**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**x**                              Quarterlyreport under Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

**For the quarterly periodended June 30, 2006**

 

**OR**

 

**o**                                 Transitionreport under Section 13 or 15(d) of the Exchange Act.

 

**For the transition periodfrom                  to                    **

 

**Commission file number**0001170106

 

**EAST KANSAS AGRI-ENERGY, LLC**

(Exact name of small business issuer as specified inits charter)

 

| **KANSAS**                       |   | **48-1251578**                        |
|----------------------------------|--------|---------------------------------------|
| (STATE OR OTHER  JURISDICTION OF |   | (I.R.S. EMPLOYER  IDENTIFICATION NO.) |
| INCORPORATION OR  ORGANIZATION)  |   |                                  |

 

**P.O. Box 225, 1304 S.Main, Garnett, Kansas 66032**

(Address of principal executive offices)

 

**(785) 448-2888**

(Issuer’s telephone number)

 

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

 

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

| Large Accelerated  Filer o |   | Accelerated  Filer o |   | Non-Accelerated  Filer x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

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

As of August 14, 2006, there were 21,898 membershipunits outstanding.

TransitionalSmall Business Disclosure Format (Check one):   o Yes    x No

 

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**INDEX**
|                                                                              | ** ** | Page No. | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                   | ** ** | ** **    | ** ** |
| **PART  I.     FINANCIAL INFORMATION**              | ** ** | **3**         | ** ** |
| ** **                                                                   | ** ** | ** **    | ** ** |
| **Item  1. Financial Statements**                                            | ** ** | **3**         | ** ** |
| **Item 2. Management’s Discussion and Analysis and Plan  of Operation** | ** ** | **18**        | ** ** |
| **Item 3. Controls and Procedures**                                          | ** ** | **23**        | ** ** |
| ** **                                                                   | ** ** | ** **    | ** ** |
| **PART  II.     OTHER INFORMATION**                 | ** ** | **23**        | ** ** |
| ** **                                                                   | ** ** | ** **    | ** ** |
| **Item  1. Legal Proceedings**                                               | ** ** | **23**        | ** ** |
| **Item  1A. Risk Factors**                                                   | ** ** | **24**        | ** ** |
| **Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds**     | ** ** | **24**        | ** ** |
| **Item 3. Defaults Upon Senior Securities**                                  | ** ** | **24**        | ** ** |
| **Item 4. Submission of Matters to a Vote of Security  Holders**             | ** ** | **24**        | ** ** |
| **Item  5. Other Information**                                               | ** ** | **25**        | ** ** |
| **Item 6.  Exhibits**                                                        | ** ** | **25**        | ** ** |

 

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**PART I.     FINANCIALINFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS.**

EAST KANSASAGRI-ENERGY, LLCBALANCE SHEET (UNAUDITED)JUNE 30, 2006
| **ASSETS**                                 |       |           |            |
|--------------------------------------------|------------|----------------|-----------------|
| CURRENT ASSETS                             |       |           |            |
| Cash and cash  equivalents                 | ** ** | **$**          | **7,174,290**   | ** ** |
| Trade accounts  receivable - related party | ** ** | **3,942,201**  | ** **      |
| Inventory                                  | ** ** | **1,997,181**  | ** **      |
| Investment in  commodity contracts         | ** ** | **260,608**    | ** **      |
| Interest  receivable                       | ** ** | **312,342**    | ** **      |
| Prepaid expense                            | ** ** | **217,469**    | ** **      |
| Total current  assets                      | ** ** | **13,904,091** | ** **      |
| PROPERTY, PLANT  AND EQUIPMENT             |       |           |            |
| Land                                       | ** ** | **580,322**    | ** **      |
| Land  improvements                         | ** ** | **2,164,402**  | ** **      |
| Office equipment                           | ** ** | **270,866**    | ** **      |
| Buildings                                  | ** ** | **1,706,226**  | ** **      |
| Equipment                                  | ** ** | **43,908,940** | ** **      |
| Vehicles                                   | ** ** | **22,743**     | ** **      |
| Construction in  progress                  | ** ** | **3,132,751**  | ** **      |
| ** **                                 | ** ** | **51,786,250** | ** **      |
| Less accumulated  depreciation             | ** ** | **(3,113,398** | **)**           |
| Total property,  plant, and equipment      | ** ** | **48,672,852** | ** **      |
| OTHER ASSETS                               |       |           |            |
| Investment in  Industrial Revenue Bonds    | ** ** | **47,866,117** | ** **      |
| Financing costs                            | ** ** | **613,606**    | ** **      |
| Less accumulated  amortization             | ** ** | **(66,057**    | **)**           |
| Total other  assets                        | ** ** | **48,413,666** | ** **      |
| Total assets                               | ** ** | **$**          | **110,990,609** | ** ** |

 

See Notes to Unaudited Financial Statements

3

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EAST KANSASAGRI-ENERGY, LLCBALANCE SHEET (UNAUDITED) (page 2)JUNE 30, 2006
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                              |       |           |            |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------|-----------------|
| CURRENT  LIABILITIES                                                                                                  |       |           |            |
| Current portion  of long-term debt                                                                                    | ** ** | **$**          | **1,689,662**   | ** ** |
| Accounts payable                                                                                                      |       |           |            |
| Trade                                                                                                                 | ** ** | **345,181**    | ** **      |
| Related parties                                                                                                       | ** ** | **409,407**    | ** **      |
| Accrued payroll,  taxes and withholdings                                                                              | ** ** | **162,639**    | ** **      |
| Accrued  dividends                                                                                                    | ** ** | **4,292,008**  | ** **      |
| Other accrued  expenses                                                                                               | ** ** | **553,363**    | ** **      |
| Accrued interest                                                                                                      | ** ** | **362,604**    | ** **      |
| Total current  liabilities                                                                                            | ** ** | **7,814,864**  | ** **      |
| LONG-TERM DEBT  (less current maturities)                                                                             | ** ** | **20,927,696** | ** **      |
| LEASE OBLIGATION                                                                                                      | ** ** | **47,866,117** | ** **      |
| MEMBERS’ EQUITY                                                                                                  |       |           |            |
| Capital  contributions, 40,000 units authorized, 23,798 units issued of which 1,900  units are held as treasury stock | ** ** | **24,707,100** | ** **      |
| Treasury stock,  at cost                                                                                              | ** ** | **(3,800,000** | **)**           |
| Retained  earnings                                                                                                    | ** ** | **13,474,832** | ** **      |
| Total members’  equity                                                                                           | ** ** | **34,381,932** | ** **      |
| Total liabilities and  members’ equity                                                                           | ** ** | **$**          | **110,990,609** | ** ** |

 

See Notes to Unaudited Financial Statements

4

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EAST KANSASAGRI-ENERGY, LLCSTATEMENT OF OPERATIONS (UNAUDITED)
| ** **                                            | ** ** | **Three Months  Ended  June 30,  2006** | ** **     | **Six Months  Ended  June 30,  2006** | ** ** | **Three Months  Ended  June 30,  2005** | ** ** | **Six Months  Ended  June 30,  2005** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------|----------------|-------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| REVENUE                                               |       |                                              |           |                                            |       |                                              |       |                                            |       |
| Related parties                                       | ** ** | **$**                                             | **23,277,515** | ** **                                      | **$**      | **44,293,213**                                    |       | $                                               | 738,982    |   | $ | 738,982 |   |
| Incentive funds                                       | ** ** | **252,207**                                       | ** **     | **933,037**                                     |       | 104,717                                           |       | 104,717                                         |       |
| ** **                                            | ** ** | **23,529,722**                                    | ** **     | **45,226,250**                                  |       | 843,699                                           |       | 843,699                                         |       |
| COST OF SALES                                         |       |                                              |           |                                            |       |                                              |       |                                            |       |
| Related parties                                       | ** ** | **(8,180,750**                                    | **)**          | **(16,322,262**                                 | **)**      | (419,600                                          | )          | (419,600                                        | )          |
| Other                                                 | ** ** | **(5,325,806**                                    | **)**          | **(11,825,567**                                 | **)**      | (569,006                                          | )          | (569,006                                        | )          |
| ** **                                            | ** ** | **(13,506,556**                                   | **)**          | **(28,147,829**                                 | **)**      | (988,606                                          | )          | (988,606                                        | )          |
| GROSS PROFIT                                          | ** ** | **10,023,166**                                    | ** **     | **17,078,421**                                  |       | (144,907                                          | )          | (144,907                                        | )          |
| OPERATING EXPENSES                                    |       |                                              |           |                                            |       |                                              |       |                                            |       |
| General, administrative and selling expenses          | ** ** | **792,217**                                       | ** **     | **1,667,266**                                   |       | 47,380                                            |       | 47,380                                          |       |
| Start-up expenses                                     |       | —                                            | ** **     | **—**                                      |       | 775,770                                           |       | 926,057                                         |       |
| ** **                                            | ** ** | **792,217**                                       | ** **     | **1,667,266**                                   |       | 823,150                                           |       | 973,437                                         |       |
| INCOME (LOSS) FROM OPERATIONS                         | ** ** | **9,230,949**                                     | ** **     | **15,411,155**                                  |       | (968,057                                          | )          | (1,118,344                                      | )          |
| OTHER INCOME (EXPENSE)                                |       |                                              |           |                                            |       |                                              |       |                                            |       |
| Interest income                                       | ** ** | **808,772**                                       | ** **     | **1,785,844**                                   |       | 30                                                |       | 882                                             |       |
| Interest expense                                      | ** ** | **(547,238**                                      | **)**          | **(1,123,418**                                  | **)**      | (45,418                                           | )          | (45,418                                         | )          |
| Plant lease interest expense                          | ** ** | **(783,343**                                      | **)**          | **(1,727,552**                                  | **)**      | 0                                                 |       | 0                                               |       |
| Other income                                          | ** ** | **736**                                           | ** **     | **736**                                         |       | 2,200                                             |       | 2,200                                           |       |
| ** **                                            | ** ** | **(521,073**                                      | **)**          | **(1,064,390**                                  | **)**      | (43,188                                           | )          | (42,336                                         | )          |
| NET INCOME (LOSS)                                     | ** ** | **$**                                             | **8,709,876**  | ** **                                      | **$**      | **14,346,765**                                    |       | $                                               | (1,011,245 | ) | $ | (1,160,680 | ) |
| BASIC AND DILUTED INCOME (LOSS) PER UNIT              | ** ** | **$**                                             | **398**        | ** **                                      | **$**      | **655**                                           |       | $                                               | (48        | ) | $ | (57 | ) |
| WEIGHTED AVERAGE  UNITS OUTSTANDING BASIC AND DILUTED | ** ** | **21,898**                                        | ** **     | **21,898**                                      |       | 20,957                                            |       | 20,335                                          |       |

