amendment to Construction Loan Agreement (Term Note #5). Filed  as Exhibit 10.2 to the registrant’s Form 10-Q filed on February 14,  2005 and incorporated by reference herein.                                                                          |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.15  |   | LSCP, LLLP Deferred Bonus Compensation Plan. Filed as Exhibit 10.1  to the registrant’s Form 10-Q filed on August 15, 2005 and  incorporated by reference herein.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                               |
| 14.1   |   | Code of Ethics of Little Sioux Corn Processors, L.L.C. adopted December 18,  2003. Filed as Exhibit 14.1 to the registrant’s Form 10-KSB filed  on December 29, 2003 and incorporated by reference herein.                                                |
|   |   |                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certificate Pursuant to 17 CFR 240.13a-14(a)                                                                                                                                                                                                                                       |

 

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| 31.2   |   | Certificate Pursuant to 17 CFR 240.13a-14(a)        |
|--------|--------|-----------------------------------------------------|
|   |   |                                                |
| 32.1   |   | Certificate Pursuant to 18 U.S.C. Section 1350 |
|   |   |                                                |
| 32.2   |   | Certificate Pursuant to 18 U.S.C. Section 1350 |

 

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*Material has been omitted pursuant to a request for confidentialtreatment and such materials have been filed separately with the Securities andExchange Commission.

 

**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|   |                   | LITTLE SIOUX CORN PROCESSORS, L.L.C.                                  |
|--------|------------------------|-----------------------------------------------------------------------|
|   |                   |                                                                  |
|   |                   |                                                                  |
| Date:  | December 28, 2005 |                                                                  | /s/ Stephen Roe |
|   |                   | Stephen Roe                                                           |
|   |                   | President and Chief Executive Officer  (Principal Executive Officer)  |
|   |                   |                                                                  |
|   |                   |                                                                  |
| Date:  | December 28, 2005 |                                                                  | /s/ Gary Grotjohn |
|   |                   | Gary Grotjohn                                                         |
|   |                   | Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

Pursuant to the requirementsof the Securities Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| Date: December 28, 2005 | /s/ Vince  Davis                         |   |
|------------------------------|------------------------------------------|--------|
|                         | Vince Davis, Director                    |   |
|                         |                                     |   |
|                         |                                     |   |
| Date: December 28, 2005 | /s/ Doug  Lansink                        |   |
|                         | Doug Lansink, Director                   |   |
|                         |                                     |   |
|                         |                                     |   |
| Date: December 28, 2005 | /s/ Ron  Wetherell                       |   |
|                         | Ron Wetherell,Chairman and Director      |   |
|                         |                                     |   |
|                         |                                     |   |
| Date: December 28, 2005 | /s/ Darrell  Downs                       |   |
|                         | Darrell Downs, Director                  |   |
|                         |                                     |   |
|                         |                                     |   |
| Date: December 28, 2005 | /s/ Myron  Pingel                        |   |
|                         | Myron Pingel, Vice Chairman and Director |   |

 

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| Date: December 28, 2005 | /s/ Verdell  Johnson      |   |
|------------------------------|---------------------------|--------|
|                         | Verdell Johnson, Director |   |

 

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