**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-KSB**

 

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

 

**For thefiscal year ended December 31, 2005**

 

**o****  Transition reportunder Section 13 or 15(d) of the Exchange Act.**

 

**1934 ActCommission number 000-51278**

 

**EAST KANSAS AGRI-ENERGY, LLC**

(Name of small business issuerin its charter)

 

| **Kansas**                          | ** ** | **48-1251578**                           |
|-------------------------------------|------------|------------------------------------------|
| **(State or other jurisdiction of** | ** ** | **(I.R.S. Employer Identification No.)** |
| **incorporation or organization)**  | ** ** | ** **                               |

 

**P.O. Box225, 1304 S. Main, Garnett, Kansas 66032**

(Address of principal executiveoffices)

 

**(785)448-2888**

(Issuer’s telephone number)

 

Securities registered under Section 12(b) ofthe Exchange Act:

 

**None**

Securities registered under Section 12(g) ofthe Exchange Act:

 

**Membership Units**

 

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

 

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

 

Check whether the issuer:  (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.                                                    ý  Yes          £  No

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bis not contained in this form, and no disclosure will be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

o  Yes          ý  No

 

State issuer’s revenues for its most recent fiscal year.     **$35,591,321**

 

As of December 31, 2005, the aggregate market value of themembership units held by non-affiliates (computed by reference to the mostrecent offering price of membership units) was **$17,393,200**

 

As of December 31, 2005, there were 23,798 membership unitsoutstanding.

 

DOCUMENTS INCORPORATED BYREFERENCE:    None.

 

Transitional Small Business Disclosure Format (Check one):                                                                   o  Yes          ý  No

 

 

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**INDEX**

 
| **PART 1**                                                                                                                         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** |
| **ITEM 1.  DESCRIPTION OF BUSINESS**                                                                                                    | ** ** |
| **ITEM 1A. RISK  FACTORS**                                                                                                              | ** ** |
| **ITEM 2.  DESCRIPTION OF PROPERTY**                                                                                                    | ** ** |
| **ITEM 3. LEGAL  PROCEEDINGS**                                                                                                          | ** ** |
| **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                        | ** ** |
| ** **                                                                                                                              | ** ** |
| **PART II**                                                                                                                        | ** ** |
| ** **                                                                                                                              | ** ** |
| **ITEM 5. MARKET  FOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS**                                                                     | ** ** |
| **ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**                                                             | ** ** |
| **ITEM  7. FINANCIAL STATEMENTS**                                                                                                       | ** ** |
| **ITEM 8. CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**                                      | ** ** |
| **ITEM  8A. CONTROLS AND PROCEDURES**                                                                                                   | ** ** |
| **ITEM  8B. OTHER INFORMATION**                                                                                                         | ** ** |
| ** **                                                                                                                              | ** ** |
| **PART III**                                                                                                                       | ** ** |
| ** **                                                                                                                              | ** ** |
| **ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,  PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE  EXCHANGE ACT** | ** ** |
| **ITEM  10. EXECUTIVE COMPENSATION**                                                                                                    | ** ** |
| **ITEM 11. SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS**                                 | ** ** |
| **ITEM  12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**                                                                            | ** ** |
| **ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**                                                                                      | ** ** |
| **ITEM  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                    | ** ** |
| ** **                                                                                                                              | ** ** |
| **SIGNATURES**                                                                                                                          | ** ** |

 

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**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

 

•                  Overcapacitywithin the ethanol industry;

•                  Actualethanol and distillers grains production varying from expectations;

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

•                  Changesin the price and market for ethanol and distillers grains;

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

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

–                 national, state or local energy policy;

–                 federal ethanol tax incentives;

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

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

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

•                  Changesin the weather or general economic conditions impacting the availability andprice of corn and natural gas;

•                  TotalU.S. consumption of gasoline;

•                  Fluctuationsin petroleum prices;

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

•                  Costsof construction and equipment;

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

•                  Resultsof our hedging strategies;

•                  Changesin interest rates or the availability of credit;

•                  Ourability to generate free cash flow to invest in our business and service ourdebt;

•                  Ourliability resulting from litigation;

•                  Ourability to retain key employees and maintain labor relations;

•                  Changesand advances in ethanol production technology;

•                  Competitionfrom alternative fuels and alternative fuel additives.

•                  Otherfactors described elsewhere in this report.

 

The cautionary statements referred to in this section alsoshould be considered in connection with any subsequent written or oralforward-looking statements that may be issued by us or persons acting onour behalf. We undertake no duty to update these forward-looking statements,even though our situation may change in the future. Furthermore, we cannotguarantee future results, events, levels of activity, performance, orachievements. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report. You should readthis report and the documents that we reference in this report and have filedas exhibits, completely and with the understanding that our actual futureresults may be materially different from what we currently expect. Wequalify all of our forward-looking statements by these cautionary statements.

 

**AVAILABLEINFORMATION**

 

Information about us is alsoavailable at our website at**www.ekaellc.com, under “SECCompliance,” which includes links to reports we have filed with the Securitiesand Exchange Commission. The contents of our website are not incorporated byreference in this Annual Report on Form 10-KSB.

 

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**PART 1.**

 

**ITEM 1.****    ****DESCRIPTION OF BUSINESS.**

 

**Overview**

 

East Kansas Agri-Energy,L.L.C. was formed as a Kansas limited liability company on October 16,2001. References to “we”, “us”, “our” and “East Kansas” refer to East KansasAgri-Energy, L.L.C. Our principal business office is currently located at 1304South Main Street, Garnett, Kansas 66032. We are managed by an 11 member Boardof Directors.

 

In June 2005, we completed the construction ofour 35 million gallon per year ethanol plant and shortly thereafter, wecommenced operations. We currently produce ethanol and distillers grains forsale throughout the continental UnitedStates.

 

We financed the development and construction of theethanol plant with a combination of equity and debt capital. We raised equityproceeds of $610,000 in our seed capital offering and $13,457,000 in ourinitial registered offering. We entered into debt financing agreements withHome Federal Savings Bank of Rochester, Minnesota on November 23, 2004,pursuant to which it lent us $26,000,000 of construction financing, which wasconverted to two term loans on September 20, 2005. To supplement ourequity financing and debt financing and complete our capitalization plan, weissued 6,250 units to ICM, Inc. of Colwich, Kansas and Fagen, Inc. ofGranite Falls, Minnesota for additional equity proceeds of $6,250,000, which wesubsequently redeemed on August 1, 2005 at a total redemption price of$6,875,000 pursuant to a Unit Purchase and Redemption Agreement with ICM, Inc.and Fagen, Inc. To raise the proceeds necessary to redeem the units, wecommenced a registered offering for additional membership units on April 20,2005 and on July 20, 2005, we closed our public offering. During theoffering, we sold 9,091 units an aggregate price of $10,000,100. Afterredeeming the units from ICM, Inc. and Fagen, Inc., we retained thebalance of the offering proceeds for working capital.

 

We have engaged United Bio Energy Management, LLC, United Bio EnergyFuels, LLC, United Bio Energy Ingredients, LLC and United Bio Energy Trading,LLC to provide us services including ethanol plant general management, ethanoland distillers grains marketing, grain origination services and overall riskmanagement. These companies are owned by United Bio Energy, LLC of Wichita,Kansas. United Bio Energy, LLC was owned by an affiliate of ICM, Inc. andan affiliate of Fagen, Inc. However, in the second quarter of 2005, UnitedBio Energy, LLC merged with US BioEnergy Corporation of Brookings, SouthDakota, which builds and operates biofuel production facilities which may bein competition with our plant. We are highly dependent on United Bio Energy,LLC and its subsidiaries. As a result of the merger between United Bio Energy,LLC and US BioEnergy Corporation, a conflict of interest may developbetween us and US BioEnergy Corporation and it may adversely affect ourability to make a profit.

 

Over the past 12 months we have installed theinfrastructure necessary to support plant operations. This includes electricalsubstations, water pipelines and wells, a water treatment facility, roadimprovements and a natural gas pipeline. We have also obtained the permitsrequired to construct and operate the plant. We have hired all of the personnelnecessary to operate the plant. We currently employ 34 full-time employees.

 

Fuel grade ethanol is our primary product accounting for the majorityof our revenue. We also sell distillers grains, a principal co-product of theethanol production process, which may be sold as distillers dried grainsand distillers modified wet grains.  Although we had a short operation year,commencing operations in June 2005, we processed approximately 7 millionbushels of corn into approximately 19.4 million gallons of ethanol in 2005. Wealso processed approximately 93,000 tons of distillers grains in 2005. In 2006,we anticipate producing approximately 37 million gallons of ethanol and 182,000tons of distillers grains, from approximately 13 million bushels of corn. Thereis no assurance that we will be able to operate at these levels.

 

We are subject to industry-wide factors that affect our operating andfinancial performance. These factors include, but are not limited to, theavailable supply and cost of corn from which our ethanol and distillers grainsare 

 

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processed; the cost of natural gas, which weuse in the production process; dependence on our ethanol marketer anddistillers grains marketer to market and distribute our products; the intenselycompetitive nature of the ethanol industry; possible legislation at thefederal, state, and/or local level; changes in federal ethanol tax incentivesand the cost of complying with extensive environmental laws that regulate ourindustry.

 

**Description of Dry Mill Process**

 

An ethanol plantis essentially a fermentation plant which makes ethanol byprocessing corn, milo and various other grains. The corn and/or milo is received bysemi-trailer truck, and is weighed and cleaned of rocks and debris before it isconveyed to one of two concrete storage silos. The corn/milo is thentransported to a hammermill or grinder where it is ground into flour andconveyed into a slurry tank for processing. We add water, heat and enzymes tobreak the ground corn/milo into a mash. This mash is heat sterilized and pumpedto a tank where other enzymes are added to convert the starches into glucosesugars. Next, the mash is pumped into one of four fermenters, where yeast isadded, to begin a forty-eight to fifty hour batch fermentation process. Carbondioxide is produced during the fermentation process. A distillation processvaporizes the alcohol from the corn mash. The alcohol is further dried in arectifier and molecular sieve. The resulting 200 proof alcohol is then pumpedto shift tanks and blended with five percent gasoline as it is pumped intodenatured ethanol storage tanks. The denaturant is used to make the productunfit for human consumption and commercially saleable.

 

The mash exiting thedistillation process is pumped into one of several centrifuges. Water from thecentrifuges, called thin stillage, is condensed into a thicker syrup calledcondensed solubles. The solids that exit the centrifuge are called wet cake ordistillers wet grains. Typically, this wet cake is conveyed to dryers wherecondensed solubles are added and moisture is removed to produce distillersdried grains, which may be used as animal feed.

 

**Principal Productsand Markets**

 

The principal products we produce at the plantare fuel-grade ethanol and distillers grains. Raw carbon dioxide gas isby-product of the ethanol production process, but, at present, we do notcapture or market it.

 

***Ethanol***

 

Ethanol isethyl alcohol, a fuel component made primarily from corn and various othergrains, and can be used as: (i) an octane enhancer in fuels; (ii) anoxygenated fuel additive for the purpose of reducing ozone and carbon monoxidevehicle emissions; and (iii) a non-petroleum-based gasoline substitute. Ethanol isused primarily as a high quality octane enhancer and an oxygenate capable ofreducing air pollution and improving automobile performance. Approximately 95% of all ethanol is used in its primary form forblending with unleaded gasoline and other fuel products. The implementation ofthe Federal Clean Air act has made ethanol fuels an important domesticrenewable fuel additive. Used as a fuel oxygenate, ethanol provides a means tocontrol carbon monoxide emissions in large metropolitan areas.

 

EthanolMarkets. The principal marketsfor our ethanol are regional petroleum terminals located in major populationcenters in Kansas and neighboring states, including such cities as Kansas City,Missouri; Wichita, Kansas; Tulsa, Oklahoma; and St. Louis, Missouri. The principal purchasers of ethanol are generally oil refinersand wholesale gasoline marketers and distributors that use ethanol for blendingwith gasoline. The passage of the Volumetric EthanolExcise Tax Credit (“VEETC”) in 2004 is expected to provide the flexibilitynecessary to expand ethanol blending into higher blends of ethanol such as E85,E diesel and fuel cell markets. In addition, the implementation of a RenewableFuels Standard in August 2005 is expected to favorably impact the ethanolindustry by enhancing the use of ethanol by allowing refiners to use renewablefuel blends in those areas where it is most cost-effective. See, “DESCRIPTION OF BUSINESS – Governmental Supports andRegulation, Federal Ethanol Supports.”

 

As described below in “Sales and Distribution ofPrincipal Products,” we market and distribute our ethanol through thirdparties.

 

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***DistillersGrains***

 

A principalco-product of the ethanol production process is distiller grains, a highprotein, high-energy animal feed supplement. Distillers grains contains nutrients that have important growth promotingproperties for dairy and beef cattle, poultry and swine. Our dry mill ethanol processing creates two forms of distiller grains:Distillers Wet Grains and Distillers Dried Grains with Solubles. Distillers WetGrains is processed corn mash that contains approximately 70% moisture. DistillersWet Grains has a shelf life of approximately three days and is generally soldlocally. Distillers Dried Grains are Distillers Wet Grains dried to 10% to 12%moisture resulting in a longer shelf life.

 

Distillers Grains Markets. The market fordistillers grains is generally confined to locations where freight costs allowit to be competitively priced against other feed ingredients. Distillers grainscompetes with other feed formulations: corn gluten feed, dry brewers grain andmill feeds. The primary value of these products as animal feed is their proteincontent. Dry brewers grain and distillers grains have about the same proteincontent, and corn gluten feed and mill feeds have slightly lower proteincontents. Distiller grains contain by-pass protein that is superior to otherprotein supplements. For dairy cattle, the high digestibility and net energy content of by-passproteins found in distillers grains, as well as its high fat content, yields greater milkproduction as compared to other feed ingredients. For beef cattle, feedlotstudies have found that the improved rumen health, energy effect of the fiberand palatability promotes faster and more efficient growth. For poultry andswine, feeding trials have found that distillers grains is a useful and economicsource of protein, fat and beneficial unidentified growth and health factors. Althoughpoultry and swine account for a small portion of the distillers grains market,we believe that with the advancement of research into the feeding rations ofpoultry and swine, these markets may grow.