 

See Notes to Unaudited Financial Statements

5

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EAST KANSASAGRI-ENERGY, LLCSTATEMENT OF CASH FLOWS (UNAUDITED)
| ** **                                                                  | ** ** | **Six Months  Ended  June 30,  2006** | ** **     | **Six Months  Ended  June 30,  2005** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------|----------------|-------------------------------------------------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES                                       |       |                                            |           |                                            |       |
| Net income (loss)                                                           | ** ** | **$**                                           | **14,346,765** |                                            | $          | (1,160,680 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities |       |                                            |           |                                            |       |
| Depreciation                                                                | ** ** | **1,535,378**                                   |           | 122,766                                         |       |
| Amortization                                                                | ** ** | **46,756**                                      | ** **     | **—**                                      | ** ** |
| (Increase) decrease in current assets                                       |       |                                            |           |                                            |       |
| Accounts receivable                                                         | ** ** | **(1,290,655**                                  | **)**          | (707,710                                        | )          |
| Incentive Receivable                                                        |       | —                                          |           | (104,717                                        | )          |
| Inventory                                                                   | ** ** | **(401,634**                                    | **)**          | (1,209,381                                      | )          |
| Commodity contracts                                                         | ** ** | **(37,657**                                     | **)**          | (84,855                                         | )          |
| Grants receivable                                                           |       | —                                          |           | 54,906                                          |       |
| Prepaid expense                                                             | ** ** | **194,704**                                     |           | (100,859                                        | )          |
| Interest receivable                                                         | ** ** | **2,394**                                       | ** **     | **—**                                      | ** ** |
| Increase (decrease) in current liabilities:                                 |       |                                            |           |                                            |       |
| Accounts payable                                                            | ** ** | **(491,061**                                    | **)**          | 1,216,061                                       |       |
| Accrued expenses                                                            | ** ** | **529,480**                                     |           | 57,302                                          |       |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                         | ** ** | **14,434,470**                                  |           | (1,917,167                                      | )          |
| CASH FLOWS FROM INVESTING ACTIVITIES                                        |       |                                            |           |                                            |       |
| Purchase of plant and equipment, including  construction in progress        | ** ** | **(3,758,304**                                  | **)**          | (33,413,116                                     | )          |
| Purchase of land and land option payments                                   |       | —                                          |           | (90,000                                         | )          |
| NET CASH (USED IN) INVESTING ACTIVITIES                                     | ** ** | **(3,758,304**                                  | **)**          | (33,503,116                                     | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |       |                                            |           |                                            |       |
| Cost of raising capital                                                     |       | —                                          |           | (134,338                                        | )          |
| Payment of financing fees                                                   | ** ** | **(14,507**                                     | **)**          | (25,097                                         | )          |
| Proceeds from refund of financing fees                                      | ** ** | **80,000**                                      | ** **     | **—**                                      | ** ** |
| Proceeds from notes payable                                                 |       | —                                          |           | 90,000                                          |       |
| Repayment of notes payable                                                  |       | —                                          |           | (90,000                                         | )          |
| Proceeds from long-term debt                                                |       | —                                          |           | 23,442,257                                      |       |
| Repayment of long-term debt                                                 | ** ** | **(4,336,514**                                  | **)**          | **—**                                      | ** ** |
| Acquisition of treasury units                                               | ** ** | **(3,800,000**                                  | **)**          | **—**                                      | ** ** |
| Proceeds from units subject to redemption                                   |       | —                                          |           | 6,250,000                                       |       |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                         | ** ** | **(8,071,021**                                  | **)**          | 29,532,822                                      |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        | ** ** | **2,605,145**                                   |           | (5,887,461                                      | )          |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              | ** ** | **4,569,145**                                   |           | 6,210,819                                       |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                   | ** ** | **$**                                           | **7,174,290**  |                                            | $          | 323,358 |   |

 

See Notes to Unaudited Financial Statements

6

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EAST KANSAS AGRI-ENERGY, LLCSTATEMENT OF CASH FLOWS (UNAUDITED) (page 2)
| ** **                                                                | ** ** | **Six Months  Ended  June 30,  2006** | ** **    | **Six Months  Ended  June 30,  2005** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------|---------------|-------------------------------------------------|------------|
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                         |       |                                            |          |                                            |       |
| Cash paid for interest, net of capitalized interest  of $248,674 for 2005 | ** ** | **$**                                           | **2,895,623** |                                            | $          | 1,174 |   |
| NON CASH INVESTING AND FINANCING ACTIVITIES                               |       |                                            |          |                                            |       |
| Property, plant, and equipment costs incurred                             | ** ** | **$**                                           | **912,712**   |                                            | $          | 2,298,343 |   |
| Deferred offering costs incurred                                          | ** ** | **$**                                           | **—**    |                                            | $          | 25,090 |   |
| Financing costs incurred                                                  | ** ** | **$**                                           | **—**    |                                            | $          | 45 |   |
| Property, plant, and equipment financed by a note  payable                | ** ** | **$**                                           | **—**    |                                            | $          | 1,760,274 |   |
| Accrued  dividends payable                                                | ** ** | **$**                                           | **4,292,008** |                                            | $          | — |   |

 

See Notes to Unaudited Financial Statements

7

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

**NOTE 1 -**                  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

*Nature of Business*

East Kansas Agri-Energy,LLC, (a Kansas limited liability company) located in Garnett, Kansas, was organizedto own and operate a 35 million gallon ethanol plant with distribution withinthe United States. East Kansas Agri-Energy, LLC (the “Company”) was formallyorganized as a limited liability company as of October 16, 2001. Prior to thatdate the Company operated as a general partnership with no formal partnershipagreement. The Company began its principal operations June 15, 2005.  Prior to that date, the Company wasconsidered to be in development stage.

*Basis ofAccounting*

The unauditedfinancial statements contained herein have been prepared pursuant to the rulesand regulations of the Securities and Exchange Commission.  Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States of America.

In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included in the accompanying financial statements.  The results of operations for the six monthsended June 30, 2006 and 2005, are not necessarily indicative of the resultsexpected for a full year.

These financialstatements should be read in conjunction with the financial statements andnotes included in the Company’s financial statements for the year endedDecember 31, 2005.

*AccountsReceivable*

Accountsreceivable are presented at face value, net of the allowance for doubtfulaccounts.  The allowance for doubtfulaccounts is established through provisions charged against income and ismaintained at a level believed adequate by management to absorb estimated baddebts based on historical experience and current economic conditions.  Management believes all receivables will becollected and therefore the allowance has been established to be zero at June30, 2006.

The Company’s policy is to charge simple interest ontrade receivables past due balances; accrual of interest is discontinued whenmanagement believes collection is doubtful. Receivables are considered past due based upon payment terms set forthat the date of the related sale.  TheCompany has no receivables accruing interest at June 30, 2006.

*PrepaidOffering Costs*

Costs incurredrelated to the sale of units are recorded as prepaid offering costs until therelated units are issued. Upon issuance of units, offering costs are deductedfrom additional paid-in capital, with any remaining amount applied to retainedearnings.  Offering costs include directcosts related to the offering such as legal fees, cost of meetings andmaterials and related costs associated with the Company’s private offering andpublic offering.

*Financing Costs*

Costs incurred related to origination of debt financing are recorded asan asset and amortized over the expected term of the debt.

*Estimates*

Management usesestimates and assumptions in preparing financial statements. Those estimatesand assumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of

8

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

the financialstatements, and the reported amounts of revenues and expenses. Actual resultscould differ from the estimates used.

*Earnings Per Unit*

Earnings per unitare calculated based on the period of time units have been issued andoutstanding. For purposes of calculating diluted earnings per capital unit,units subscribed for but not issued are included in the computation ofoutstanding capital units.

*General,administrative and selling expenses*

The primary components of general and administrative expenses aremanagement fees, insurance expense, selling expenses and payroll.

*RevenueRecognition*

Revenue from the production of ethanol and related products is recordedupon transfer of title to our customers. The transfer takes place at the plant site and therefore shipping termsare FOB shipping point.  Interest incomeis recognized as earned.  Income fromfederal and state incentives is recognized when received due to uncertainty ofavailable funds and pro-rations used by the sponsoring organizations.

*Costof Sales*

The primary components of cost of sales from the production of ethanoland related products are grain expense, energy expense (natural gas andelectricity), raw materials expense (chemicals and denaturant), labor anddepreciation on process equipment.

*Shippingand Handling*

Shipping and handling costs are expensed as incurred and are includedin the cost of sales.

*Organizationand Start-up Costs*

Organizational and start-up costs are expensed as incurred.  Organizational costs consist of amounts relatedto the formation of the company. Start-up costs consist of amounts incurred during the development stagerelated to the operation and management of the Company, which do not qualify ascapitalized costs.

*IncomeTaxes*

The Company is organized as a limited liability company under state lawand is treated as a partnership for income tax purposes.  Under this type of organization, the Company’searnings pass through to the partners and are taxed at the partner level.  Accordingly, no income tax provision has beencalculated.  Differences betweenfinancial statement basis of assets and tax basis of assets is related tocapitalization and amortization of organizational and start-up costs for taxpurposes, whereas these costs are expensed for financial statement purposes,and the difference between the recorded amounts of financial statement and taxdepreciation, unrealized gains or losses on commodity contracts and incentiveprograms payments.

*CashEquivalents*

For purposes of the statement of cash flows, the Company considers allhighly liquid debt instruments purchased with an original maturity of threemonths or less to be cash equivalents.

9

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

*FairValue of Financial Instruments*

The Company believes the carrying value of cash and cash equivalentsapproximates fair value due to the short maturity of these instruments.  The Company estimates the fair market valueof the investment in Industrial Revenue Bonds to approximate cost.

The Company believes the carrying amount of long-term note payableobligations approximates fair value.  Forthe permanent financing, fair value approximates the carrying amount due to thevariable interest rate feature of the debt.

*Inventory*

Inventory is stated atthe lower of cost, determined on a first in, first out basis, or market value.

*Investmentin Commodity Contracts*

SFAS No. 133 requires a company to evaluate itscontracts to determine whether the contracts are derivatives. Certain contractsthat literally meet the definition of a derivative may be exempted from SFASNo. 133 as normal purchases or normal sales. Normal purchases and normal salesare contracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business. Contracts that meet the requirements of normal aredocumented as normal and exempted from the accounting and reportingrequirements of SFAS No. 133.

The Company enters into short-term cash grain, optionand futures contracts as a means of securing grain for the ethanol plant andmanaging exposure to changes in commodity prices. All derivatives aredesignated as non-hedge derivatives. Although the contracts are effectiveeconomic hedges of specified risks, they are not designated as and accountedfor as hedging instruments.

As part of itstrading activity, the Company uses futures and option contracts offered throughregulated commodity exchanges to reduce risk and is exposed to risk of loss inthe market value of inventories. To reduce that risk, the Company generallytakes positions using cash and futures contracts and options. During theperiods ended June 30, 2006 and 2005 this activity resulted in net losses of$1,053,343 and $28,495, respectively, which are reported in cost of sales.

*Propertyand Equipment*

Depreciation iscomputed over the estimated useful life of each asset using the straight-linemethod.  Estimated useful lives generallyused in computing depreciation are:

| Land improvements        |   | 15 to 20 years |   |
|--------------------------|--------|----------------|--------|
| Buildings                |   | 40 years       |   |
| Machinery and  equipment |   | 7 to 15 years  |   |
| Office equipment         |   | 5 to 10 years  |   |
| Computers and  software  |   | 3 to 5 years   |   |
| Vehicles                 |   | 5 years        |   |

 

The Company’sproperty and equipment were acquired under lease agreements pursuant to anindustrial revenue bond issue.  TheCompany is required to make semi-annual deposits with the Trustee sufficient toservice the principal maturities and interest requirements.  Title to the property will be transferred tothe Company when the lease is terminated upon retirement of the bonds.  Accordingly, the bonds have been recorded asa direct obligation of the Company.  TheCompany is also the holder of the bonds.

The Companyreviews its property and equipment for impairment whenever events indicate thatthe carrying amount of the asset may not be recoverable.  An impairment loss is recorded if the sum ofthe future cash flows is less than 

10

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**EAST KANSASAGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

the carryingamount of the asset.  The amount of theloss is determined by comparing the fair market value of the asset to thecarrying amount of the asset.  Suchassessments did not result in any adjustment to the value of the non-currentassets.

*EnvironmentalLiabilities*

The Company’s operations are subject to federal, state and localenvironmental laws and regulations. These laws require the Company to investigate and remediate the effectsof the release 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 be reasonably estimated.

**NOTE 2 -**                  INCENTIVE PAYMENTS

The Company has qualified for the federal U.S.Department of Agriculture Bio Energy Program. The federal program is managed by the Commodity Credit Corporation andis designed to expand the production of fuel grade ethanol by offeringincentives for incremental production compared to the same quarter of the prioryear.  The annually funded program runsthrough fiscal year 2006 and incentive payments are pro-rated if applicationsfor incentives exceed the annual funding. The maximum annual incentive program payments the Company can receive is$7,500,000; individual producers are also subject to an annual limitation of 5%of the total funding.  The Company hasincluded federal incentives of $477,366 and $104,717 in revenue for the periodsended June 30, 2006 and 2005, respectively.

The Company has been approved for the Kansas QualifiedAgricultural Ethanol Producer Incentive Fund. The incentive rate is $.075 per gallon of ethanol produced.  The Company must establish they have produced5,000,000 gallons of ethanol before the State of Kansas will disburse thefunds.  The Company has included stateincentives of $455,671 and $0 in revenue for the periods ended June 30, 2006and 2005, respectively.

**NOTE 3 -**                  INVENTORY

As of June 30, 2006,inventory consists of:

| Raw Material     |   | $1,187,173 |   |
|------------------|--------|------------|--------|
| Work in Progress |   | 378,755    |   |
| Finished Goods   |   | 431,253    |   |
|             |   | $1,997,181 |   |

 

**NOTE 4 -**                  UNITS SUBJECT TOREDEMPTION

On October 11, 2004, the Company executed a UnitPurchase and Redemption Agreement with ICM, Inc. and Fagen, Inc. in which theCompany agreed to issue a total of 6,250 units to them in exchange for theircombined capital contribution of $6,250,000. The Company also agreed to redeemall 6,250 units from ICM, Inc. and Fagen, Inc. using the proceeds from the saleof units in a future registered offering or, to the extent the future offeringis unsuccessful, from cash flow generated by operations subject to certain loancovenants, restrictions and tax distributions. The redemption price was $1,100per unit.  In connection with thiscapital contribution, the Company amended the Operating Agreement to allow ICM,Inc. and Fagen, Inc. to appoint a total of three directors to the Company’sboard of directors, subject to the Company’s ability to terminate one of theirdirector positions for every $2,000,000 dollars in redemption payments made toeither or both of ICM, Inc. and Fagen, Inc. On January 19, 2005, the Companyclosed on the purchase of these units by ICM, Inc. and Fagen, Inc. and issued3,125 units to Fagen, Inc. and 3,125 units to ICM, Inc. at a purchase price of$1,000 per unit. The purchases were made with cash 

11

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

and the total amount of cash consideration for thosesecurities was $6,250,000.  On August 1,2005, the Company redeemed the 6,250 units from ICM, Inc. and Fagen, Inc. at aprice of $1,100 per unit for a total of $6,875,000.

On December 16, 2004, the Company filed a registrationstatement on Form SB-2 (Commission File 333-121323) with pre-effectiveamendments to the registration statement on February 1, 2005, April 6, 2005 andApril 19, 2005, which became effective April 20, 2005.

The Company accepted units for an aggregate price of$10,000,100 and used the proceeds of the registered offering to redeem theunits from ICM, Inc. and Fagen, Inc. in accordance with the agreement andretained the balance of the proceeds for working capital.  The $6,250,000 of equity associated with theunits subject to redemption was converted to a liability.  Interest expense of $625,000 was recorded forthe year ended December 31, 2005 when the liability was paid.

**NOTE 5 -**                  LONG-TERM DEBT

On November 23, 2004, the Company entered into aCredit Agreement with Home Federal Savings Bank, establishing a constructionloan facility for the construction of a 35 million gallon per year ethanolplant. The construction financing is in the amount of $26,000,000 consisting ofa $21,000,000 conventional term loan and a $5,000,000 loan potentiallyguaranteed 80% by the USDA, and is secured by substantially all of our assets.