 

As described below in “Sales Distribution ofPrincipal Products,” we market and distribute our distillers grains throughthird parties.

 

**Sales and Distribution of Principal Products**

 

Our ethanolplant is located in Garnett, Kansas in eastern Kansas. The plantsite is located in the Golden Prairie Industrial Park on the edge of Garnett.We selected Garnett because of its location relative to existing grainproduction and its close proximity to major highways that connect to majorpopulation centers such as Kansas City, Missouri; Wichita, Kansas; Tulsa,Oklahoma; and St. Louis, Missouri. Although,the site has accessibility to rail transportation, our distribution needsare currently satisfied by truck transportation and we do not anticipateconstructing a rail spur to access such rail transportation for the foreseeablefuture.

 

***EthanolDistribution***

 

We market the ethanolproduced at the plant through United Bio Energy Fuels, LLC (“UBE Fuels”)Pursuant to our marketing agreement with UBE Fuels, UBE Fuels purchases andmarkets all of the fuel-grade ethanol produced at our plant. UBE Fuels isresponsible for determining the price and terms at which the ethanol acquiredfrom the plant is sold and to whom it is sold. The price received by us fromthe sale of ethanol is based upon the price that UBE Fuels receives from thesale of ethanol to its customers, minus a $0.01 fee per gallon sold and anyexpenses incurred in connection with the sale and delivery of the ethanol. Themarketing agreement between us and UBE Fuels is in effect until 2009 and isrenewed automatically for one-year terms, unless either party provides ninetydays written notice of termination prior to the end of the current term.

 

***DistillersGrains Distribution***

 

We contract with United BioEnergy Ingredients, LLC (“UBE Ingredients”) to market all of the dried and wetdistillers grains produced at the plant. For our distillers grains, wereceive 98% of the price UBEIngredients charges its buyers of dried distillers grains, and 95% of the priceUBE Ingredients charges its buyers of wet distillers grains. The distillersgrains marketing contract is in effect until 2009 and automatically renews foradditional one-year terms, unless discontinued by either party upon at leastninety days prior written notice. UBE Ingredients has also hired a distillersgrains merchandiser who is located at our plant and is expected to sell aportion of our distillers grains to local markets.

 

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**Seasonal Factors in Business**

 

In an effort to improve airquality in regions where carbon monoxide and ozone are a problem, such as St.Louis, Missouri, the Federal Oxygen Program of the Clean AirAct requires the sale of oxygenated motor fuels during the winter months toreduce carbon monoxide pollution. Becauseethanol is a fuel oxygenate additive, we expect fairly light seasonality withrespect to our gross profit margins on our ethanol.

 

**New Products andServices**

 

We have notintroduced any new products or services during this fiscal year.

 

**Dependence on One ora Few Major Customers**

 

As discussedabove, we have marketing agreements with UBE Fuels and UBE Ingredients and werely on UBE Fuels and UBE Ingredients for the sale and distribution of all ofour products. In the event our relationship with UBEFuels or UBE Ingredients is interrupted or terminated for any reason, webelieve that another entity to market our ethanol and distillers grains couldbe located. Any interruption, however, could temporarily disrupt the sale ofethanol and distillers grains and adversely affect our business and operations.See “Sales and Distribution of PrincipalProducts.”

 

**Governmental Supportsand Regulation**

 

***FederalEthanol Supports***

 

The ethanol industry benefits from severaleconomic incentives to produce ethanol, including federal ethanol supports. Themost recent ethanol supports are contained in the Energy Policy Act of 2005. The provision of the Energy Policy Act of2005 that is likely to have the greatest impact on the ethanol industry is thecreation of a 7.5 billion gallon Renewable Fuels Standard (the “RFS”). The RFSbegan at 4 billion gallons in 2006 and will increase to 7.5 billion gallons by2012. The RFS is a national flexible program that does not require that anyrenewable fuels be used in any particular area or state, allowing refiners touse renewable fuel blends in those areas where it is most cost-effective.According to the Renewable Fuels Association, the RFS is expected to lead toabout $6 billion in new investment in ethanol plants across the country. Anincrease in the number of new plants will bring an increase in the supply ofethanol. Thus, while the RFS may cause ethanol prices to increase in theshort term due to additional demand, future supply could outweigh the demandfor ethanol in the future. This would have a negative impact on our earnings.Alternatively, since the RFS began at 4 billion gallons in 2006 and nationalproduction is expected to exceed this amount, there could be a short-term oversupplyuntil the RFS requirements exceed national production. This would have animmediate adverse effect on our earnings.

 

On December 30, 2005,the Environmental Protection Agency published an “interim rule” in the FederalRegister imposing a 2.78% default provision (equating to 4 billion gallons ofrenewable fuel) of the RFS. The interim rule was prepared as a DirectFinal Rule, meaning it became effective upon publication due to the absence of compellingnegative comments filed within 30 days. The Direct Final Rule applies acollective compliance approach, meaning no refiner individually has to meet thestandard, but that the industry as a whole will have to blend at least 2.78%renewable fuels into gasoline this year. Any shortfall in meeting this requirementwould be added to the 4.7 billion gallon RFS requirement in 2007. There are noother consequences for failure to collectively meet the 2006 standard. Althoughthere is not a requirement for individual parties to demonstrate compliance in2006, the EPA found that increases in ethanol production and projections forfuture demand indicate that the 2006 volume is likely to be met and that morethan 4 billion gallons of ethanol and biodiesel will be blended this year. AnEPA brief explaining its action can be viewed atwww.epa.gov/otaq/renwewablefuels/. The Direct Final Rule is only expectedto apply in 2006. The EPA expects to promulgate more comprehensive regulationsby August 8, 2006, but the interim rules and collective complianceapproach are expected to apply for the entire 2006 calendar year. In 2007 andsubsequent years, the EPA expects to specifically identify liable parties,determine the applicable RFS, and develop a credit trading program. Further,the standards for compliance, record-keeping and reporting are expected to beclarified.

 

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The use of ethanol as analternative fuel source has been aided by federal tax policy. On October 22, 2004, President Bushsigned H.R. 4520, which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”)and amended the federal excise tax structure effective as of January 1,2005. Prior to VEETC, ethanol-blended fuel was taxed at a lower rate thanregular gasoline (13.2 cents on a 10% blend). Under VEETC, the ethanol excisetax exemption has been eliminated, thereby allowing the full federal excise taxof 18.4 cents per gallon of gasoline to be collected on all gasoline andallocated to the highway trust fund. This is expected to add approximately $1.4billion to the highway trust fund revenue annually. In place of the exemption,the bill creates a new volumetric ethanol excise tax credit of 5.1 cents pergallon of ethanol blended at 10%. Refiners and gasoline blenders apply for thiscredit on the same tax form as before only it is a credit from generalrevenue, not the highway trust fund. Based on volume, the VEETC is expected toallow much greater refinery flexibility in blending ethanol since it makes thetax credit available on all ethanol blended with all gasoline, diesel and ethyltertiary butyl ether (“ETBE”), including ethanol in E-85 and the E-20 inMinnesota. The VEETC is scheduled to expire on December 31, 2010.

 

The Energy Policy Act of 2005 expands who qualifiesfor the small ethanol producer tax credit. Historically, small ethanolproducers were allowed a 10-cents-per-gallon production income tax credit on upto 15 million gallons of production annually. The size of the plant eligiblefor the tax credit was limited to 30 million gallons. Under the Energy PolicyAct of 2005 the size limitation on the production capacity for small ethanolproducers increases from 30 million to 60 million gallons. The credit can betaken on the first 15 million gallons of production. The tax credit is cappedat $1.5 million per year per producer.

 

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

 

Historically,ethanol sales have been favorably affected by the Clean Air Act amendments of1990, particularly the Federal Oxygen Program which became effective November 1,1992. The Federal Oxygen Program requires the sale of oxygenated motor fuelsduring the winter months in certain major metropolitan areas to reduce carbonmonoxide pollution. Ethanol use has increased due to a second Clean Air Actprogram, the Reformulated Gasoline Program. This program became effective January 1,1995, and requires the sale of reformulated gasoline in nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog. However, the Energy Policy Act of 2005 repeals theClean Air Act’s 2% oxygenate requirement for reformulated gasoline immediatelyin California and 270 days after enactment elsewhere. The Clean Air Act alsocontains an oxygenated fuel requirement for areas classified as carbon monoxidenon-attainment areas. These areas are required to establish an oxygenated fuelsprogram for a period of no less than three months each winter. The minimumoxygen requirement for gasoline sold in these areas is 2.7% by weight. This isthe equivalent of 7.7% ethanol by volume in a gasoline blend. This requirementwas unaffected by the Energy Policy Act and a number of states, includingCalifornia, participate in this program. The two major oxygenates added to gasoline pursuant to theseprograms are MTBE and ethanol, however MTBE has caused groundwatercontamination and has been banned from use by many states. While weexpect ethanol to be the oxygenate of choice in these areas, there is noassurance that ethanol will in fact be used.

 

***Effectof Governmental Regulation***

 

The government’s regulation of the environmentchanges constantly. Weare subject to extensive air, water and other environmental regulations and wehave been required to obtain a number of environmental permits to construct andoperate the plant. It is possible that more stringentfederal or state environmental rules or regulations could be adopted,which could increase our operating costs and expenses. It also is possible thatfederal or state environmental rules or regulations could be adopted thatcould have an adverse effect on the use of ethanol. For example, changes in theenvironmental regulations regarding the required oxygen content of automobileemissions could have an adverse effect on the ethanol industry. Furthermore,plant operations likely will be governed by the 

 

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OccupationalSafety and Health Administration (“OSHA”). OSHA regulations may changesuch that the costs of the operation of the plant may increase. Any ofthese regulatory factors may result in higher costs or other materiallyadverse conditions effecting our operations, cash flows and financialperformance.

 

We haveobtained all of the necessary permits to operate the plant including, airpollution construction permits, a pollutant discharge elimination systemgeneral permit, storm water discharge permits, a water withdrawal permit, andan alcohol fuel producer’s permit. Although we have been successful inobtaining all of the permits currently required, any retroactive change inenvironmental regulations, either at the federal or state level, could requireus to obtain additional or new permits or spend considerable resources oncomplying with such regulations.

 

In 2005, our costs of environmentalcompliance were approximately $60,000, and consisted primarily of permittingand licensing fees and environmental compliance testing.

 

**Our Competition**

 

We are in direct competition with numerous otherethanol producers, many of whom have greater resources than we do. We alsoexpect that additional producers will enter the market if the demand forethanol continues to increase. Ourethanol plant competes with other ethanol producers on the basis of price and,to a lesser extent, delivery service. We believe we compete favorably withother ethanol producers due to our proximity to ample grain supplies and ourproximity to regional petroleum terminals.

 

According to the Renewable Fuels Association’sEthanol Industry Outlook (January 2006), at the end of 2005 the ethanolindustry has grown to over 95 production facilities in the United States withan additional 29 plants under construction and 9 expansions of existing plants.The largest ethanol producers include Abengoa Bioenergy Corp., Archer DanielsMidland (“ADM”), Aventine Renewable Energy, Inc., Cargill, Inc., NewEnergy Corp. and VeraSun Energy Corporation, all of which are each capable ofproducing more ethanol than we expect to produce. Archer Daniels Midland hasannounced its plan to add approximately 500 million gallons per year ofadditional ethanol production capacity in the United States. Management isunable to determine the number and production capacity of plants thatultimately may be constructed, the timing of such construction or theeffect of resulting production upon the demand for or price of our ethanol.However, it is possible that the plant-building boom will create a market glutfor ethanol thereby driving ethanol prices, along with our revenues, down dueto the increasing supply.

 

The following map from the Renewable FuelsAssociation identifies the location of most of the ethanol producers inthe United States.

 

 

*Source: Renewable Fuels Association, Ethanol Industry Outlook (January 2006)*

 

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***International Competition***

 

Ethanol production is also expandinginternationally and we may have to compete with international ethanol producers,which may be able to produce and sell ethanol more inexpensively. Brazilhas long been the world’s largest producer and exporter of ethanol; however, in2005, US ethanol production slightly exceeded Brazilian production. Ethanol isproduced more cheaply in Brazil than in the United States because of the use ofsugarcane, a less expensive raw material alternative to corn. However, becauseof various tariffs on the importation of ethanol into the United States, theprice of ethanol produced in the United States is currently more competitivethan ethanol imported from Brazil. In the event that these tariffs are reducedor eliminated, however, the price of ethanol produced in the United States may becomeless competitive, which could adversely impact the ability to sell ethanol.

 

In addition, the Caribbean Basin Initiativeallows for ethanol produced in participating Caribbean Basin countries to beimported into the United States duty free. While the Caribbean Basin Initiativecaps the amount of duty free ethanol imported into the United States at 7% ofthe total United States’ production from the previous year, as total productionin the United States grows, the amount of ethanol produced from the Caribbeanarea and sold in the United States will also grow, which could impact theability to sell ethanol.

 

***Competition from Alternative Fuels***

 

Alternative fuels, gasoline oxygenates andalternative ethanol production methods are also continually under development by ethanol and oil companies with fargreater resources. The major oil companies have significantly greater resourcesthan we have to develop alternative products and to influence legislation andpublic perception of MTBE and ethanol. Thesecompanies also have sufficient resources to begin production of ethanol shouldthey choose to do so. Newethanol products or methods of ethanol production developed by larger andbetter-financed competitors could provide them competitive advantages and harmour business.

 

A number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean burning gaseous fuels.Like ethanol, the emerging fuel cell industry offers a technological option toaddress increasing worldwide energy costs, the long-term availability ofpetroleum reserves and environmental concerns. Fuel cells have emerged as apotential alternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions. If the fuel cell and hydrogen industries continue toexpand and gain broad acceptance and hydrogen becomes readily available toconsumers for motor vehicle use, we may not be able to compete effectively.This additional competition could reduce the demand for ethanol, which wouldnegatively impact our profitability.

 

***DistillersGrains***

 

Our plant primarily competes with other ethanolproducers in the production and sales of distillers grains. According to theRenewable Fuels Association approximately 9 million metric tons of distillersgrains were produced by ethanol plants in 2005 and this amount is expected toincrease as the number of ethanol plants increase. Our distillers grains alsocompete with other livestock feed formulations: corn gluten feed, dry brewers grain, soybean meal and mill feeds. Distillersgrains primarily compete with these products on the basis of price and proteincontent.

 

**Sources of RawMaterials - Corn and Milo Feedstock Supply**

 

To operate at a name-plate capacity of 35 milliongallons of ethanol annually, our plant requires approximately 13 millionbushels of grain per year for its dry milling process. The grain supply for ourplant will be obtained pursuant to our Raw Grains Agreement with United BioEnergy Ingredients, LLC, described below. We will depend heavily on theperformance of United Bio Energy Ingredients, LLC for our grain inputs.

 

We are dependent on the availability and price ofcorn and milo. Although the area surrounding the plant produces a significantamount of corn and milo and we do not anticipate problems sourcing grain, thereis no assurance that a shortage will not develop, particularly if there is anextended drought or other production problem.

 

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***Raw Grains Agreement***

 

We purchase the raw grains (cornand milo) necessary for ethanol production at our plant from United Bio EnergyIngredients, LLC (“UBE Ingredients”). Pursuant to our raw grains agreement withUBE Ingredients, we pay UBE Ingredients the actual cash procurement price andall reasonable and necessary expenses to get the grain to the plant plus a perbushel fee. The title, risk of loss, and responsibility for the quality ofgrain transfers to us when we unload the grain at the plant. Prior to thattime, UBE Ingredients bears the risk of loss. All grain delivered to the plantmust meet certain quality standards and we have the option to reduce the pricewe pay or fully reject any delivery that fails to conform to thesestandards, depending upon the severity of the noncompliance. The raw grainsagreement between us and UBE Ingredients is in effect until 2009 and is renewedautomatically for one-year terms, unless either party provides ninety dayswritten notice of termination prior to the end of the current term.

 

***Trading Agreement***

 

We have engaged United BioEnergy Trading, LLC (“UBE Trading”) to provide us with market information,hedging consulting services and to assist with internal risk managementprocedures. Due to fluctuations in energy and feedstock markets, UBE Tradingutilizes forward contracting and hedging strategies to manage our commodityrisk exposure and optimize finished product pricing. For these services, wewill pay UBE Trading a monthly fee of $6,000. The trading agreement between usand UBE Trading is in effect until 2009 and is renewed automatically forone-year terms, unless either party provides ninety days written notice oftermination prior to the end of the current term.

 

See “MANAGEMENT’S DISCUSSION ANDANALYSIS – Results of Operations for Fiscal Year 2005, Cost of Sales” for amore detailed discussion of our corn supply.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS –Commodity Price Risks” for a more detailed discussion of our hedgingactivities.

 

**Utilities**

 

The plantrequires a significant and uninterrupted supply of electricity, natural gas andwater to operate. We have entered into agreements with providers of theseutilities as follows:

 

***NaturalGas***

 

Our plantrequires a natural gas supply of approximately 2,900 MMBtu per day when drying.If the direct gas-fired dryer operates 100% of the time for an entire year, theplant could consume 1,030,000 MMBtu per year. We engaged U.S. Energy Services, Inc. of Wayzata, Minnesota, toprovide consulting and energy management services for supplies of electricityand natural gas. Our natural gas requirements are supplied by Southern StarCentral Gas Pipeline and Kinder Morgan Interstate Gao Transmission. Sinceoperations commenced in June 2005, there have been no interruptions in thesupply of natural gas to our plant from our suppliers and all of our naturalgas requirements have been met.

 

***Electricity***

 

Our plant requires approximately 20,000,000kilowatt hours per year. We have entered into an agreement with KansasCity Power and Light Company to provide for our electricity needs for a term of15 years.

 

On May 10, 2005, we entered into anagreement with ICM, Inc. for the purchase of a steam turbine generator. Inorder to finance the purchase of the generator, we executed a promissory for$1,760,274 to ICM, Inc and granted a security interest in the generator toICM, Inc. as collateral for the loan. See MANAGEMENT’S DISCUSSION ANDANALYSIS – Liquidity and Capital Resources, Debt Financing” for a more detaileddiscussion of this note. We expect that the generator will generate up toapproximately 25% of the plant’s electricity needs and will result in netenergy savings.

 

***Water***

 

We will require a significant supply ofwater, approximately 350,000 gallons per day. We have entered into an agreementwith the City of Garnett for our water requirements at the usual rates.

 

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**Research andDevelopment**

 

We do notconduct any research and development activities associated with the developmentof new technologies for use in producing ethanol and distillers grains.

 

**Management and Employees**

 

United Bio Energy Management,LLC (“UBE Management”) manages the day-to-day operations of the ethanol plant,under a management agreement with East Kansas. Under the managementagreement, we pay UBE Management a fixed annual fee and an incentive bonusbased on annual net income. We also pay certain expenses incurred with respectto the operation of the plant while other expenses, including, but not limitedto, the provision of a full-time general manager, are included as part ofUBE Management’s fees. The agreement is in effect until November 12, 2009and automatically renews for successive one-year terms unless either partyprovides a 90-day advance written notice of termination. We may terminateUBE Management if UBE Management fails or refuses to perform its dutiesunder the management agreement and in certain other limited circumstances.

 

Mike Goblirsch is ourgeneral manager. Mr. Goblirsch oversees and is responsible for operationsand production at the plant on a day-to-daybasis. The general manager is a full-time, on-site position, but Mr. Goblirschis an employee of UBE Management. For Mr. Goblirsch’s biographicalinformation, see “Directors and Executive Officers of the Registrant.”

 

We employ 34full-time employees, 30 of whom are employed in ethanol production operations and 4 are employed ingeneral management and administration. This does not include Mr. Goblirschwho is the employee of UBE Management, our distillers grains merchandiser whois employed by UBE Ingredients or our grain merchandiser who is employed by UBETrading. The following table represents the positions held by our currentemployees:

 

| **Position**                        | ** ** | **# Employed** | ** ** |
|-------------------------------------|------------|---------------------|------------|
| Plant  Manager                      |       | 1                   |       |
| Chief  Financial Officer/Controller |       | 1                   |       |
| Lab Manager                         |       | 1                   |       |
| Lab  Technician                     |       | 2                   |       |
| Administrative/Clerical             |       | 2                   |       |
| Shift  Supervisors                  |       | 4                   |       |
| Maintenance  Supervisor             |       | 1                   |       |
| Maintenance  Craftsmen              |       | 5                   |       |
| Material  Handlers                  |       | 4                   |       |
| Plant  Operators                    |       | 9                   |       |
| Scale  Operator                     |       | 1                   |       |
| **TOTAL**                           | ** ** | **34**              | ** ** |

 

We do not expect a significant change in the numberemployees over the next 12 months.

 

**ITEM 1A. RISK FACTORS.**

 

*You should carefully readand consider the risks and uncertainties below and the other informationcontained in this report. The risks and uncertainties described below are notthe only ones we may face. The following risks, together with additionalrisks and uncertainties not currently known to us or that we currently deemimmaterial could impair our financial condition and results of operation.*

 

**Risks Relating to Our Business**

 

***We havea limited operating history and our******operatingresults could fluctuate significantly******.***We began our business in 2001 and commencedproduction of ethanol at our plant in June 2005. Accordingly, we have alimited operating history from which you can evaluate our business andprospects. Our operating resultscould fluctuate 

 

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significantly in the future as a result of a varietyof factors many of which are outside our control. These factors include:

 

•                  Weather, supply and demand and othervariables affecting the price and supply of corn;

•                  Changes in interest rates and availability ofcredit;

•                  Reliability and construction quality of theethanol plant to permit it to operate at a level that we expect;

•                  Legislative changes in policy at the federalor state level concerning ethanol and gasoline additives;

•                  Amount and timing of capital expenditures andother costs relating to maintenance or expansion of our operations;

•                  Technical difficulties in operating theethanol plant;

•                  New products and new plants from ethanolproducers or oil companies; and

•                  General economic conditions, or economicevents specific to agriculture, oil or automobile markets.

 

As a result of these factors, and other risk factorsdescribed herein, our operating results may not be indicative of futureoperating results and you should not rely on them as indications of our futureperformance. In addition, our prospectsmust be considered in light of the risks and uncertainties encountered by anearly-stage company and in rapidly growing industries, such as the ethanolindustry, where supply and demand may change substantially in a shortamount of time.

 

***We aredependent upon United Bio Energy, LLC and its subsidiaries to manage andoperate our ethanol plant.***There are several material agreements in effect with four subsidiariesof United Bio Energy, LLC (“UBE”) with respect to the operations of the plant. UBEManagement manages our ethanol plant and UBE Fuels is the sole buyer of ourethanol. UBE Ingredients is the sole marketer of our distillers grains andprocures all of the corn and milo needed for ethanol production at our plant.UBE Trading provides us with overall risk management. In addition, UBE is ownedby US BioEnergy Corporation of Brookings, South Dakota which builds and operatesbiofuel production facilities which may be in competition with our plant. Ifany of these parties were to terminate any of these relationships, we believethat we can locate other arrangements for the management of our plant, the saleand distribution of our products and procurement of our grain inputs. However,if we are not able to secure suitable and timely replacements for thoseservices at a reasonable cost or at all, it would materially harm our business.

 

***Our business isnot diversified.***Our success depends largely upon our ability toprofitably operate our ethanol plant. We do not have any other lines ofbusiness or other sources of revenue if we are unable to operate our ethanolplant and manufacture ethanol and distillers grains. If economic or politicalfactors adversely affect the market for ethanol, the Company has no other lineof business to fall back on if the ethanol business declines. Our businesswould also be significantly harmed if its ethanol plant could not operate atfull capacity for any extended period of time.

 

***Our financialperformance is dependent on corn and natural gas prices and market prices forethanol and distillers dried grains, and our financial condition and results ofoperation are directly affected by changes in these market prices*****.**Our results ofoperations and financial condition is significantly affected by the cost andsupply of corn and natural gas and by the sellingprice for ethanol and distillers grains. Changes in the price and supply ofthese commodities are subject to and determined by market forces over which wehave no control.

 

The availability and priceof corn is influenced byweather, governmental policy, disease and other market conditions. The pricesfor and availability of natural gas, like corn, are also subject to volatilemarket conditions. In addition, naturalgas has recently been available only at prices exceeding historical averages. Moreover,significant disruptions in the supply of natural gas could impair our abilityto manufacture ethanol for our customers. Generally, higher input prices produce lower profit margins. This isespecially true if market conditions do not allow us to pass to our customersthese increased costs. In the event of higher prices, there is no assurancethat we will be able to pass these costs through to our customers. Furthermore,increases in our corn or natural gas prices or changes in our corn or naturalgas costs relative to corn and natural gas costs paid by competitors may adverselyaffect our results of operations and financial condition. We seek to minimize the risks fromfluctuations in the prices of corn and natural gas through the use of hedginginstruments. However, these hedging transactions also involve risks to ourbusiness. See “**Risks Relating to Our Business- *We engage in hedging transactions whichinvolve risks that could harm our business***.”

 

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Our revenues areexclusively dependent on the market prices for ethanol and distillers grains. Theseprices can be volatile as a result of a number of factors. These factorsinclude the overall supply and demand, the price of gasoline, level ofgovernment support, and the availability and price of competing products. Forinstance, the price of ethanol generally tends to increase as the price ofgasoline increases, and the price of ethanol generally tends to decrease as theprice of gasoline decreases. Any lowering of gasoline prices will likely leadto lower prices for ethanol, which may decrease our ethanol revenues. Similarly,the price of distillers grains generally tends to fluctuate in the samedirection as the price of corn and soybean meal. Therefore, any lowering ofcorn or soybean meal prices will likely lead to lower prices of distillersgrains.

 

***The spreadbetween ethanol and corn prices can vary significantly and we do not expect thespread to remain at recent high levels.***Recently, thespread between ethanol and corn prices has been at historically high level, duein large part to high oil prices and low corn prices. However, this spreadhas fluctuated significantly in 2005 and may fluctuate significantly inthe future. Any reduction in the spread between ethanol and corn prices,whether as a result of an increase in corn prices or a reduction in ethanolprices, would adversely affect our results of operations and financialcondition.

 

***We engage inhedging transactions which involve risks that could harm our business.***We are exposed tomarket risk from changes in commodity prices. Exposure to commodity price riskresults from our dependence on corn and natural gas in the ethanol productionprocess. We seek to minimize the risks from fluctuations in the prices of corn,natural gas and ethanol through the use of hedging instruments. However, ourhedging activities may not successfully reduce the risk caused by pricefluctuation which may leave us vulnerable to high corn and natural gasprices. In addition, hedging activities themselves can result in costs becauseprice movements in corn, natural gas and ethanol contracts are highly volatileand are influenced by many factors, including commodity cash prices, that arebeyond our control. We may incur such costs and they may besignificant.

 

***Changes andadvances in ethanol production technology may hinder our ability to******competein the ethanol industry or operate profitably.***Advances andchanges in the technology of ethanol production are expected to occur. Suchadvances and changes may make the ethanol production technology installedin our plant less desirable or obsolete. These advances could also allow ourcompetitors to produce ethanol at a lower cost than we are able. If we areunable to adopt or incorporate technological advances, our ethanol productionmethods and processes could be less efficient than our competitors, which couldcause our plant to become uncompetitive or completely obsolete. If ourcompetitors develop, obtain or license technology that is superior to ours orthat makes our technology obsolete, we may be required to incursignificant costs to enhance or acquire new technology so that our ethanolproduction remains competitive.