During the construction phase, the Company mademonthly payments of interest only at a variable interest rate equal to primeplus 1.75% with a floor of 6%. On September 20, 2005, following constructioncompletion, the loan was segmented into two loans (1) a $5,000,000 loan(Loan A), and (2) a $21,000,000 conventional term loan (Loan B). The $5,000,000loan has an amortization period and maturity date of 10 years. The Companymakes monthly payments of principal and interest on the $5,000,000 loan at ainterest rate of prime.  The $21,000,000conventional loan has an amortization period of ten years but will mature atthe end of five years. The Company makes monthly payments of principal andinterest on the $21,000,000 loan at a rate equal to prime.  The effective interest rate for both loans atJune 30, 2006 was 8.25%.

The Company pays a $30,000 annual administration feerelated to the credit facility.  This feehas been reduced to $20,000, beginning with the payment due in December of2006.  The credit facility is secured bya mortgage on our real property and a security interest in all personal andintangible assets of the Company, including assignment of all materialcontracts.

The $5,000,000loan imposes a prepayment penalty depending on the year of refinancing startingwith the 5% penalty in year one and decreasing to 1% in year five. The$21,000,000 conventional loan imposes a prepayment penalty starting with a 3%penalty in year one and decreasing to 1% in year three.

On May 4, 2006,the Company agreed to renegotiate terms of their bank financing.  The new terms provide for a $4,000,000 termrevolving loan in addition to the existing term loans.  The interest rate on the term revolving loanis the prime rate.  The term revolvingloan available credit balance is reduced by $400,000 annually beginningDecember 31, 2007 and matures on October 1, 2010.

During the term of the loan, all deposit accountsrelated to the Company must be maintained at Home Federal Savings Bank. TheCompany is subject to certain financial loan covenants consisting of minimumworking capital, minimum fixed charge coverage, minimum current ratio, minimumdebt service, minimum net worth and maximum debt to net worth covenants duringthe term of the loan. The Company is also prohibited from making distributionsto their members; however, the Company is allowed to distribute 50% of our netincome to our members after our lender has received audited financialstatements for the fiscal year. If the Company meets certain financial ratiorequirements, it may distribute an additional 10% of net income.  The Company must be in compliance with allfinancial ratio requirements and loan covenants before and after anydistributions to the members.  The lendertemporarily waived, through December 31, 2006, certain minimum net worth andmaximum debt to net worth covenants.  Withthe waiver, the Company is in compliance with the applicable loan covenants asof June 30, 2006.

12

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

The Company isonly allowed to make annual capital expenditures up to $500,000 annuallywithout the lender’s prior approval. During the term of the loan, the Companyis required to pay to the lender an annual amount equal to the greater of: 1)75% of any Commodity Credit Corporation Bio-Energy income payments receivedduring the year, or 2) 25% of the Company’s free cash flow for each year.Payments consisting of USDA Commodity Credit Corporation Bio-Energy income mustbe paid to the lender within 15 days of receipt of any such payments. Thesepayments will continue until an aggregate sum of $7,500,000 has been receivedby the lender.  The Company is incompliance with the applicable loan covenants as of June 30, 2006.

On May 10, 2005 the Company entered into a contractwith ICM, Inc. to purchase a steam turbine electric generator for$1,760,274.  The note is payable inquarterly installments of $146,689.50 plus interest at a variable rate of primeplus 1%, starting October 1, 2005 and maturing July 1, 2008.  The variable interest rate will be adjustedquarterly on the first day of January, April, July and October.  The note was paid in full on March 1, 2006.

The Company financed its waste water reuse facilitythrough two bond issues by the City of Garnett. The Utility System Revenue Bonds require annual principal paymentsbeginning on October 1, 2006 and continue through 2015.  Interest payments on these bonds are duesemi-annually, at interest rates ranging from 4.6% to 5.2%.  The first interest payment was due April 1,2006.  The Community Development BlockGrant (CDBG) Bonds require semi-annual principal and interest paymentsbeginning on July 1, 2006 and continue through 2015.  The bonds have a fixed interest rate of 2%

Long-term obligations of the Company are summarized asfollows at June 30, 2006:

| Loan B                        |   | $          | 17,546,477 |   |
|-------------------------------|--------|------------|------------|--------|
| Loan A                        |   | 4,204,961  |       |
| Utility System  Revenue Bonds |   | 525,000    |       |
| CDBG Bonds                    |   | 340,920    |       |
| Less current portion          |   | (1,689,662 | )          |
| Long-term  portion            |   | $          | 20,927,696 |   |

 

The estimated maturities of long-term debt at June 30,2006, are as follows:

| 12 Month Period Ending 6/30 | ** ** | ** ** | ** ** | **Amount** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                            |       | $          | 1,689,662  |       |
| 2008                                            |       | 1,733,184  |       |
| 2009                                            |       | 1,875,511  |       |
| 2010                                            |       | 2,034,987  |       |
| 2011                                            |       | 12,588,908 |       |
| Thereafter                                      |       | 2,695,106  |       |
|                                            |       | $          | 22,617,358 |       |

 

**NOTE 6 -**                  MEMBERS’ EQUITY

As specified inthe Company’s Operating Agreement, voting rights are one vote for each votingunit registered in the name of such Member as shown on the MembershipRegistration maintained by the Company. No Member shall directly or indirectlyown or control more than 25% of the issued and outstanding voting membershipinterest in the Company at any time.

Income and lossesof the Company shall be allocated among the Members in proportion to eachMember’s respective percentage of units when compared with the total Unitsissued.

13

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

The Company’s cashflow shall first be applied to the payment of the Company’s operating expenses(including debt service) and then to maintenance of adequate cash reserves asdetermined by the board of directors in its sole discretion, and then shall bedistributed from time to time to the Members in proportion to their respectivepercentage units. No member has the right to demand and receive anydistribution from the Company other than in cash. No distribution shall be madeif, as a result thereof, the Company would be in violation of any loanagreement, and of if the Company would be in violation of any loan agreement,of if the Company’s total assets would be less than the sum of its totalliabilities.

Transfer,disposition or encumbrance of Capital Units is subject to certain restrictions,including approval by the board of directors.

The Companycompleted its second public offering and escrow was broken in July 2005.  A total of 9,091 units were subscribed andpaid for during the year ended December 31, 2005.  Uponissuance of the units related to the second public offering, costs related tothe issuance of the units of $168,453 was charged to members’ equity.

The board ofdirectors approved the redemption of 1,900 units from a member.  The redemption represents the member’s entireunit balance.  On May 10, 2006, theCompany purchased the member’s units for a total of $3,800,000.

**NOTE 7 -**                  CONCENTRATION OFCREDIT RISK

The Companymaintains cash balances at five financial institutions in its trade area. Theaccounts are secured by the Federal Deposit Insurance Corporation up to$100,000. At times, the Company’s bank balance may exceed $100,000.

**NOTE 8 -**                  COMMITMENTS ANDCONTINGENCIES

On November 12,2004, the Company entered into a Trading Agreement with United Bio EnergyTrading, LLC, an affiliated related party, in which United Bio Energy Trading,LLC will provide market information and consulting services for the Company.The Company anticipates that the term of the agreement will be for at leastfive years and will pay a monthly fee of $6,000.

On November 12,2004, the Company entered into a Distillers Grains Marketing Agreement withUnited Bio Energy Ingredients, LLC, an affiliated related party, pursuant towhich United Bio Energy Ingredients, LLC will purchase all dried and wetdistillers grains produced at the plant for a term of at least five years at aprice of 98% of the FOB plant price United Bio Energy Ingredients, LLC chargesits buyers of dried distillers grains, and 95% of the FOB plant price UnitedBio Energy Ingredients, LLC charges its buyers of wet distillers grains. UnitedBio Energy Ingredients, LLC, will use its best efforts to achieve the highestresale price available under prevailing market conditions. The Company isresponsible for supplying all labor and equipment to load or unload trucks orrail cars without charge to United Bio Energy Ingredients, LLC and is requiredto provide storage for at least 10 days production of wet and dry distillergrains. In addition, the distiller grains must meet quality requirements sothat they will meet current industry standards for primary animal feedingredients. If the Company fails to supply distiller grains that comply withindustry standards, United Bio Energy Ingredients, LLC may reject them.  The Company paid commissions of $151,307 and$2,952, respectively, for the periods ended June 30, 2006 and 2005 related tothis marketing agreement.

On November 12,2004, the Company entered into a Raw Grains Agreement with United Bio EnergyIngredients, LLC, an affiliated related party. The Raw Grains Agreementprovides for the Company to purchase all raw grains necessary for ethanolproduction from United Bio Energy Ingredients, LLC for a period of at leastfive years. Pursuant to the agreement, United Bio Energy Ingredients, LLC willuse its best efforts to arrange for the purchase of grain at the lowest priceavailable under prevailing market conditions and we will supply all labor andequipment necessary to load or unload trucks or rail cars. For its service, theCompany will pay United Bio Energy Ingredients, LLC the actual cash procurementprice and all reasonable and necessary expenses to get the grain to the plantplus a $.02 per bushel fee. The title, risk of loss, and responsibility for thequality of grain will transfer to the Company 

14

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

when it unloadsthe grain at the plant. Prior to that time, United Bio Energy Ingredients, LLCwill bear the risk of loss. All grain delivered to the plant shall meet certainquality standards and the Company will have the option to reduce the price theCompany will pay or fully reject any delivery that fails to conform to thesestandards, depending upon the severity of the noncompliance.  For the periods ended June 30, 2006 and 2005,the Company paid $140,338 and $10,629, respectively, in brokerage fees forgrain purchases made under this agreement.

On November 12,2004, the Company also entered into an Ethanol Agreement with United Bio EnergyFuels, LLC, an affiliated related party. The terms of the agreement providethat United Bio Energy Fuels, LLC will market all fuel-grade ethanol producedat our plant. In exchange, the Company agrees to pay United Bio Energy Fuels,LLC a fee of $.01 for each gallon of ethanol produced at the Company’s plantduring the term of the agreement. The Company expects that the term of theagreement will be at least 5 years. United Bio Energy Fuels, LLC also agreed touse its best efforts to obtain the highest price for ethanol available underprevailing market conditions.  For theperiods ended June 30, 2006 and 2005, the Company paid $196,048 and $4,629,respectively, in marketing fees for ethanol marketing under this agreement.

On November 12,2004, the Company entered into a Management Agreement with United Bio EnergyManagement, LLC, a related party, in which United Bio Energy Management, LLCwill supervise and direct the general operations of the plant for ananticipated period of at least five years. United Bio Energy Management, LLCwill provide the services of a full-time general manager to the plant.  The Company has agreed to compensate UnitedBio Energy Management, LLC an annual fee of $250,000 for these services payablein monthly installments of $20,833, plus an incentive bonus based on theattainment of certain financial benchmarks. United Bio Energy Management, LLCwill appoint a general manager to be based on site at our plant, and shall workexclusively for us. In the event of a dispute, the Management Agreementprovides that the Company will first attempt to amicably settle any dispute ordifference privately between United Bio Energy Management, LLC and the Company.If the Company cannot resolve the dispute as a result of the discussions, then theCompany must submit the matter to non-binding mediation. In the event that thedispute is not settled through mediation, the matter must be resolved bynon-appealable arbitration in accordance with the rules of the AmericanArbitration Association as applicable in the State of Kansas. The determinationof the arbitrator is expected to be final and may not be appealed to any court.The prevailing party in any arbitration proceeding is entitled to recoverreasonable attorneys’ fees and expenses incurred. The agreement commencedduring March 2005. For the periods ended June 30, 2006 and 2005, the Companyincurred costs of $400,000 and $44,833, respectively, related to this agreementincluding reimbursable expenses, of which $89,324 is in related party accountspayable.

The Company has an agreement with the City of Garnett,Kansas to share the cost of certain highway improvements. Management estimatesthe obligation under this agreement will be approximately $135,000.

On July 28, 2005,the Company entered into an agreement with HDB Construction, Inc. foradditional work on the railroad spur project not to exceed an amount of$1,567,268.  As of June 30, 2006 costsrelated to the agreement of $1,567,268 and additional costs related to theproject of $298,116 had been incurred and paid for.

Due to a builder’sdesign change during construction of the ethanol plant an extra beerwell wasinstalled and remains the property of the design/builder.  The Company has the option to purchase thebeerwell as part of the expansion option in the original design/buildagreement.  If the Company does not electto exercise the expansion option the purchase price will be negotiated at thattime.  On May 10, 2006, an agreement wasreached on a purchase price of $1,800,000 for the additional beerwell.  This amount has been paid for in full as ofJune 30, 2006.

The Company hasissued purchase orders in the amount of $1,145,803 for planned capitalexpenditures.

The following is a schedule of the annual commitments related to theabove agreements.

15

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

| 12 months ending June 30, | ** ** |
|-----------------------------------------------|------------|
| 2007                                          |       | $ | 663,275 |   |
| 2008                                          |       | 654,108 |   |
| 2009                                          |       | 654,108 |   |
| 2010                                          |       | 546,775 |   |
| 2011                                          |       | 332,108 |   |
| Thereafter                                    |       | 1,276,413 |   |
|                                          |       | $ | 4,126,787 |   |

 

The Company is involved in various claims arising inthe normal course of business. Management believes that any financial responsibility that may beincurred would not be material and therefore no additional accrual is deemednecessary.

**NOTE9 -**                  SALE / LEASEBACKTRANSACTION

On December 20, 2005, the Company completed anindustrial revenue bond financing with the City of Garnett, Kansas that willprovide property tax savings for 10 years on the plant site.  As part of the financing, title to the plantsite and improvements have been transferred to the City of Garnett, Kansas, assecurity for the repayment of the bonds, and the Company is leasing back thesite in an amount that is equal to the amount of the principal and interest tobe paid on The City of Garnett, Kansas bonds. Home Federal Savings Bank consented to this transaction, and the bondshave been pledged to Home Federal Savings Bank as security for any obligationsunder the Home Federal Savings Bank Credit Agreement.  As part of the financing, the Company paidthe bond underwriter, Gilmore & Bell, P.C. $40,000.  The maximum principal amount of the bonds is$50,000,000.  The bonds were initiallyissued in the principal amount of $47,866,117, which is the amount of theCompany’s expenditures on the plant as of December 20, 2005.  Additional project costs of $2,133,883 areplanned and are expected to be eligible for submission for the bond trustee foradditional bond issuances.

The $40,000 of financing fees paid to the bondunderwriter and $20,656 of legal and other cost associated with the bondclosing will be amortized over the approximately 10.5 year life of thebonds.  A total of $2,867 of amortizationexpense related to these costs was recognized during the period ended June 30,2006.

From the proceeds of the bond, the Company purchasedthe bonds as an investment.  The Company,as holder of the industrial revenue bonds, is due interest at 8.0% per annumwith interest payable semi-annually on June 1st and December 1st, commencing June 1, 2006.  The interest income is directly offset by thelease payments on the plant.  Both thebond and the corresponding lease have terms commencing December 20, 2005 andterminating on June 1, 2016.  The entireoutstanding principal is due upon termination of the bonds.  The outstanding principal at June 30, 2006was $47,866,117.  The lease qualifies asa capital lease.  Interest income recognizedon the Industrial Revenue Bonds for the period ended June 30, 2006 was$1,727,552.  This amount is equal to thelease expense of the plant.

Future debt servicerequirements on the Industrial Revenue Bonds at June 30, 2006 are as follows:

16

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**EASTKANSAS AGRI-ENERGY, LLCNOTES TO UNAUDITED FINANCIAL STATEMENTSJUNE 30, 2006**

| 12 months ending  June 30, | ** ** | ** ** | ** ** | **Interest  Rate** | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------------|------------|---------------|------------|--------------|------------|-----------|------------|
|                                      |       |       |       |               |       |          |       |         |       |
| 2007                                      |       | 8%         |       | $                  | —     |          | $          | 3,829,289    |       | $         | 3,829,289  |   |
| 2008                                      |       | 8%         |       | —             |       | 3,829,289     |       | 3,829,289    |       |
| 2009                                      |       | 8%         |       | —             |       | 3,829,289     |       | 3,829,289    |       |
| 2010                                      |       | 8%         |       | —             |       | 3,829,289     |       | 3,829,289    |       |
| 2011                                      |       | 8%         |       | —             |       | 3,829,289     |       | 3,829,289    |       |
| Thereafter                                |       | 8%         |       | 47,866,117         |       | 19,146,449    |       | 67,012,566   |       |
| Totals                                    |       |       |       | $                  | 47,866,117 |          | $          | 38,292,894   |       | $         | 86,159,011 |   |
| Amount representing interest              |       |       |       |               |       |          |       | (38,292,894  | )          |
| Long-Term  Obligation                     |       |       |       |               |       |          |       | $            | 47,866,117 |      |

 

**NOTE 10 — RETIREMENT PLAN**

During 2005, the Company began a SIMPLE 401(k),Savings Incentive Match Plan for Employees, retirement plan for all eligibleemployees.  All employees are eligible toparticipate in the plan.  The Companymakes a matching contribution of 3% of participants’ eligible wages.  The employees are fully vested uponcontribution to the plan.  The Companymatch for the periods ended June 30, 2006 and 2005 was $20,585 and $0,respectively.

**NOTE 11 — SUBSEQUENT EVENTS**

On July 28, 2006, theCompany paid the full amount of the accrued dividend totaling $4,292,008.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISAND PLAN OF OPERATION.**

Weprepared the following discussion and analysis to help you better understandour financial condition, changes in our financial condition, and results ofoperations for the three and six months ended June 30, 2006.  This discussion and analysis should be readin conjunction with the financial statements and notes to financial statementsincluded elsewhere in this report and the information contained in our annualreport on Form 10-KSB for the fiscal year ended December 31, 2005.  Since we only became operational in June2005, we do not have comparable income, production and sales data for the threemonths and six months ended June 30, 2005. Accordingly, we do not provide a comparison of our financial resultsbetween reporting periods in this report. If you undertake your own comparison of three months and six monthsending June 30, 2005 and the three months and six months ending June 30, 2006,it is important that you keep that in mind.