 

**Risks Related to Ethanol Industry**

 

***New plantsunder construction or decreases in the demand for ethanol may result inexcess production capacity in our industry.***The supply ofdomestically produced ethanol is at an all-time high. In 2005, 95 ethanolplants located in 19 states produced a record 4 billion gallons, a 17% increasefrom 2004 and 126% increase from 2001. At the end of 2005, 29 plants and 9major expansions were under construction, representing an additional 1.5 billongallons of production capacity. Kansas currently has 7 ethanol plants inoperation. If the production ofethanol exceeds either the demand for ethanol or the petroleum industry’sability to blend ethanol with gasoline,the market price of ethanol may decline to a level that is inadequate togenerate sufficient cash flow to cover our costs.

 

***We operate inan intensely competitive industry and compete with larger, better financedentities which could impact our ability to operate profitably.***There issignificant competition among ethanol producers. There are numerousproducer-owned and privately-owned ethanol plants planned and operatingthroughout the Midwest and elsewhere in the United States. We compete with plants similar to our size, as well as anumber of plants that can produce a wider range of products than we can andhave greater resources than we do. Inaddition, the number of ethanol plants being developed and constructed in theUnited States continues to increase at a rapid pace. The recent passage of theEnergy Policy Act of 2005 included a renewable fuels mandate that we expectwill further increase the number of domestic ethanol production facilities. Ifthe demand for ethanol does not grow at the same pace as increases in supply,we expect that lower prices for ethanol will result which may adverselyaffect our ability to generate profits and our financial condition.

 

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***Competitionfrom the advancement of alternative fuels may lessen the demand for******ethanol.***Alternative fuels, gasoline oxygenates and ethanol production methods arecontinually under development. A number of automotive, industrial and powergeneration manufacturers are developing alternative clean power systems usingfuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cellindustry offers a technological option to address increasing worldwide energycosts, the long-term availability of petroleum reserves and environmentalconcerns. Fuel cells have emerged as a potential alternative to certainexisting power sources because of their higher efficiency, reduced noise andlower emissions. Fuel cell industry participants are currently targeting thetransportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions. If the fuel cell and hydrogen industries continue to expand and gainbroad acceptance, and hydrogen becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively. This additionalcompetition could reduce the demand for ethanol, resulting in lower ethanolprices that might adversely affect our results of operations and financialcondition.

 

***Corn-basedethanol may compete with cellulose-based ethanol in the future,******whichcould make it more difficult for us to produce ethanol on a**cost-effective basis****.*Mostethanol is currently produced from corn and other raw grains, such as milo orsorghum. This is especially true for the Midwest. The current trend in ethanolproduction research is to develop an efficient method of producing ethanol fromcellulose-based biomass, such as agricultural waste, forest residue, municipalsolid waste, and energy crops. This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas which are unable to grow corn. Although current technology is notsufficiently efficient to be competitive, an April 2000 report by theUnited States Department of Energy entitled “Outlook for Biomass EthanolProduction and Demand” indicates that new conversion technologies may bedeveloped in the future. If an efficient method of producing ethanol fromcellulose-based biomass is developed, we may not be able to competeeffectively.

 

**C*ompetition from ethanol importedfrom Brazil and Caribbean Basin countries may be a less**expensive alternative to our ethanol.***Brazil is currentlyone of the world’s largest producers and exporters of ethanol. Ethanol is produced more cheaply in Brazilthan in the United States because of the use of sugarcane, a less expensive rawmaterial alternative to corn. In addition, ethanol produced or processed in certain countries in Central America andthe Caribbean region is eligible for tariff reduction or elimination uponimportation to the United States under a program known as the Caribbean BasinInitiative. Competition from ethanol imported from Caribbean Basin countries orBrazil may affect our ability to sell our ethanol profitably, adverselyaffecting our results of operations and financial condition.

 

***Consumerresistance to the use of ethanol based on the belief that ethanol is******expensive,adds to air pollution, harms engines and/or takes more energy to**produce than it contributes may affect thedemand for ethanol.***Certain individuals believe that use of ethanol willhave a negative impact on gasoline prices at the pump. Many also believe thatethanol adds to air pollution and harms car and truck engines. Still otherconsumers believe that the process of producing ethanol actually uses morefossil energy, such as oil and natural gas, than the amount of ethanol that isproduced. These consumer beliefs could potentially be wide-spread. If consumerschoose not to buy ethanol, it would affect the demand for the ethanol weproduce which could lower demand for our product and negatively affect ourprofitability and financial condition.

 

**Risks Related to Regulation and Governmental Action**

 

***A change ingovernment policies favorable to ethanol may cause demand for******ethanolto decline.***Growth and demand for ethanol may be drivenprimarily by federal and state government policies, such as state laws banningMTBE and the national renewable fuels standard. The continuation of thesepolicies is uncertain, which means that demand for ethanol may decline ifthese policies change or are discontinued. A decline in the demand for ethanolis likely to cause lower ethanol prices which in turn will negatively affectour results of operations, financial condition and cash flows.

 

***Governmentincentives for ethanol production, including federal tax incentives, may beeliminated in the future,******which could hinder our ability tooperate at a profit.***The ethanol industry and our business arebenefited by a variety offederal laws covering environmental, tax and other areas and federal incentives, including Clean Air Act Programs, VEETC andthose included in the Energy Policy Act of 2005. See “DESCRIPTIONOF BUSINESS 

 

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– Governmental Supports and Regulation,Federal Ethanol Supports.”  The modification or elimination of any of thefederal laws and programs described above (or any other applicable law orprogram), or the reduction of any of the incentives or tax credits describedabove, could result in decreased demand for ethanol, which could negativelyaffect our profitability and financial condition.

 

***Changes inenvironmental regulations or violations of the regulations could be******expensiveand reduce our profitability.***We are subject to extensive air, water andother environmental laws and regulations. In addition, some of these lawsrequire our plant to operate under a number of environmental permits. Theselaws, regulations and permits can often require expensive pollution controlequipment or operation changes to limit actual or potential impacts to theenvironment. A violation of these laws and regulations or permit conditions canresult in substantial fines, damages, criminal sanctions, permit revocationsand/or plant shutdowns. We do not assure you that we have been, are or will beat all times in complete compliance with these laws, regulations or permits orthat we have had or have all permits required to operate our business. We donot assure you that we will not be subject to legal actions brought byenvironmental advocacy groups and other parties for actual or allegedviolations of environmental laws or our permits. Additionally, any changes inenvironmental laws and regulations, both at the federal and state level, couldrequire us to invest or spend considerable resources in order to comply withfuture environmental regulations. The expense of compliance could besignificant enough to reduce our profitability and negatively affect ourfinancial condition.

 

**ITEM 2. DESCRIPTIONOF PROPERTY.**

 

Theethanol plant is located on an approximately 59 acres located in the Golden Prairie Industrial Park on the edge ofGarnett, Kansas. The plant’s address is 1304 S. Main Street, Garnett, Kansas 66032.

 

Theplant is designed to grind approximately 13 million bushels of corn and miloper year to produce approximately 35 million gallons of ethanol. Constructionof the plant was substantially completed in July 2005 with finalconstruction items completed in September 2005. The ethanol plant consistsof the following buildings:

 

•                  A fermentation and processing building, which contains processingequipment, laboratories, control room and offices. This building alsoincludes a maintenance area with offices, spare parts storage, welding shop andmaintenance equipment;

•                  A grain handling and storage building, which contains a control room and1st and 2nd level mezzanines for cleaning, grinding and conveying corn;

•                  An administrative building, along with furniture and fixtures,office equipment and computer and telephone systems.

•                  An energy building which contains centrifuges, DDGS dryers,thermal oxidizer, steam turbine generator and reverse osmosis water filtrationssystem.

•                  A pump house which contains a motor control room, diesel poweredfire pump and water pump for process water.

 

In addition,the plant includes a fermenter walkway, evaporator and storage facilities forethanol and distillers grains. The site also contains improvements such aslandscaping, drainage systems and paved access roads. On April 5,2005, we received an easement from the State of Kansas in exchange for $1.00which will allow us to construct and operate a railroad spur line across statepark property owned by the State of Kansas. Although we expect to complete thedirt work**for the rail sidingduring the second quarter of 2006, our distribution needs are currentlysatisfied by truck transportation and we do not anticipate constructing a railspur to access such rail transportation for the foreseeable future.

 

We have transferred title to the plant site andimprovements to the City of Garnett as the security for the industrial revenuebond financing from the City of Garnett and are leasing back the site inexchange for lease payments in an amount that is equal to the amount ofinterest to be paid on the City of Garnett Bonds. The industrial revenue bondsthat we purchased from the City of Garnett serve as collateral for our termdebt financing with HomeFederal Savings Bank. See MANAGEMENT’S DISCUSSION AND ANALYSIS– Liquidity and Capital Resources, Debt Financing” for a more detaileddiscussion of these transactions.

 

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**ITEM 3. LEGALPROCEEDINGS.**

 

From time to time in the ordinary course ofbusiness, East Kansas may be named as a defendant in legal proceedingsrelated to various issues, including without limitation, workers’ compensationclaims, tort claims, or contractual disputes. We are not currently involved inany material legal proceedings, directly or indirectly, and we are not aware ofany claims pending or threatened against us or any of the directors that couldresult in the commencement of legal proceedings..

 

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

 

We did not submit any matter to a vote of our unitholders through the solicitation of proxies or otherwise during the fiscal yearended December 31, 2005.

 

**PART II**

 

**ITEM 5. MARKETFOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS.**

 

**Market Information**

 

There is no public tradingmarket for our units. We havecreated a private qualified online matching service in order to facilitatetrading of our units. Our online matching service consists of an electronicbulletin board that provides information to prospective sellers and buyers ofour units. We do not receive any compensation for creating or maintaining thematching service. We do not become involved in any purchase or salenegotiations arising from our qualified matching service. In advertising ourqualified matching service, we do not characterize the Company as being abroker or dealer or an exchange. We do not give advice regarding the merits orshortcomings of any particular transaction. We do not receive, transfer or holdfunds or securities as an incident of operating the online matching service. Wedo not use the bulletin board to offer to buy or sell securities other than incompliance with the securities laws, including any applicable registrationrequirements. We have no role in effecting the transactions beyond approval, asrequired under our operating agreement and the issuance of new certificates. Solong as we remain a publicly reporting company, information about the Companywill be publicly available through the SEC’s filing system. However, if at anytime we cease to be a publicly reporting company, we will continue to makeinformation about the Company publicly available on our website.

 

**Unit Holders**

 

As of December 31, 2005, we haveapproximately 646 unit holders of record.

 

**Distributions**

 

We have not declared orpaid any distributions on our units. Our board of directors has completediscretion over the timing and amount of distributions to our unit holders,however, our operating agreement requires the board of directors to endeavor tomake cash distributions at such times and in such amounts as will permit ourunit holders to satisfy their income tax liability in a timely fashion. Ourexpectations with respect to our ability to make future distributions arediscussed in greater detail under “MANAGEMENTS DISCUSSION AND ANALYSIS — LIQUIDITYAND CAPITAL RESOURCES, DEBT FINANCING.”

 

**ITEM 6. MANAGEMENT’SDISCUSSION AND ANALYSIS.**

 

We prepared the following discussion and analysis tohelp you better understand our financial condition, changes in our financialcondition, and results of operations for the fiscal year ended December 31,2005. Since we only became operational in June 2005, we do not havecomparable income, production and sales data for the twelve months ended December 31,2004. Accordingly, we do not provide a comparison of our financial resultsbetween 

 

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reporting periods in this report. If you undertake your own comparisonof fiscal year ending December 31, 2004 and the fiscal year ending December 31,2005, it is important that you keep that in mind.

 

Except for the historical information, the followingdiscussion contains forward-looking statements that are subject to risks anduncertainties. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report. Our actual resultsor actions may differ materially from these forward-looking statements formany reasons, including the risks described in “RISK FACTORS” and elsewhere inthis annual report. Our discussion and analysis of our financial condition andresults of operations should be read in conjunction with the financialstatements and related notes and with the understanding that our actual futureresults may be materially different from what we currently expect.

 

**Overview**

 

We were formed as a Kansas limited liabilitycompany on October 16, 2001, for the purpose of constructing and operatingan ethanol plant near Garnett in eastern Kansas. In June 2005, wecompleted the construction of our 35 million gallon per year ethanol plant andsince then, we have been engaged in the production of ethanol anddistillers grains. We haveengaged UBE Management to supervise and direct the general operations of ourplant. See “DESCRIPTION OF BUSINESS – Management Agreement” for additionalinformation regarding our management agreement with UBE Management.

 

Our revenues are derived from the sale anddistribution of our ethanol and distillers grains throughout the continentalUnited States. We purchase all of our corn and milo from UBE Ingredients. See “DESCRIPTIONOF BUSINESS – Sourcesof Raw Materials - Corn and Milo Feedstock Supply, Raw Grains Agreement” for informationregarding our raw grains agreement with UBE Ingredients. After processing thecorn, our ethanol and distillers grains are sold to UBE Fuels and UBEIngredients, respectively, which subsequently markets and sells our products. See“DESCRIPTION OF BUSINESS – Salesand Distribution of Principal Products,” forinformation regarding our ethanol agreement with UBE Fuels and our distillersgrains marketing agreement with UBE Energy Ingredients.

 

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

 

Our two largest costs of production are corn andnatural gas. The cost of corn is affected primarily by supply and demandfactors such as crop production, carryout, exports, government policies andprograms, risk management and weather, much of which we have no control over. Naturalgas prices fluctuate with the energy complex in general. Over the last fewyears, natural gas prices have trended higher than average and it appearsprices will continue to trend higher due to the high price of alternative fuelssuch as fuel oil. Our costs of production are affected by the cost of complyingwith the extensive environmental laws that regulate our industry.