**ForwardLooking Statements**

This report contains or incorporates by reference “forward-lookingstatements” that involve future events, our future performance and our expectedfuture operations and actions.  In some cases you can identifyforward-looking statements by the use of words such as “may,” “will,” “should,”“anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,”“predict,” “hope,” “potential,” “continue,” or the negative of these terms orother similar expressions.  These forward-looking statements are only ourpredictions and involve numerous assumptions, risks and uncertainties,including, but not limited to those described in the “Risk Factors” section ofour Annual Report on Form 10-KSB, those listed below and those business risksand factors described elsewhere in this report and our other Securities andExchange Commission filings.
| · |   | Projected growth, overcapacity or contraction in the  ethanol market in which we operate;                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Fluctuations in the price and market for ethanol and  distillers grains;                                                                                                        |
| · |   | Changes in plant production capacity, variations  actual ethanol and distillers grains production from expectations or  technical difficulties in operating the plant;          |
| · |   | Availability and costs of products and raw  materials, particularly corn and natural gas;                                                                                       |
| · |   | Changes in our business strategy, capital  improvements or development plans for expanding, maintaining or contracting  our presence in the ethanol market in which we operate; |
| · |   | Our ability to market and our reliance on third  parties to market our products;                                                                                                |
| · |   | Our ability to distinguish ourselves from our  current and future competition;                                                                                                  |
| · |   | Changes in or elimination of governmental laws,  tariffs, trade or other controls or enforcement practices such as:                                                             |
|   |   | -                                                                                                                                                                               |   | national, state or local energy policy; |
|   |   | -                                                                                                                                                                               |   | federal ethanol tax incentives; |
|   |   | -                                                                                                                                                                               |   | legislation mandating the use of ethanol or other  oxygenate additives; |
|   |   | -                                                                                                                                                                               |   | state and federal regulation restricting or banning  the use of MTBE; or |
|   |   | -                                                                                                                                                                               |   | environmental laws and regulations that apply to our  plant operations and their enforcement; |
| · |   | Increased competition in the ethanol and oil  industries;                                                                                                                       |
| · |   | Fluctuations in US oil consumption and petroleum  prices;                                                                                                                       |
| · |   | Changes in plant production capacity or technical  difficulties in operating the plant;                                                                                         |
| · |   | Changes in general economic conditions or the  occurrence of certain events causing an economic impact in the agriculture,  oil or automobile industries;                       |
| · |   | Anticipated trends in our financial condition and  results of operations                                                                                                        |
| · |   | Changes and advances in ethanol production  technology; and                                                                                                                     |
| · |   | Competition from alternative fuels and alternative  fuel additives.                                                                                                             |

 

Our actual results or actions could and likely willdiffer materially from those anticipated in the forward-looking statements formany reasons, including the reasons described in this report.  We are notunder any duty to update the forward-looking statements contained in thisreport.  We cannot guarantee future results, levels of activity, performanceor achievements.  We caution you not to put undue reliance on anyforward-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.

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**Overview**

Since June 2005, wehave been engaged in the production of ethanol and distillers grains.  Our ethanol plant is managed by United BioEnergy Management, LLC, an affiliate of US BioEnergy Corporation of Brookings,South Dakota, which builds and operates biofuel production facilities which maybe in competition with our plant.   Wepurchase all of our corn and milo from United Bio Ingredients, LLC, anotheraffiliate of US BioEnergy Corporation. Our revenues are derived from the sale and distribution of our ethanoland distillers grains, which are sold to United Bio Energy Fuels, LLC (also anaffiliate of US BioEnergy Corporation) and United Bio Energy Ingredients, LLC,respectively, which subsequently markets and sells our products.  The principal markets for ourethanol are regional petroleum terminals located in major population centers inKansas and neighboring states, including such cities as Kansas City, Missouri; Wichita, Kansas; Tulsa,Oklahoma; and St. Louis, Missouri.

Our operating results arelargely driven by the prices at which we sell ethanol and distillers grain andthe costs related to their production.  Historically, the price of ethanolhas fluctuated with the price of petroleum-based products such as unleadedgasoline, heating oil, and crude oil. The price of distillers grains is primarily influenced the price of cornas a substitute livestock feed.  Weexpect these price relationships to continue for the foreseeable future.

Our largest costsof production are corn, natural gas, and manufacturing chemicals.  The cost of corn is largely impacted bygeopolitical supply and demand factors. Natural gas and chemical/denaturant pricing levels are tied directly tothe overall energy sector; crude oil, and unleaded gasoline.

**Resultsof Operations**

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 statements ofoperations for the fiscal quarter ended June 30, 2006:

| Income Statement Data | ** ** | ** ** | ** **    | **Amount** | ** ** | **% of  Revenues** | ** ** |
|---------------------------------|------------|------------|---------------|------------|------------|-------------------------|------------|
|                            |       |       |          |       |       |
| Revenues                        |       | $          | 23,529,722    |       | 100        | %                       |
| Cost of Sales                   |       | $          | 13,506,556    |       | 58         | %                       |
| Gross Profit                    |       | $          | 10,023,166    |       | 42         | %                       |
|                            |       |       |          |       |       |
| Operating Expenses              |       | $          | 792,217       |       | 3          | %                       |
| Operating Income                |       | $          | 9,230,949     |       | 39         | %                       |
|                            |       |       |          |       |       |
| Other Income (Expense)          |       | $          | (521,073      | )          | (2         | )%                      |
| **Net Income**                  | ** ** | **$**      | **8,709,876** | ** ** | **37**     | **%**                   |

 

Revenues.  Our revenues from operations come from threeprimary sources:  ethanol sales,distillers grain sales and ethanol incentive payments from federal and stategovernments.  For the three months endedJune 30, 2006 our total revenues were $23,529,722.  The following table shows the sources of ourrevenue:

| Revenue Sources                  | ** ** | ** ** | ** ** | **Amount** | ** ** | **% of  Total Revenue** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|-----------------------------------|------------|
|                                  |       |       |       |       |       |
| Ethanol Sales                         |       | $          | 21,163,142 |       | 90         | %                                 |
| Distillers Grain Sales                |       | $          | 2,114,373  |       | 9          | %                                 |
| Ethanol Incentive  Payments - Federal |       | $          | 252,207    |       | 1          | %                                 |
| Ethanol Incentive  Payments - State   |       | -0-        |       | 0          | %          |
| Total Revenues                        |       | $          | 23,529,722 |       | 100        | %                                 |

 

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Ethanol prices remained high during the second quarterof 2006.  We believe the favorable pricesresulted from higher gasoline prices which encourages voluntary blending, thegrowing recognition of ethanol as an alternative energy source, and the unmetdemand.  Based on existing marketconditions, we expect favorable pricing to continue through the third fiscalquarter because the price of unleaded gasoline is expected to remain near itscurrent price levels as we finish the summer driving season.

Income from the United States Department ofAgriculture’s Commodity Credit Corporation Bioenergy Program is significantlyless than the amount we are eligible for based on our production.  Weexpect minimal payments from this program in 2006 because of increased participation by ethanol producers,decreased funding, and a termination of the program on June 30, 2006.  We do not expect any further paymentsfrom this program in 2006 due to termination of the program on June 30,2006.

We also derive income fromthe State of Kansas through the Kansas Qualified Agricultural Ethyl AlcoholProducer’s Program.  We have received themaximum reimbursement for the state’s 2006 fiscal year, but will be eligiblefor incentives beginning with our quarter ending September 30, 2006.  We are not expecting more than minimalpayments under this program.

Cost of Sales.   Cost of sales for our products for thethree months ended June 30, 2006 was $13,506,556 or 58% of our revenue.

Operating Expenses.  Operating expenses for three months endedJune 30, 2006 were equal to 3% of our revenue and totaled $792,217.  We expect that these expenses will remainconstant and keep in line with sales and production.

Net Income.  Net income was 37% of revenues for thequarter ending June 30, 2006.  Net incomefor the quarter was $8,709,876.

Other Income (Expense).  Other income and expense for the three monthperiod ending June 30, 2006 consisted of an expense of $521,073.  Interest expense is the primary expense inthis category.