 

**Results ofOperations**

 

***FinancialSummary and Analysis of the Fiscal Year Ended December 31, 2005***

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our statements ofoperations for the fiscal year ended December 31, 2005:

 

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| **Income Statement Data** | ** ** | **Amount** | ** **    | **% of  Revenues** | ** ** |
|-------------------------------------|------------|------------|---------------|-------------------------|------------|
|                                |       |       |          |                    |       |
| Revenues                            |       | $          | 35,591,321    |                    | 100.0      |   |
| Cost of  Sales                      |       | $          | (26,879,985   | )                       | 75.5       |   |
| Gross Profit                        |       | $          | 8,711,336     |                    | 24.5       |   |
|                                |       |       |          |                    |       |
| Operating  Expenses                 |       | $          | 1,781,495     |                    | 5.0        |   |
| Operating  Income                   |       | $          | 6,929,841     |                    | 19.5       |   |
|                                |       |       |          |                    |       |
| Other Income  (Expense)             |       | $          | (1,822,302    | )                       | (5.1       | ) |
| **Net  Income**                     | ** ** | **$**      | **5,107,539** | ** **              | **14.4**   | ** ** |

 

We had net income of $5,107,539in fiscal year 2005. Since we only recently became operational in June 2005,we do not yet have comparable income, production and sales data for fiscal yearended December 31, 2004.

 

Revenues. Revenues from operations for fiscal yearended December 31, 2005 totaled approximately $35.6 million. Net gallonsof denatured ethanol sold totaled approximately 19,111,000 gallons for fiscalyear ended December 31, 2005. Revenues in fiscal year 2005 resulted fromthe start-up of operations in June 2005.

 

Ethanol prices, which had experienced a seasonal decline in the spring and summer of calendar 2005, started rising in approximately August 2005, commensurate with the increase in gasoline prices resulting from the hurricanes in the southeastern United States which interrupted petroleum refining. Historically, ethanol prices have been seasonal, increasing in the late summer and fall as gasoline blenders and marketers increase inventory in anticipation of mandatory blending in the winter months, and decreasing in the spring and summer when mandatory blending ceases. The rise in ethanol prices during 2005 was remarkable because it started sooner than the seasonal norm and rose higher than historical norms, due in part to the hurricanes as well increased demand, public acceptance and positive political signals for ethanol.

 

The increase in ethanol prices during the latter part of our 2005 has continued through the first quarter of 2006, despite a significant increase in supply of ethanol resulting from many additional producers in the industry. However, management believes the industry will need to continue to grow demand in order to sustain these higher price levels. Unless the new supply is equally met with demand, downward pressure on ethanol prices could occur. If ethanol prices start to decline, our earnings will decline in the process, especially if corn costs fail to remain low and stable. Areas where demand may increase are new markets in New Jersey, Pennsylvania, Massachusetts, North Carolina, South Carolina, Michigan, Tennessee, Louisiana and Texas. According to the Renewable Fuels Association, Minnesota may also generate additional demand due to the recent passage of state legislation mandating a 20% ethanol blend in its gasoline. Montana passed a similar mandate this year, but it will not go into effect until 60 million gallons of ethanol are produced in the state.

 

Our revenues and profits are impacted by federal ethanol supports and tax incentives, such as VEETC and the RFS. Changes to these supports or incentives could significantly impact demand for ethanol. Since the current national ethanol production capacity exceeds the 2006 RFS requirement, it is management’s belief that other market factors are primarily responsible for current ethanol prices. Accordingly, it is possible that the RFS requirements may not significantly impact ethanol prices in the short-term. For instance, if gasoline prices continue to trend higher, consumers will look for lower priced alternative fuels. The Consumer Federation of America recently published a report that states that consumers could save up to $0.08 per gallon at the pump if ethanol were blended at 10%. Since ethanol blended fuel is a cheaper alternative for consumers, the demand for such ethanol blended fuel could increase thus increasing the overall demand for ethanol. This could positively affect our earnings. However, the increased RFS requirement of 7.5 billion by 2012 is expected to support ethanol prices in the long term. A greater supply of ethanol on the market from these additional plants and plant expansions could reduce the price we are able to charge for our ethanol. This would have a negative impact on our earnings.

 

Due to the several factors affecting the price of ethanol, we are unable to predict with any degree of certainty where prices might be during the remainder of fiscal 2006.

 

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Our USDA Commodity CreditCorporation Bioenergy Program payments were $1,276,927 for the fiscal yearended December 31, 2005. Payments under the Bioenergy Program are basedupon increases in ethanol production relative to previous years. Due to thefact we only had a partial year of operation in fiscal year 2005, we expect toreceive additional program payments in fiscal year 2006. However, based uponthe reductions in Bioenergy Program payments made during 2005, we do not expectto receive the maximum award of $7.5 million. The receipt of these additionalprogram payments is subject to the continued availability of program funds,which may be reduced as a result of increased participation in the programby new and expanding plants as well as decreased federal funding. In addition,the income from the Bioenergy Program is significantly less than the amount weare eligible for based on our production. This reduction is attributed to anincrease in the number of eligible participants in the program, which reducesour share of the payments. We do not anticipate receiving unpaid amounts forpast pro rata reductions. The receipt of these additional program payments issubject to the continued availability of program funds, which may bereduced as a result of increased participation in the program by new andexpanding plants as well as decreased federal funding. The Bioenergy Program wasscheduled to expire on September 30, 2006. Funding under the program issubject to an annual apportionment.  OnJanuary 23, 2006, the USDA Farm Service Agency issued a letter outlining thefunding factors for the Bioenergy Program for the government fiscal year 2006. TheOMB apportioned the Bioenergy Program $60 million for fiscal year 2006 and theapportionment includes a restriction that the funds may only be used during the2006 fiscal year.  This same restrictionapplied for the last three fiscal year program apportionments. As a result ofthis restriction, $34 million of the $60 million apportionment was used for thefourth quarter fiscal year 2005 payments, leaving only $25.5 million availablefor the first three quarters of fiscal year 2006, or $8.5 million perquarter.  The CCC recently announced thatits funds would be exhausted in the third quarter of the government’s fiscalyear and that the Bioenergy Program would terminate as of June 30, 2006.

 

During the 2005 fiscal year,we received payments of $669,329 from the Kansas Qualified Agricultural EthanolProducer Incentive Fund. These incentive payments are only available for thefirst seven years of production. The available statewide funding for theseincentive payments was $1.5 million per year for 2002-2004 and will increase to$3.5 million per year for 2005-2011 plus any excess balance carried over fromthe prior year’s current production account. Any shortfall in the availablefunds will result in a pro rata decrease in the incentives paid to theindividual ethanol producers.

 

Cost of Sales. Our cost of sales from the production ofethanol and distillers grains are primarily made up of raw grains expenses andenergy expenses (natural gas and electricity). Cost of Sales for fiscal yearended December 31, 2005 totaled approximately $26.9 million.

 

We purchased approximately 7million bushels of corn in fiscal year 2005. The 2005 national corn crop wasthe second largest on record with national production at approximately 11.11billion bushels, exceeded only by the 2004 crop (at approximately 11.8 billionbushels). This resulted in lower corn prices as reflected in our cost of goodssold. A crop at this level is anticipated to provide an ample supply of cornand we anticipate corn costs will remain low and stable into the 2005-2006marketing year. However, an increase in corn exports as well as sustaineddomestic usage may increase total demand for corn and result in upwardpressure on corn prices. Any increase in the price of corn would have a negativeimpact on our cost of goods sold. In addition, we expect the grain market tobegin focusing on prospects for the 2006 crop, where variables such asrainfall, planting dates, and temperatures will likely cause market uncertaintyand create corn price volatility as the growing season begins. Recently, manymarket analysts are predicting lower U.S. corn acreage this year due to higherfertilizer prices caused by high natural gas prices, decreased domesticfertilizer production and increased global demand for fertilizers. Althoughcarryout supplies for 2006 marketing year appear adequate, any productionshortfall during the 2006 growing season will create volatility and may increaseour cost of corn.

 

Natural gas is also animportant input to our manufacturing process. We estimate that our natural gasusage is approximately 85,000 million British thermal units (“MMBTU”) per month.We use natural gas to dry our distillers grains products to moisture contentsat which they can be stored for long periods and transported greater distances,so that we can market them to broader livestock markets, including poultry andswine markets in the continental UnitedStates. Natural gas has recently been available only at prices exceedinghistorical averages. The prices are increasing our costs of production. In lateAugust 2005, Hurricane Katrina caused dramatic damage to areas ofLouisiana, which is the location of one of the largest natural gas hubs in the United States. Natural gas prices rosefrom approximately $9.80/MMBTU to approximately $12.30/MMBTU as a result of thehurricane. We expect natural gas prices to remain high during 2006.

 

Cost of goods sold includesa gain of $38,000 for the fiscal year ended December 31, 2005 related toour corn and natural gas derivative instruments. We recognize the gains orlosses that result from the changes in the value of our derivative instrumentsin cost of goods sold as the changes occur. As corn and natural gas pricesfluctuate, the value of our derivative instruments are impacted, which affectsour financial performance. For the fiscal year ended December 31, 2005,the increases in the value of our derivative instruments partially offset the 

 

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increases in the cash prices for corn and naturalgas. We anticipate continued volatility in our cost of goods sold due to thetiming of the changes in value of the derivative instruments relative to thecost and use of the commodity being hedged.

 

Operating Expenses. Operating expenses for fiscal year ended December 31,2005 totaled $1,781,495.  Ouroperating expenses are primarily due to expenses of $926,057 from start-upoperations and $855,438 of general and administrative expenses.

 

Operating Income. Operating income for fiscal year ended December 31,2005 totaled $6,929,841.

 

Other Income (Expense). Our other income and expense for the fiscalyear ended December 31, 2005 was an expense of $1,822,302. This expense resulted primarily from interest expenseof $1,869,346.

 

***FinancialSummary and Analysis of Fiscal Quarter Ended December 31, 2005***

 

The following tables showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our statement ofoperations for the fiscal quarter ended December 31, 2005:

 
| **Income Statement Data** | ** ** | **Amount** | ** **    | **% of  Revenues** | ** ** |
|-------------------------------------|------------|------------|---------------|-------------------------|------------|
|                                |       |       |          |                    |       |
| Revenues                            |       | $          | 19,792,899    |                    | 100.0      |   |
| Cost of  Sales                      |       | $          | (13,921,289   | )                       | 70.3       |   |
| Gross Profit                        |       | $          | 5,871,610     |                    | 29.7       |   |
|                                |       |       |          |                    |       |
| Operating  Expenses                 |       | $          | 432,781       |                    | 2.2        |   |
| Operating  Income                   |       | $          | 5,438,829     |                    | 27.5       |   |
|                                |       |       |          |                    |       |
| Other Income  (Expense)             |       | $          | (627,858      | )                       | 3.2        |   |
| **Net  Income**                     | ** ** | **$**      | **4,810,971** | ** **              | **24.3**   | ** ** |

 

For the fourth fiscalquarter of 2005, net income totaled $4,810,971, up from net income ofapproximately $1,457,000 reported in the third quarter of fiscal year 2005.  Since we only recently became operational in June 2005,we do not yet have comparable income, production and sales data for fiscalquarter ended December 31, 2004.

 

Revenues. Revenues from operations for the fourthfiscal quarter of 2005 totaled $19,792,899, up from $14,977,276 in the thirdquarter of fiscal 2005. This increase was primarily due to an increase in netgallons of denatured ethanol sold at higher prices in the fourth quarter offiscal 2005 compared to the third quarter of fiscal year 2005. Our distillersgrains sales also increased from $2,158,000 in the third quarter to $2,607,000in the forth quarter of fiscal year 2005. Additionally, federal and stateincentives received in the forth quarter increased by $1,864,000 compared tothe third quarter of fiscal year 2005. Federal and state incentives received inthe third quarter only reflected our first 15 days of operation.

 

Cost of Sales. Our cost of sales for the fourth fiscalquarter of 2005 totaled $13,921,289, up from $11,970,090 in the third quarterof fiscal 2005. The change in cost of goods sold resulted from increasedpurchases of raw materials due to the increase in production volume at ourplant.

 

Operating Expenses. Operating expenses for the fourth quarterof fiscal 2005 totaled $432,781, up from the $375,277 we reported in the third quarter because ofan increase in our general and administrative expenses.

 

Operating Income. Our operating income the fourth quarter of2005 was $5,438,829, up from $2,609,356. This increase was primarily due to afull quarter of operations in the fourth quarter of 2005.

 

Other Income (Expense). Other income and expense consisted of anexpense of $627,858 in the fourth fiscal quarter of 2005, compared to an expenseof $1,152,108 reported in the third quarter of fiscal 2005. The 

 

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decrease in other expense was a result of a decreasein interest expense which was higher in the third quarter due to interestexpenses associated with our redemption of units held ICM, Inc. and Fagen, Inc.

 

**Application of Critical Accounting Estimates**

 

Managementuses estimates and assumptions in preparing our financial statements inaccordance with generally accepted accounting principles. These estimates andassumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses. We did not have any critical accounting estimates as of fiscal yearended December 31, 2005.

 

**CommodityPrice Risk Protection**

 

Weseek to minimize the risks from fluctuations in the prices of raw materialinputs, such as corn and natural gas, and finished products, such as ethanoland distillers grains, through the use of hedging instruments. Inpractice, as markets move, we actively manage our risk and adjust hedgingstrategies as appropriate. Although we believe our hedge positions accomplishan economic hedge against our future purchases, they do not qualify for hedgeaccounting, which would match the gain or loss on our hedge positions to thespecific commodity purchase being hedged. We are using non-hedge derivativeaccounting for our hedge positions, which means as the current market price ofour hedge positions changes, the gains and losses are immediately recognized inour cost of sales. The immediate recognition of hedging gains and losses underfair value accounting can cause net income to be volatile from quarter toquarter due to the timing of the change in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged. As of December 31,2005, the fair value of our derivative instruments relating to corn arereflected as an asset in the amount of $111,000. There are several variablesthat could affect the extent to which our derivative instruments are impactedby price fluctuations in the cost of corn. However, it is likely that commoditycash prices will have the greatest impact on the derivative instruments withdelivery dates nearest the current cash price.

 

As of December 31,2005, UBE Trading has entered into forward corn purchase contracts for thepurchase of approximately 13,345,000 bushels of corn at various dates through July 2006on our behalf. We have price protection in place for approximately 60% of ourcorn needs through July 2006. As we move forward, additional protection may benecessary. As corn prices move in reaction to market trends and information,our income statement will be affected depending on the impact such marketmovements have on the value of our derivative instruments. As we move forwardinto the fall harvest months, additional price protection may be requiredto solidify our margins for fiscal year 2006. Depending on market movements,crop prospects and weather, these price protection positions may causeimmediate adverse effects, but are expected to produce long-term positivegrowth for the Company.

 

As of December 31,2005, we have forward contracts to purchase approximately 143,000 MBTUs ofnatural gas through February 2006. Additional price protection for fiscalyear 2006 natural gas purchases may be necessary as we attempt to furtherreduce our susceptibility to price increases. However, we may not be ableto secure natural gas for prices less than current market price and we may notrecover high costs of production resulting from high natural gas prices, which may raiseour costs of production and reduce our net income.

 

**Plan of Operations for the Next 12 Months**

 

We expect to spend the next12 months operating the ethanol plant to produce and sell ethanol anddistillers grains. We will continue to focus our attention on three main areas:(i) maximizing our plant’s operational efficiency to operate ascompetitively as possible; (ii) completing any unfinished site work; and (iii) purchasingimportant manufacturing inputs such as corn and natural gas as cost effectivelyas possible.

 

***Plant Operations***

 

We commencedoperations at our plant in June 2005 and our plant passed performancetesting on July 15, 2005. Since that time, our plant has consistentlyexceeded its nameplate production capacity of 35 million gallons of ethanol peryear, as measured on a pro rata basis. While management continues to direct itsefforts toward 

 

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increasing production and operatingefficiencies while maintaining or decreasing operating costs, there is noassurance or guarantee that we will be able to consistently satisfy theseobjectives.

 

We are subject to ongoingenvironmental regulations and testing. On October 24, 2005, we completedand passed all air emission and associated compliance testing for the plant. Inaddition, as a condition of our National Pollutant Discharge Elimination System(“NPDES”) Wastewater Discharge Permit, we must submit monthly monitoringreports to Kansas Department of Health and Environment.  We are currently in compliance with all NDPEScompliance testing for the plant.

 

On April 5, 2005, wereceived an easement from the State of Kansas in exchange for $1.00 which willallow us to construct and operate a railroad spur line across state parkproperty owned by the State of Kansas. Although we expect to complete the dirtwork**for the rail siding duringthe second quarter of 2006, our distribution needs are currently satisfied bytruck transportation and we do not anticipate constructing a rail spur toaccess such rail transportation for the foreseeable future. This may negativelyaffect our ability to make a profit due to the higher cost associated withtransport by trucks.

 

On October 11, 2005, weentered into a definitive written agreement with Mike Burns, a member of EastKansas, for approximately 720,000 cubic yards of compacted fill in exchange forpayment of $300,000 to be paid in three equal payments of $100,000. The firstpayment was due and paid upon execution of the agreement and the remainingpayments were due on November 15, 2005 and December 15, 2005. As of December 31,2005, we have paid all amounts due under the agreement.

 

On July 28, 2005 weengaged HDB Construction, Inc. for rail spur site preparation work inexchange for payment of an aggregate cost not to exceed $1,556,468 andinstructed HDB to commence work on rail site preparation. As of December 31,2005, we have incurred and paid $1,233,644 of costs related to this project.

 

We have an agreement withthe City of Garnett to share the cost of certain highway improvements. Weestimate that our obligation for improvements under the agreement will beapproximately $135,000.

 

We are in theprocess of installing optimization software to provide advanced processcontrols for our natural gas usage, ethanol output and distillers grains output.The purpose of this software is to provide greater efficiency in the drying ofour distillers grains, which we anticipate will reduce our energy costs andpotentially increase our ethanol and distillers grains output. We expect theproject to be completed in the second quarter of2006. Total projectcosts are expected to be approximately $600,000.

 

***Operating Budget and Financing of Plant Operations***

 

We expect tohave sufficient cash from cash flow generated by plant operations, current cashreserves, our senior credit facility and other sources of debt financing tocover our operating costs over the next 12 months, including the cost of cornand natural gas supplies, other production costs, staffing, office, audit,legal, compliance and working capital costs. The following is our estimate ofour operating costs and expenditures for the next 12 months:

 
| Operating  Costs:                 |   |   |       |
|-----------------------------------|--------|--------|------------|
| Corn and  Utilities Costs         |   | $      | 41,200,000 |   |
| General and  administrative costs |   | $      | 7,030,000  |   |
| Other  Production Costs           |   | $      | 7,650,000  |   |
|                              |   |   |       |
| Total  operating costs            |   | $      | 55,880,000 |   |

 

The estimates in the table set forth aboveare based upon our limited operational experience and that of UBE Managementwith other ethanol plants similar to ours. These are only estimates and ouractual expenses and costs could be much higher due to a variety of factorsoutside our control, such as:

 

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•                  Changesin the availability and price of corn;

•                  Changesin federal ethanol tax incentives;

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

•                  Increasedcompetition in the ethanol industry;

•                  Changesin interest rates or the availability of credit;

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

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

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

•                  Changesin the availability and price of natural gas;

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

 

**Liquidity and Capital Resources**

 

***Overview***

 

At December 31, 2005,we had the following assets: cash and cash equivalents of $4,569,145, totalcurrent assets of $9,766,098 and total assets of $103,859,381. Our cash andcash equivalents increased due to our accumulation of cash reserves during thefourth quarter. The substantialincrease in total assets from year end 2004 is a result of an increase of ourproperty, plant and equipment assets due to completion of construction of theplant and our approximately $48 million investment in industrial revenue bondsfrom the City of Garnett, Kansas. See “Debt Financing - Industrial Revenue BondFinancing” below for further information about the industrial revenue bondfinancing.

 

At December 31,2005, we had total current liabilities of approximately $4,428,030, long termdebt, net of current maturities, of $23,438,059 and a lease obligation of$47,866,177. We incurred our lease obligation in December 2005 as part ofour industrial revenue bond financing. See “Debt Financing - Industrial RevenueBond Financing” for further information about the lease obligation.

 

The members’ contributionsare $24,707,100. Retained earnings as of December 31, 2005 is $3,420,075. Totalmembers’ equity as of December 31, 2005, is $28,127,175.

 

Our capital requirements for the coming year include financing operations and completing necessary follow-up construction, regular maintenance and infrastructure projects for our plant. As of December 31, 2005, working capital, consisting of current assets and current liabilities, totaled $5,338,068 and our ratio of current assets to current liabilities was 2.2 to one. With the capital we had available at December 31, 2005, we believe we have sufficient resources for those purposes.

 

***Cash Flow***

 

The following table showscash flows for the fiscal year ended December 31, 2005:

 

| ** **                              | ** ** | **2005** | ** **  |
|-----------------------------------------|------------|----------|-------------|
| Net cash  from operating activities     |       | $        | 3,175,168   |   |
| Net cash  used for investing activities |       | $        | (38,817,615 | ) |
| Net cash  from financing activities     |       | $        | 34,000,773  |   |

 

Cash Flow From Operations*.*Our operating activities for the year ended December 31,2005, generated $3,175,168 of net cash flow, which included energy productioncredits from state and federal programs, as discussed below. The net cash fromoperating activities primarily includes net income from operations adjusted fordepreciation and amortization of $1,590,700. Also reducing cash at December 31,2005 was an increase in accounts receivable of $2,651,546 and inventory of$1,595,547.

 

CashFlow From Investing Activities*.*We used $38,817,615 of cash for investingactivities for the year ended December 31, 2005, all of which was used topurchase land, property and equipment. A majority of that 

 

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amount,$38,427,615, was used to purchase our plant and equipment. The remaining amountof $390,000 was used to purchase land and land option payments.

 

Management estimates thatapproximately $4 million in capital expenditures will be made in the nexttwelve months for necessary follow-upconstruction, improvements and infrastructure projects, all of which are expected to be financed from a portion of cash flowsfrom operations.

 

Cash Flow From Financing Activities*.*By far, the largest source of cash during fiscal year 2005 was our financing activities, which provided $34,000,773 of cash from our equity and debt financing transactions, described below.

 

***Equity Financing***

 

Our members contributed $610,000 of seed capital in a private placement, and $13,457,000 of equity in our initial public offering completed in January 2004.

 

On October 11, 2004, to supplement our equityfinancing, our debt financing and complete our capitalization plan we enteredinto a Unit Purchase and Redemption Agreement with ICM, Inc. of Colwich,Kansas and Fagen, Inc. of Granite Falls, Minnesota. On January 19,2005, we issued 6,250 of our units to ICM, Inc. and Fagen, Inc. at apurchase price of $1,000 per unit in exchange for a combined capitalcontribution from them of $6,250,000. Pursuant to the Unit Purchase andRedemption Agreement, we agreed to redeem all 6,250 units from ICM, Inc.and Fagen, Inc. using the proceeds from the sale of units in a registeredoffering or, to the extent the offering was unsuccessful, from cash flowgenerated by operations subject to certain loan covenants, restrictions and taxdistributions. Under the Unit Purchase and Redemption Agreement, we agreed toredeem the units at a redemption price of $1,100 per unit if we wereable to raise at least $6,875,000 in a future registered offering, or if theoffering was unsuccessful at the fair market value of the units at the time ofredemption.

 

To raise the proceedsnecessary to redeem the units in accordance with the terms of Unit Purchase andRedemption Agreement, we commenced a registered offering for additionalmembership units. Our registered offering became effective on April 20,2005 and we began our efforts to sell the registered membership units shortlythereafter. On July 20, 2005 we closed our public offering. During theoffering, we sold 9,091 units for an aggregate price of $10,000,100. On August 1,2005 we used the proceeds of the public offering to redeem 3,125 units eachfrom ICM, Inc. and Fagen, Inc. at a total redemption price of$6,875,000 in accordance with the Unit Purchase and Redemption Agreement andretained the balance of the proceeds for working capital.

 

We do not anticipate that any additional equity financing will be necessary in the foreseeable future. During the 2005 fiscal year, our equity increased $14,861,215 over fiscal year 2004.

 

***Debt Financing***

 

Long-Term Debt. In November 23, 2004, we entered intoa Credit Agreement with Home Federal Savings Bank of Rochester, Minnesota,establishing a construction loan facility in the amount of $26,000,000 andsecured by substantially all of our assets. We converted the construction loaninto two term loans on September 20, 2005, consisting of (1) a$21,000,000 conventional term loan (“LoanA”), and (2) a $5,000,000 term loan with a potential USDA guarantee of upto 80% of the loan value (“Loan B”). Loan A has an amortization period of10 years but matures at the end of 5 years. We make monthly paymentsof principal and interest on Loan A at a variable rate equal to prime plus1.75% with a floor of 6%. Loan A has a prepayment penalty of 3% in year onewhich decreases to 1% in year three. Loan B has an amortization period andmaturity date of 10 years. We make monthly payments of principal andinterest on Loan B at a variable interest rate of prime plus 1.25%, as adjustedquarterly. Loan B has a prepayment penalty of 5% in year one which decreases to1% in year five. We pay a $30,000 annual administration fee for the creditfacility. As of December 31, 2005, the principal balance on Loan A was$19,734,115 and the principal balance on the Loan B was $4,706,173. At December 31,2005, the effective interest rate for both loans was 8.75%. As interest ratesincrease, we will incur higher interest payments, which could adversely affectour net income.

 

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The two terms loans containrestrictions and financial covenants to which we are subject during the term ofthe agreements. Specifically, we are subject to certain financial loancovenants consisting of minimum working capital, minimum fixed coverage,minimum current ratio, minimum net worth and maximum debt/net worth covenantsduring the term of the loan. We are also prohibited from making distributionsto our members; except that we may distribute 40% of our net income to ourmembers after our lender has received audited financial statements for thefiscal year demonstrating our compliance with all financial ratio requirementsand loan covenants before and after any distributions to the members. However,Home Federal has waived, through December 31, 2006, certain minimum networth and maximum debt to net worth covenants. In addition, we are only allowedto make annual capital expenditures of up to $400,000 without our lender’sprior approval. During the term of the loan, we are required to pay to thelender an annual amount equal to the greater of (i) 75% of any CommodityCredit Corporation Bio Energy income payments received during the year or (ii) 25%of the Company’s free cash flow for each year. Payments consisting of USDACommodity Credit Corporation Bio Energy income must be paid to the lenderwithin 15 days of receipt of any such payments. These payments willcontinue until an aggregate sum of $7,500,000 has been received by the lender.As of December 31, 2005, with waivers, we are in compliance with allapplicable loan covenants.

 

On May 10, 2005, weentered into an agreement with ICM, Inc. for the purchase of a steamturbine generator. In order to finance the purchase of the generator, weexecuted a promissory note for $1,760,274 at an interest rate of 1% plus theprime rate payable to ICM, Inc and granted a security interest in a steamturbine generator to ICM, Inc. as collateral for the loan. Under the termsof the promissory note, we agree to make quarterly installment payments ofprincipal and interest with the balance due on July 1, 2008. We alsoentered into a subordination agreement with Home Federal Savings Bank (“HomeFederal”), our senior lender, in which Home Federal agrees ICM, Inc.’ssecurity interest in the generator is senior to the security interest of HomeFederal in the generator. Subsequent to the end of fiscal year 2005, on March 1,2006, this loan was paid in full.

 

Industrial Revenue BondFinancing. On December 20,2005, we completed an industrial revenue bond financing with the City ofGarnett, Kansas, which we expect to provide property tax savings for 10 yearson the plant site. In order to obtain the property tax savings, we transferredtitle to the plant site and improvements to the City of Garnett as security forthe repayment of the bonds, and we are leasing back the site in exchange forlease payments in an amount that is equal to the amount of interest to be paidon the City of Garnett Bonds (the “sale-leaseback transaction”). We purchasedall of the Bonds offered by the City of Garnett. Our senior lender, HomeFederal Savings Bank, consented to the sale-leaseback transaction, and thebonds have been pledged to Home Federal Savings Bank as security for ourobligations under the term debt credit facility. The maximum principal amountof the bonds is $50,000,000. The bonds were initially issued in the principalamount of $47,866,117, which is the amount of our expenditures on the plant asof December 20, 2005. Both the bonds and the corresponding lease have termsof 10 years. Assuming we have paid all of the interest due under the financingagreements at the end of the 10-year period, the financing agreements providethat the City of Garnett will transfer the plant site and improvements back toEast Kansas in return for nominal consideration.