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

The followingtable highlights the changes in our financial condition for the three monthsended June 30, 2006:

|                      | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Current Assets       |       | $                           | 13,904,091 |                            | $          | 9,766,098 |   |
| Current Liabilities  |       | $                           | 7,814,864  |                            | $          | 4,428,030 |   |
| Long-Term Debt       |       | $                           | 20,927,696 |                            | $          | 23,438,059 |   |
| Members’ Equity |       | $                           | 34,381,932 |                            | $          | 28,127,175 |   |

 

Current Assets.  Current assets totaled $13,904,091 at June30, 2006 up from $9,766,098 at December 31, 2005.  The change resultedfrom increased Cash and Cash Equivalents which was $7,174,290 at June 30, 2006compared to $4,569,145 at December 31, 2005. We were accumulating cash in anticipation of a distribution of earningsto our members.  In addition, our tradeaccounts receivable increased to $3,942,201 at June 30, 2006 compared to$2,651,546 at December 31, 2005 and our interest receivable decreased to$312,342 from $412,173 for the same periods respectively.

Current Liabilities.  Current liabilities totaled $7,814,864 atJune 30, 2006, up from the $4,428,030 at December 31, 2005.  Thischange is largely due to a dividend accrued but not paid at June 30, 2006 inthe amount of $4,292,008, a decrease in the current portion of long-term debtwhich totaled $1,689,662 at June 30, 2006 down from $2,615,813 at December 31,2005 and a decrease in related parties accounts payable which was $409,407 and$813,775 for the same periods.  .

Long-Term Debt.  Long-term debt, net of current maturities,totaled $20,927,696 at June 30, 2006, down from $23,438,059 at December 31,2006, due to our regularly scheduled loan payments, reductions to the principal

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amounts due to the free flow cash covenants of ourcredit agreement and a reduction required when we renegotiated our MasterCredit Agreement with our Bank.

Members’ Equity.  The members’ contributions are$24,707,100.  Retained earnings as of June 30, 2006 is $13,474,832compared to $3,420,075 at December 31, 2005. Total members’ equity as of June 30, 2006, is $34,381,932 up from$28,127,175 at December 31, 2006.

**Liquidity and Capital Resources**

Our liquidity needs are primarily met throughinternally generated cash flow.  Our primary uses of cash are cost ofsales, operating expenses, debt service and capital expenditures.  Thefollowing table shows cash flows for the three months ended June 30, 2006:

|                                         | ** ** | **June 30, 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| Net cash from operating  activities     |       | $                           | 14,434,470 |   |
| Net cash used for  investing activities |       | $                           | (3,758,304 | ) |
| Net cash used for financing activities  |       | $                           | (8,071,021 | ) |

 

Cash Flow From Operations*. *Ouroperating activities for the six months ended June 30, 2006, generated$14,434,470 of net cash flow, which included energy production credits fromstate and federal programs, as discussed above. The net cash from operating activities primarily includes net incomefrom operations adjusted for depreciation and amortization of $1,582,134.

The loan agreement with our Home Federal Savings Bank limits distributions to our members; except we may distribute up to 50% of our net income if our lender has received audited financial statements for the fiscal year demonstrating our compliance with all financial ratio requirements and loan covenants before and after any distributions to the members.  We take all of these factors into consideration, in addition to our anticipated cash requirements for future operations, in evaluating the propriety of any future distributions to members.

Cash Flow Used ForInvesting Activities*. *Weused $3,758,304 of cash for investing activities for the six months ended June30, 2006, all of which was used to purchase personal property and equipment forthe plant.  Most of the equipment purchases are forinfrastructure improvements to optimize the performance of our facility.

Dueto a builder’s design change during construction of the ethanol plant, an extrabeerwell was installed at the plant which remained the property of ICM,Inc.  On May 10, 2006, we agreed topurchase the beerwell for $1,800,000.  Including the purchase of the beerwell, weestimate that approximately $6 million in capital expenditures will be made inthe next twelve months, all of which are expected to be financed from a portionof cash flows from operations or from cash provided through a revolving creditagreement with Home Federal Savings Bank.

Cash Flow Used For Financing Activities*.*By far, the largest use of cash during the three months ended June 30, 2006 was our financing activities, which used $8,071,021 of cash from our debt financing transactions, described below.

Long-Term Debt.  Our long term debt consists of two term loanswith Home Federal Savings Bank of Rochester, Minnesota: (1) a $21,000,000conventional term loan (“Loan A”), and (2) a $5,000,000 term loan (“Loan B”).  As of June 30, 2006, the principal balance onLoan A was $17,546,477 and the principal balance on the Loan B was$4,204,960.  At June 30, 2006, theeffective interest rate for both loans was 8.25%.

On June 10, 2006, we entered into a MasterAmended and Restated Credit Agreement, First Supplement to the Master Amendedand Restated Credit Agreement, Second Supplement to the Master Amended andRestated Credit Agreement and Third Amendment to Future Advance Mortgage withHome Federal Savings Bank (together, the “Amended Credit Agreements”). Underthe Amended Credit Agreements, our effective interest rate on our existing TermLoan A and Term Loan B is reduced to prime, as adjusted quarterly. Under theprior credit agreement, interest on Term Loan A accrued at a variable rateequal to prime plus 1.75% with a floor of 6% and on Term Loan B at prime plus 1.75%.The Amended Credit Agreements also provide for a $4,000,000 revolving creditline. The 

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revolving credit line carries an interest rate ofprime, as adjusted quarterly. The term revolving loan available credit balancewill be reduced by $400,000 annually beginning December 31, 2007 andmatures on October 1, 2010.

In connection with this the Amended Credit Agreements,we were required to pay down the principal amount outstanding on Term Loan Aand Term Loan B to $4,250,000 and $17,750,000, respectively.  In addition, we paid a $5,000 origination feefor the revolving credit line. The Amended Credit Agreements are subject to thesame terms and conditions of our previous Credit Agreement datedNovember 23, 2004 with Home Federal Savings Bank, including the specificprovisions regarding distributions to members, maintenance of deposit accounts,annual capital expenditures, certain financial loan covenants, pre-paymentpenalties, events of default and the granting of liens to secure ourperformance. We will also be prohibited from making distributions to ourmembers, however, we will be allowed to distribute 50% of our net income to ourmembers after our lender has received audited financial statements for thefiscal year. We must be in compliance with all financial ratio requirements andloan covenants before and after any distributions to the members. In the eventof default, Home Federal Savings Bank may accelerate the due date of the loansand declare all obligations immediately due and payable.

Industrial Revenue Bonds.  On December 20, 2005, we completed anindustrial revenue bond financing with the City of Garnett, Kansas, which weexpect to provide property tax savings for 10 years on the plant site. As partof the financing, title to the plant site and improvements have beentransferred to the City of Garnett, Kansas, as security for the repayment ofthe bonds, and we are leasing back the site in an amount that is equal to theamount of the principal and interest to be paid on the bonds (the “sale-leasebacktransaction”). We purchased all of the Bonds offered by the City ofGarnett.  Home Federal Savings Bankconsented to the sale-leaseback transaction, and the bonds have been pledged toHome Federal Savings Bank as security for our obligations under the term debtcredit facility. The maximum principal amount of the bonds is $50,000,000, ofwhich $47,866,117 has been issued.  Boththe bonds and the corresponding lease have terms of 10 years.  The interest income due to us as holder ofthe bonds is directly offset by the lease payments we owe on the plant.  Both the bond and the corresponding leasehave 10-year terms commencing December 20, 2005.  The entire outstanding principal is due upontermination of the bonds.  Theoutstanding principal at June 30, 2006 was $47,866,117.

Waste Water BondFinancing.  We financedour waste water reuse facility through two bond issues by the City of Garnett -Utility System Revenue Bonds (“USR Bonds”) and Community Development BlockGrant Bonds (“CDBG Bonds”).  The USR Bondsrequire annual principal payments beginning on October 1, 2006 and continuethrough 2015.  Interest payments on thesebonds are due semi-annually beginning April 1, 2006, at interest rates rangingfrom 4.6% to 5.2%.  The CDBG Bondsrequire semi-annual principal and interest payments beginning on July 1, 2006and continue through 2015, at a fixed interest rate of 2%.

**Distribution to Unit Holders**

On June 10, 2006 our board of directors approved atotal cash distribution of $196.00 per membership unit to all unit holders ofrecord as of June 10, 2006 for a total distribution of $4,292,008.   This distribution was paid on July 28,2006.  We expect that this distributionwill not affect our ability to maintain financial covenants and meet operatingcosts.

**Commodity Price Risk Protection**

We seek to minimize therisks from price fluctuations in the prices of raw material inputs and finishedproducts through the use of hedging instruments.  We are using non-hedgederivative accounting for our hedge positions, which means as the currentmarket price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of sales. The immediate recognition ofhedging gains and losses under fair value accounting can cause net income to bevolatile from quarter to quarter due to the timing of the change in value ofthe derivative instruments relative to the cost and use of the commodity beinghedged.  As of June 30, 2006, the fairvalue of our derivative instruments relating to corn are reflected as an assetin the amount of $327,656.

Asof June 30, 2006, we have price protection in place for approximately 40% ofour corn needs through December 2006.  Aswe move forward, additional protection may be necessary.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on theimpact such market movements have on the value of our derivativeinstruments.  Depending on marketmovements, crop prospects and 

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weather, theseprice protection positions may cause immediate adverse effects, but areexpected to produce long-term positive growth for East Kansas.

As of June 30, 2006, we currently have no priceprotection in place for our natural gas needs in fiscal year 2006.  As we move forward in fiscal year 2006, wemay determine that price protection for natural gas purchases is necessary toattempt to reduce our susceptibility to price increases.  However, 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 and reduce our net income.

**Applicationof Critical Accounting Estimates**

There were nomaterial changes in our accounting estimates during the six months ended June30, 2006.

**Off Balance Sheet Arrangements.**

We do not have any off-balance sheet arrangementsother than those described in the notes to our Financial Statements at June 30,2006 located above in Note 4, describing our unit purchase and redemptiontransaction with ICM, Inc. and Fagen, Inc., and Note 9, describingthe sale-leaseback transaction with the City of Garnett.

**ITEM 3.  CONTROLSAND PROCEDURES.**

Wemaintain disclosure controls and procedures designed to ensure that informationrequired to be disclosed in our reports under the Securities and Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms. Thesedisclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that the information required to be disclosed isaccumulated and communicated to management, including our Principal ExecutiveOfficer, Principal Financial Officer and General Manager, to allow for timelydecisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, thePrincipal Executive Officer, Principal Financial Officer and General Managerrecognize that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is necessarily required to apply judgment inevaluating the cost-benefit relationship of possible controls and objectives.

Ourmanagement (including the Principal Executive Officer, Principal FinancialOfficer and General Manager) has evaluated the effectiveness of our disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)), as of the end of the period covered by this Quarterly Report on Form10-QSB.  Based on such evaluation, ThePrincipal Executive Officer, Principal Financial Officer and General Managerhave agreed that, as of the end of such period, our disclosure controls andprocedures are effective in recording, processing, summarizing and reporting,on a timely basis, information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act.

Ourmanagement (including the Principal Executive Officer, Principal FinancialOfficer and General Manager) has reviewed and evaluated any changes in ourinternal control over financial reporting that occurred as of June 30, 2006 andthere has been no change that has materially affected or is reasonably likelyto materially affect our internal control over financial reporting.

**PART II — OTHER INFORMATION**

**ITEM 1.  LEGALPROCEEDINGS.**

None.

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**ITEM IA.                RISKFACTORS.**

Therehave been no material changes from the factors discussed in Part I, “Item 1A.Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2005.  In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form10-KSB for the year ended December 31, 2005, which could materially affectour business, financial condition or future results. The risks described in ourAnnual Report on Form 10-KSB are not the only risks facing us.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

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

*Repurchases ofEquity Securities*

Thefollowing is a breakdown of the units repurchased during the period:
| **Period**       | ** ** | **Total Number of  Units Purchased(1)** | ** ** | **Average Price Paid  per Unit** | ** ** | **Total Units Purchased  as Part of Publicly  Announced Plans  or Programs(2)** | ** ** | **Max. Units that May Yet  be Purchased Under the  Plans or Programs(2)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| **May 11, 2006** | ** ** | **1,900**                                              | ** ** | **$**                                           | **2,000**  | ** **                                                                                                         | **0**      | ** **                                                                                                             | **0**      | ** ** |
|                  |            |                                                        |            |                                                 |            |                                                                                                                    |            |                                                                                                                        |            |  |

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1)      Redemptionof all 1,900 units held by Energy Investors, LLC at a total redemption price of$3,800,000.  

(2)    We do nothave any plans or programs to repurchase units.

**ITEM 3.  DEFAULTSUPON SENIOR SECURITIES.**

None.

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

We held our 2006 annual members meeting on Saturday, June 10, 2006 for thepurpose of electing directors.  Votes were solicited in person and byproxy.  Pursuant to our Amended andRestated Operating Agreement, as amended, eleven (11) director positions wereopen.  We had sixteen nominees for the vacant positions.  The followingpersons were nominated and the eleven nominees receiving the greatest number ofvotes were elected to serve on our board of directors:

|                   | ** ** | **NUMBER OF  VOTES FOR** | ** ** |
|-------------------|------------|------------------------------------|------------|
| William R. Pracht |       | 14,587                             |       |
| Daniel Guetterman |       | 14,460                             |       |
| Glenn A. Caldwell |       | 14,425                             |       |
| Scott A. Burkdoll |       | 14,382                             |       |
| Roger J. Brummel  |       | 14,203                             |       |
| Jill A. Zimmerman |       | 13,276                             |       |
| Charles P. Torrey |       | 12,643                             |       |
| Steve Doering     |       | 12,038                             |       |
| Daniel V. Morgan  |       | 11,516                             |       |
| Scott Brittenham  |       | 11,031                             |       |
| Donald S. Meats   |       | 11,014                             |       |
| Walter Wulf       |       | 3,935                              |       |
| Brad Foote        |       | 3,842                              |       |
| John Burns        |       | 3,492                              |       |
| Harold Wilmarth   |       | 2,120                              |       |
| Byron C. Long     |       | 570                                |       |

 

For the matter on which votes were entitled to becast, there were no abstentions or broker non-votes.

Pursuantto our operating agreement, prior to the annual meeting the board passed aresolution dividing the board into three (3) classes which will servestaggered terms as follows:  fourdirectors will serve one-year terms until 2007 (“Group I”), three directorswill serve two-year terms until 2008 (“Group II”), and four directors willserve three-year terms until 2009 (“Group III”).  At the first regular meeting of the Board ofDirectors following the 2006 Annual Meeting, the directors determined byresolution which director seats shall be classified as Group I, Group II orGroup III directors.  As a result the board will serve terms as follows:

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| DIRECTOR          | ** ** | ** **              | ** ** | **POSITION** | ** ** | **TERM  ENDS** |
|-------------------|------------|-------------------------|------------|--------------|------------|----------------|
| Steve Doering     |       | Director                |       | 2007         |
| Daniel V. Morgan  |       | Director                |       | 2007         |
| Scott Brittenham  |       | Director                |       | 2007         |
| Donald S. Meats   |       | Director                |       | 2007         |
| Jill A. Zimmerman |       | Director, Secretary     |       | 2008         |
| Charles P. Torrey |       | Director                |       | 2008         |
| Daniel Guetterman |       | Director                |       | 2008         |
| William R. Pracht |       | Director, Chairman      |       | 2009         |
| Glenn A. Caldwell |       | Director                |       | 2009         |
| Scott A. Burkdoll |       | Director, Vice-Chairman |       | 2009         |
| Roger J. Brummel  |       | Director                |       | 2009         |

 

**ITEM 5.                  OTHER INFORMATION.**

None.

**ITEM 6.  EXHIBITS.**

The following exhibits are filed as part of this report.  Exhibits previously filed are incorporated byreference, as noted.
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                            | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.1             |       | Master  Amended and Restated Credit Agreement dated June 10, 2006 by and between East  Kansas Agri-Energy, LLC and Home Federal Savings Bank                           |       |
|             |       |                                                                                                                                                                   |       |
| 10.2             |       | First  Supplement to the Master Amended and Restated Credit Agreement dated June 10,  2006 by and between East Kansas Agri-Energy, LLC and Home Federal Savings  Bank  |       |
|             |       |                                                                                                                                                                   |       |
| 10.3             |       | Second  Supplement to the Master Amended and Restated Credit Agreement dated June 10,  2006 by and between East Kansas Agri-Energy, LLC and Home Federal Savings  Bank |       |
|             |       |                                                                                                                                                                   |       |
| 10.4             |       | Third  Amendment to Future Advance Mortgage and Security Agreement dated June 10,  2006 by and between East Kansas Agri-Energy, LLC and Home Federal Savings  Bank     |       |
|             |       |                                                                                                                                                                   |       |
| 31.1             |       | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)                                                                                                                        |       |
|             |       |                                                                                                                                                                   |       |
| 31.2             |       | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)                                                                                                                        |       |
|             |       |                                                                                                                                                                   |       |
| 31.3             |       | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)                                                                                                                        |       |
|             |       |                                                                                                                                                                   |       |
| 32.1             |       | Certificate  Pursuant to 18 U.S.C. Section 1350                                                                                                                   |       |
|             |       |                                                                                                                                                                   |       |
| 32.2             |       | Certificate  Pursuant to 18 U.S.C. Section 1350                                                                                                                   |       |
|             |       |                                                                                                                                                                   |       |
| 32.3             |       | Certificate Pursuant to  18 U.S.C. Section 1350                                                                                                                   |       |

 

**SIGNATURES**

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|                       | EAST KANSAS AGRI-ENERGY, LLC            |
|-----------------------|-----------------------------------------|
|                  |                                    |
| Date: August 11, 2006 | /s/ William R. Pracht                   |
|                  | William R. Pracht                       |
|                  | President (Principal Executive Officer) |

 

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| Date: August 11, 2006 | /s/ Thomas D. Leitnaker                                                 |
|-----------------------|-------------------------------------------------------------------------|
|                  | Thomas D. Leitnaker                                                     |
|                  | Chief Financial Officer (Principal Financial &  Accounting Officer) |
|                  |                                                                    |
| Date: August 11, 2006 | /s/ Mike Goblirsch                                                      |
|                  | Mike Goblirsch                                                          |
|                  | General Manager                                                         |

 

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