 

**Off-BalanceSheet Arrangements.**

 

We do not have anyoff-balance sheet arrangements other than those described in the notes to ourFinancial Statements as December 31, 2005 located below in Note 4,describing our unit purchase and redemption transaction with ICM, Inc. andFagen, Inc. and Note 10, describing the sale-leaseback transaction withthe City of Garnett.

 

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**ITEM 7. FINANCIAL STATEMENTS.**

 

**EAST KANSAS AGRI-ENERGY, LLC**

 

Table of Contents

 
| Report of Independent  Registered Public Accounting Firm |   |
|----------------------------------------------------------|--------|
| Balance Sheets                                           |   |
| Statements of Operations                                 |   |
| Statements of Changes in  Members’ Equity           |   |
| Statements  of Cash Flows                                |   |
| Notes to Financial Statements                            |   |

 

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[Letterheadof Eide Bailly LLP]

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Audit Committee

**East Kansas Agri-Energy, LLC**

Garnett, Kansas

 

 

We have audited the accompanying balance sheets of **East Kansas Agri-Energy, LLC** (a limited liability company)as of December 31, 2005 and 2004, and the related statements of operations,members’ equity and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based upon our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we do not express such an opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of **East Kansas Agri-Energy, LLC** as of December 31, 2005 and2004, and the results of its operations and its cash flows for the years thenended, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
| /s/ Eide Bailly LLP                                                         |   |
|-----------------------------------------------------------------------------|--------|
|                                                                        |
|                                                                        |
| Minneapolis, Minnesota                                                      |
| February 9, 2006, except for Note  13, for which the date is March 28, 2006 |

 

27

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##### **EAST KANSAS AGRI-ENERGY, LLC**

**BALANCE SHEETS**

**DECEMBER31, 2005 AND 2004**

 
| ** **                                 | ** ** | **2005**       | ** **      | **2004**   | ** ** |
|--------------------------------------------|------------|----------------|-----------------|------------|------------|
| **ASSETS**                                 |       |           | ** **      |       |       |
|                                       |       |           | ** **      |       |       |
| CURRENT ASSETS                             |       |           | ** **      |       |       |
| Cash and cash  equivalents                 | ** ** | **$**          | **4,569,145**   | ** ** | $          | 6,210,819 |   |
| Trade accounts  receivable - related party | ** ** | **2,651,546**  | ** **      | —     |       |
| Inventory                                  | ** ** | **1,595,547**  | ** **      | —     |       |
| Investment in  commodity contracts         | ** ** | **222,951**    | ** **      | —     |       |
| Interest  receivable                       | ** ** | **314,736**    | ** **      | —     |       |
| Prepaid expense                            | ** ** | **412,173**    | ** **      | 4,938      |       |
| Grant receivable                           | ** ** | **—**     | ** **      | 54,906     |       |
| Prepaid offering  costs                    | ** ** | **—**     | ** **      | 64,518     |       |
| Total current  assets                      | ** ** | **9,766,098**  | ** **      | 6,335,181  |       |
|                                       |       |           | ** **      |       |       |
| PROPERTY, PLANT  AND EQUIPMENT             |       |           | ** **      |       |       |
| Land                                       | ** ** | **580,322**    | ** **      | 170,011    |       |
| Land  improvements                         | ** ** | **1,178,941**  | ** **      | —     |       |
| Office equipment                           | ** ** | **270,866**    | ** **      | 16,998     |       |
| Buildings                                  | ** ** | **1,668,527**  | ** **      | —     |       |
| Equipment                                  | ** ** | **42,019,400** | ** **      | —     |       |
| Vehicles                                   | ** ** | **22,743**     | ** **      | —     |       |
| Construction in  progress                  | ** ** | **1,404,589**  | ** **      | 16,366,365 |       |
| ** **                                 |       | **47,145,388** | ** **      | 16,553,374 |       |
| Less accumulated  depreciation             | ** ** | **(1,578,020** | **)**           | (6,818     | )          |
| Total property,  plant, and equipment      | ** ** | **45,567,368** | ** **      | 16,546,556 |       |
|                                       |       |           | ** **      |       |       |
| OTHER ASSETS                               |       |           | ** **      |       |       |
| Investment in  Industrial Revenue Bonds    | ** ** | **47,866,117** | ** **      | —     |       |
| Financing costs                            | ** ** | **679,099**    | ** **      | 552,385    |       |
| Less accumulated  amortization             | ** ** | **(19,301**    | **)**           | —     |       |
| Total other  assets                        | ** ** | **48,525,915** | ** **      | 552,385    |       |
|                                       |       |           | ** **      |       |       |
| Total assets                               | ** ** | **$**          | **103,859,381** | ** ** | $          | 23,434,122 |   |

 

Continued on next page

 

28

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##### **EAST KANSAS AGRI-ENERGY, LLC**

**BALANCESHEETS****(page 2)**

 
| ** **                                                                                                                                      | ** ** | **2005**       | ** **      | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|-----------------|------------|------------|
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                                                                       | ** ** | ** **     | ** **      | ** ** | ** ** |
|                                                                                                                                            |       |           |            |       |       |
| CURRENT  LIABILITIES                                                                                                                            |       |           |            |       |       |
| Current portion  of long-term debt                                                                                                              | ** ** | **$**          | **2,615,813**   |       | $          | — |   |
| Accounts payable                                                                                                                                |       |           |            |       |       |
| Trade                                                                                                                                           | ** ** | **449,316**    |            | 384,287    |       |
| Related parties                                                                                                                                 | ** ** | **813,775**    |            | 9,837,189  |       |
| Accrued payroll,  taxes and withholdings                                                                                                        | ** ** | **52,574**     |            | 7,365      |       |
| Other accrued  expenses                                                                                                                         | ** ** | **89,295**     |            | 17,262     |       |
| Accrued interest                                                                                                                                | ** ** | **407,257**    |            | —     |       |
| Total current  liabilities                                                                                                                      | ** ** | **4,428,030**  |            | 10,246,103 |       |
|                                                                                                                                            |       |           |            |       |       |
| LONG-TERM DEBT  (less current maturities)                                                                                                       | ** ** | **23,438,059** |            | —     |       |
|                                                                                                                                            |       |           |            |       |       |
| LEASE OBLIGATION                                                                                                                                | ** ** | **47,866,117** |            | —     |       |
|                                                                                                                                            |       |           |            |       |       |
| MEMBERS’ EQUITY                                                                                                                            |       |           |            |       |       |
| Capital  contributions, 40,000 units authorized, 23,798 and 14,707 units issued and  outstanding as of December 31, 2005 and 2004, respectively | ** ** | **24,707,100** |            | 14,707,000 |       |
| Retained  earnings (accumulated deficit)                                                                                                        | ** ** | **3,420,075**  |            | (1,518,981 | )          |
| Total members’  equity                                                                                                                     | ** ** | **28,127,175** |            | 13,188,019 |       |
|                                                                                                                                            |       |           |            |       |       |
| Total  liabilities and members’ equity                                                                                                     | ** ** | **$**          | **103,859,381** |       | $          | 23,434,122 |   |

 

See Notes to FinancialStatements

 

29

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##### **EAST KANSAS AGRI-ENERGY, LLC**

**STATEMENTS OF OPERATIONS**

 
| ** **                                    | ** ** | **Year  Ended  December 31,  2005** | ** **     | **Year  Ended  December 31,  2004** |   |
|-----------------------------------------------|------------|------------------------------------------|----------------|------------------------------------------|--------|
|                                          |       |                                     | ** **     |                                     |   |
| REVENUE                                       |       |                                     | ** **     |                                     |   |
| Related parties                               | ** ** | **$**                                    | **33,645,065** | ** **                               | $      | — |   |
| Incentive funds                               | ** ** | **1,946,256**                            | ** **     | —                                   |   |
| ** **                                    |       | **35,591,321**                           | ** **     | —                                   |   |
|                                          |       |                                     | ** **     |                                     |   |
| COST OF SALES                                 |       |                                     | ** **     |                                     |   |
| Related parties                               | ** ** | **(15,371,411**                          | **)**          | —                                   |   |
| Other                                         | ** ** | **(11,508,574**                          | **)**          | —                                   |   |
| ** **                                    | ** ** | **(26,879,985**                          | **)**          | —                                   |   |
|                                          |       |                                     | ** **     |                                     |   |
| GROSS PROFIT                                  | ** ** | **8,711,336**                            | ** **     | **—**                               |   |
|                                          |       |                                     | ** **     |                                     |   |
| OPERATING  EXPENSES                           |       |                                     | ** **     |                                     |   |
| General,  administrative and selling expenses | ** ** | **855,438**                              | ** **     | —                                   |   |
| Start-up  expenses                            | ** ** | **926,057**                              | ** **     | 357,591                                  |   |
| ** **                                    |       | **1,781,495**                            | ** **     | 357,591                                  |   |
|                                          |       |                                     | ** **     |                                     |   |
| INCOME (LOSS)  FROM OPERATIONS                | ** ** | **6,929,841**                            | ** **     | **(357,591**                             | **)**  |
|                                          |       |                                     | ** **     |                                     |   |
| OTHER INCOME  (EXPENSE)                       |       |                                     | ** **     |                                     |   |
| Interest income                               | ** ** | **359,580**                              | ** **     | 47,020                                   |   |
| Interest expense                              | ** ** | **(1,869,346**                           | **)**          | (3,656                                   | )      |
| Plant lease  interest expense                 | ** ** | **(314,736**                             | **)**          | —                                   |   |
| Other income                                  | ** ** | **2,200**                                | ** **     | —                                   |   |
| ** **                                    |       | **(1,822,302**                           | **)**          | 43,364                                   |   |
|                                          |       |                                     | ** **     |                                     |   |
| NET INCOME  (LOSS)                            | ** ** | **$**                                    | **5,107,539**  | ** **                               | **$**  | **(314,227** | **)** |
|                                          |       |                                     | ** **     |                                     |   |
| BASIC INCOME  (LOSS) PER UNIT                 | ** ** | **$**                                    | **235**        | ** **                               | $      | (29 | ) |
|                                          |       |                                     | ** **     |                                     |   |
| DILUTED INCOME  (LOSS) PER UNIT               | ** ** | **$**                                    | **233**        | ** **                               | $      | (29 | ) |
|                                          |       |                                     | ** **     |                                     |   |
| WEIGHTED AVERAGE  UNITS OUTSTANDING           |       |                                     | ** **     |                                     |   |
| BASIC                                         | ** ** | **21,771**                               | ** **     | 10,662                                   |   |
|                                          |       |                                     | ** **     |                                     |   |
| DILUTED                                       | ** ** | **21,925**                               | ** **     | 10,662                                   |   |

 

See Notes to FinancialStatements

 

30

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##### **EAST KANSAS AGRI-ENERGY, LLC**

**STATEMENTSOF CHANGES IN MEMBERS’ EQUITY**

 
| ** **                                       | ** ** | ** ** | ** ** | **Contributed** | ** **     | **Retained**                | ** ** | ** **    | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------------|----------------|-----------------------------|------------|---------------|------------|
| ** **                                       | ** ** | **Units**  | ** ** | **Capital**     | ** **     | **(Deficit) Earnings** | ** ** | **Total**     | ** ** |
|                                             |       |       |       |            |           |                        |       |          |       |
| BALANCE,  DECEMBER 31, 2003                      |       | 1,220      |       | $               | 1,220,000      |                        | $          | (940,625      | )          | $ | 279,375 |   |
| Units issued                                     |       | 13,457     |       | 13,457,000      |           | —                      |       | 13,457,000    |       |
| Units issued for  compensation                   |       | 30         |       | 30,000          |           | —                      |       | 30,000        |       |
| Cost of raising  capital                         |       | —     |       | —          |           | (264,129                    | )          | (264,129      | )          |
| Net loss for the  year ended December 31, 2004   |       | —     |       | —          |           | (314,227                    | )          | (314,227      | )          |
| BALANCE,  DECEMBER 31, 2004                      |       | 14,707     |       | 14,707,000      |           | (1,518,981                  | )          | 13,188,019    |       |
| Units issued                                     |       | 15,341     |       | 16,250,100      |           | —                      |       | 16,250,100    |       |
| Units converted  to a liability                  |       | (6,250     | )          | (6,250,000      | )              |                        |       | (6,250,000    | )          |
| Cost of raising  capital                         |       |       |       | —          |           | (168,483                    | )          | (168,483      | )          |
| Net income for  the year ended December 31, 2005 |       |       |       | —          |           | 5,107,539                   |       | 5,107,539     |       |
|                                             |       |       |       |            |           |                        |       |          |       |
| **BALANCE,  DECEMBER 31, 2005**                  | ** ** | **23,798** | ** ** | **$**           | **24,707,100** | ** **                  | **$**      | **3,420,075** | ** ** | **$** | **28,127,175** | ** ** |

 

See Notes to FinancialStatements

 

31

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##### **EAST KANSAS AGRI-ENERGY, LLC**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                  | ** ** | **Year  Ended  December 31,  2005** | ** **    | **Year  Ended  December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------|---------------|------------------------------------------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES                                       |       |                                     | ** **    |                                     |       |
| Net income  (loss)                                                          | ** ** | **$**                                    | **5,107,539** | ** **                               | $          | (314,227 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                                     | ** **    |                                     |       |
| Depreciation                                                                | ** ** | **1,571,399**                            | ** **    | 3,324                                    |       |
| Amortization                                                                | ** ** | **19,301**                               | ** **    | —                                   |       |
| Non-cash  compensation for capital units                                    | ** ** | **—**                               | ** **    | 30,000                                   |       |
| (Increase)  decrease in current assets                                      |       |                                     | ** **    |                                     |       |
| Accounts  receivable                                                        | ** ** | **(2,651,546**                           | **)**         | —                                   |       |
| Inventory                                                                   | ** ** | **(1,595,547**                           | **)**         | —                                   |       |
| Commodity  contracts                                                        | ** ** | **(222,951**                             | **)**         | —                                   |       |
| Grants  receivable                                                          | ** ** | **54,906**                               | ** **    | (27,847                                  | )          |
| Prepaid expense                                                             | ** ** | **(407,235**                             | **)**         | (3,519                                   | )          |
| Interest  receivable                                                        | ** ** | **(314,736**                             | **)**         | —                                   |       |
| Increase  (decrease) in current liabilities:                                |       |                                     | ** **    |                                     |       |
| Accounts payable                                                            | ** ** | **1,125,975**                            | ** **    | 36,452                                   |       |
| Accrued expenses                                                            | ** ** | **488,063**                              | ** **    | 17,886                                   |       |
| NET CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES                        | ** ** | **3,175,168**                            | ** **    | (257,931                                 | )          |
|                                                                        |       |                                     | ** **    |                                     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                       |       |                                     | ** **    |                                     |       |
| Purchase of  plant and equipment, including construction in progress        | ** ** | **(38,427,615**                          | **)**         | (6,242,181                               | )          |
| Purchase of land  and land option payments                                  | ** ** | **(390,000**                             | **)**         | (160,011                                 | )          |
| NET CASH (USED  IN) INVESTING ACTIVITIES                                    | ** ** | **(38,817,615**                          | **)**         | (6,402,192                               | )          |
|                                                                        |       |                                     | ** **    |                                     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                       |       |                                     | ** **    |                                     |       |
| Cost of raising  capital                                                    | ** ** | **(168,483**                             | **)**         | (1,260                                   | )          |
| Payment of  financing fees                                                  | ** ** | **(124,442**                             | **)**         | (552,385                                 | )          |
| Proceeds from  notes payable                                                | ** ** | **90,000**                               | ** **    | —                                   |       |
| Repayment of  notes payable                                                 | ** ** | **(90,000**                              | **)**         | —                                   |       |
| Proceeds from  long-term debt                                               | ** ** | **26,000,000**                           | ** **    | —                                   |       |
| Repayment of  long-term debt                                                | ** ** | **(1,706,402**                           | **)**         | (75,000                                  | )          |
| Proceeds from  units subject to redemption                                  | ** ** | **6,250,000**                            | ** **    | —                                   |       |
| Redemption of  units converted to a liability                               | ** ** | **(6,250,000**                           | **)**         | —                                   |       |
| Capital  contributions                                                      | ** ** | **10,000,100**                           | ** **    | 13,457,000                               |       |
| NET CASH  PROVIDED BY FINANCING ACTIVITIES                                  | ** ** | **34,000,773**                           | ** **    | 12,828,355                               |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                       | ** ** | **(1,641,674**                           | **)**         | 6,168,232                                |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF YEAR                               | ** ** | **6,210,819**                            | ** **    | 42,587                                   |       |
| CASH AND CASH  EQUIVALENTS, END OF YEAR                                     | ** ** | **$**                                    | **4,569,145** | ** **                               | $          | 6,210,819 |   |

 

(continued on next page)

 

32

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**EAST KANSAS AGRI-ENERGY, LLC**

**STATEMENTS OF CASH FLOWS (page 2)**

 
| ** **                                                                | ** ** | **Year  Ended  December 31,  2005** | ** **     | **Year  Ended  December 31,  2004** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------|----------------|------------------------------------------|------------|
|                                                                      |       |                                     |           |                                     |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                         |       |                                     |           |                                     |       |
| Cash paid for  interest, net of capitalized interest of $254,282 for 2005 | ** ** | **$**                                    | **1,776,825**  |                                     | $          | 3,338 |   |
|                                                                      |       |                                     |           |                                     |       |
| NON CASH  INVESTING AND FINANCING ACTIVITIES                              |       |                                     |           |                                     |       |
|                                                                      |       |                                     |           |                                     |       |
| Property, plant,  and equipment costs incurred                            | ** ** | **$**                                    | **30,155**     |                                     | $          | 10,049,997 |   |
|                                                                      |       |                                     |           |                                     |       |
| Deferred  offering costs incurred                                         | ** ** | **$**                                    | **—**     |                                     | $          | 64,518 |   |
|                                                                      |       |                                     |           |                                     |       |
| Property, plant,  and equipment financed by a note payable                | ** ** | **$**                                    | **1,760,274**  |                                     | $          | — |   |
|                                                                      |       |                                     |           |                                     |       |
| Financing costs  incurred                                                 | ** ** | **$**                                    | **2,272**      |                                     | $          | — |   |
|                                                                      |       |                                     |           |                                     |       |
| Units subject to  redemption converted to a liability                     | ** ** | **$**                                    | **6,250,000**  |                                     | $          | — |   |
|                                                                      |       |                                     |           |                                     |       |
| Lease obligation  issued                                                  | ** ** | **$**                                    | **47,866,117** |                                     | $          | — |   |
|                                                                      |       |                                     |           |                                     |       |
| Investment in  Industrial Revenue Bonds                                   | ** ** | **$**                                    | **47,866,117** |                                     | $          | — |   |
|                                                                      |       |                                     |           |                                     |       |
| Cost of raising  capital reclassified to members’ equity             | ** ** | **$**                                    | **168,483**    |                                     | $          | 264,129 |   |
|                                                                      |       |                                     |           |                                     |       |
| Capital  contributions issued for compensation                            |       |                                     |           |                                     |       |
| Expensed during  the year ended December 31, 2004                         | ** ** | **$**                                    | **—**     |                                     | $          | 15,000 |   |
| Liability  converted to capital units                                     | ** ** | **—**                               |           | 15,000                                   |       |
| ** **                                                                |       | **$**                                    | **—**     |                                     | $          | 30,000 |   |

 

See Notes to Financial Statements

 

33

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**EAST KANSAS AGRI-ENERGY, LLC**

**NOTES TO FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*Natureof Business*

 

EastKansas Agri-Energy, LLC, (a Kansas limited liability company) located inGarnett, Kansas, was organized to own and operate a 35 million gallon ethanolplant with distribution within the United States. East Kansas Agri-Energy, LLC(the Company) was formally organized as a limited liability company asof October 16, 2001. Prior to that date the Company operated as a generalpartnership with no formal partnership agreement. The Company began its principal operations June 15, 2005. Prior to that date,the Company was considered to be in development stage.

 

*Accounts Receivable*

 

Accounts receivable arepresented at face value, net of the allowance for doubtful accounts. Theallowance for doubtful accounts is established through provisions charged againstincome and is maintained at a level believed adequate by management to absorbestimated bad debts based on historical experience and current economicconditions. Management believes all receivables will be collected and thereforethe allowance has been established to be zero at December 31, 2005.

 

The Company’spolicy is to charge simple interest on trade receivables past due balances;accrual of interest is discontinued when management believes collection isdoubtful. Receivables are considered past due based upon payment terms setforth at the date of the related sale. The Company has no receivables accruinginterest at December 31, 2005.

 

*Prepaid Offering Costs*

 

Costsincurred related to the sale of units are recorded as prepaid offering costsuntil the related units are issued. Upon issuance of units, offering costs arededucted from additional paid-in capital, with any remaining amount applied toretained earnings. Offering costs include direct costs related to the offeringsuch as legal fees, cost of meetings and materials and related costs associatedwith the Company’s private offering and public offering.

 

*Investments*

 

The Company classifiesits marketable debt securities as “held to maturity” if it has the positiveintent and ability to hold the securities to maturity. Securities classified asheld to maturity are carried at amortized cost.

 

*FinancingCosts*

 

Costs incurred related to origination of debtfinancing are recorded as an asset and amortized over the expected term of thedebt.

 

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

 

34

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*EarningsPer Unit*

 

Earnings per unit arecalculated based on the period of time units have been issued and outstanding.For purposes of calculating diluted earnings per capital unit, units subscribedfor but not issued are included in the computation of outstanding capitalunits.

 

*StockBased Compensation*

 

The Company records stock based compensation basedon the fair value of the units issued for the compensation.

 

*General, administrative and selling expenses*

 

The primary components of general andadministrative expenses are management fees, insurance expense, sellingexpenses and payroll.

 

*Revenue Recognition*

 

Revenue from the production of ethanol and relatedproducts is recorded upon transfer of title to our customers. The transfertakes place at the plant site and therefore shipping terms are FOB shippingpoint. Interest income is recognized as earned. Income from federal and stateincentives are recognized when received due to uncertainty of available fundsand pro-rations used by the sponsoring organizations.

 

*Cost of Sales*

 

The primary components of cost of sales from theproduction of ethanol and related products are grain expense, energy expense(natural gas and electricity), raw materials expense (chemicals anddenaturant), labor and depreciation on process equipment.

 

*Shipping and Handling*

 

Shipping and handling costs are expensed as incurredand are included in the cost of sales.

 

*Organization and Start-up Costs*

 

Organizational and start-up costs are expensed asincurred. Organizational costs consist of amounts related to the formation ofthe company. Start-up costs consist of amounts incurred during the developmentstage related to the operation and management of the Company, which do notqualify as capitalized costs.

 

*Income Taxes*

 

The Company is organized as a limited liability companyunder state law and is treated as a partnership for income tax purposes. Underthis type of organization, the Company’s earnings pass through to the partnersand are taxed at the partner level. Accordingly, no income tax provision hasbeen calculated. Differences between financial statement basis of assets andtax basis of assets is related to capitalization and amortization oforganizational and start-up costs for tax purposes, whereas these costs areexpensed for financial statement purposes, and the difference between therecorded amounts of financial statement and tax depreciation, unrealized gainsor losses on commodity contracts and incentive programs payments.

 

35

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*Cash Equivalents*

 

For purposes of the statement of cash flows, theCompany considers all highly liquid debt instruments purchased with an originalmaturity of three months or less to be cash equivalents.

 

*Fair Value of Financial Instruments*

 

The Company believes the carrying value of cash andcash equivalents approximates fair value due to the short maturity of theseinstruments. The Company estimates the fair market value of the investment inIndustrial Revenue Bonds to approximate cost.

 

The Company believes the carrying amount oflong-term note payable obligations approximates fair value. For the permanentfinancing, fair value approximates the carrying amount due to the variableinterest rate feature of the debt.

 

*Inventory*

 

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

 

*Investment in Commodity Contracts*

 

SFAS No. 133 requires acompany to evaluate its contracts to determine whether the contracts arederivatives. Certain contracts that literally meet the definition of aderivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

 

The Company enters intoshort-term cash grain, option and futures contracts as a means of securinggrain for the ethanol plant and managing exposure to changes in commodityprices. All derivatives are designated as non-hedge derivatives. Although thecontracts are effective economic hedges of specified risks, they are not designatedas and accounted for as hedging instruments.

 

As part of its trading activity, the Company uses futures and optioncontracts offered through regulated commodity exchanges to reduce risk and isexposed to risk of loss in the market value of inventories. To reduce thatrisk, the Company generally takes positions using cash and futures contractsand options. During the year ended December 31, 2005 this activityresulted in net gains of $38,327 which are reported in cost of sales.

 

*Property and Equipment*

 

Depreciation is computedover the estimated useful life of each asset using the straight-line method. Estimateduseful lives generally used 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        |   |

 

36

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The Company’s propertyand equipment were acquired under lease agreements pursuant to an industrialrevenue bond issue. The Company is required to make semi-annual deposits withthe Trustee sufficient to service the principal maturities and interestrequirements. Title to the property will be transferred to the Company when thelease is terminated upon retirement of the bonds. Accordingly, the bonds havebeen recorded as a direct obligation of the Company. The Company is also theholder of the bonds.

 

The Company reviews itsproperty and equipment for impairment whenever events indicate that thecarrying amount of the asset may not be recoverable. An impairment loss isrecorded if the sum of the future cash flows is less than the carrying amountof the asset. The amount of the loss is determined by comparing the fair marketvalue of the asset to the carrying amount of the asset. Such assessments didnot result in any adjustment to the value of the non-current assets.

 

*Environmental Liabilities*

 

The Company’s operations are subject to federal,state and local environmental laws and regulations  These laws require the Company to investigateand remediate the effects of the release or disposal of materials at itslocation. Accordingly, the Company has adopted policies, practices andprocedures in the areas of pollution control, occupational health, and theproduction, handling, storage and use of hazardous materials to preventmaterial environmental or other damage; and to limit the financial liabilitywhich could result from such events. Environmental liabilities are recordedwhen the liability is probable and the costs can be reasonably estimated.

 

**NOTE 2 - INCENTIVE PAYMENTS**

** **

The Company has qualifiedfor the federal U.S. Department of Agriculture Bio Energy Program. The federalprogram is managed by the Commodity Credit Corporation and is designed toexpand the production of fuel grade ethanol by offering incentives forincremental production compared to the same quarter of the prior year. Theannually funded program runs through fiscal year 2006 and incentive paymentsare pro-rated if applications for incentives exceed the annual funding. Themaximum 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 has included federal incentives of $1,276,927in revenue for the year ended December 31, 2005.

 

The Company has been approved for the Kansas QualifiedAgricultural Ethanol Producer Incentive Fund. The incentive rate is $.075 pergallon of ethanol produced. The Company must establish they have produced5,000,000 gallons of ethanol before the State of Kansas will disburse the funds.The Company has included state incentives of $669,329 in revenue for the yearended December 31, 2005.

 

**NOTE 3 - INVENTORY**

** **

As of December 31, 2005,inventory consists of:

 

| Raw Material     |   | $       | 836,322   |   |
|------------------|--------|---------|-----------|--------|
| Work in Progress |   | 301,995 |      |
| Finished Goods   |   | 457,230 |      |
|             |   |    |      |
|             |   | $       | 1,595,547 |   |

 

37

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**NOTE 4 - UNITS SUBJECT TOREDEMPTION**

 

OnOctober 11, 2004, the Company executed a Unit Purchase and Redemption Agreementwith ICM, Inc. and Fagen, Inc. in which the Company agreed to issue a total of6,250 units to them in exchange for their combined capital contribution of$6,250,000. The Company also agreed to redeem all 6,250 units from ICM, Inc.and Fagen, Inc. using the proceeds from the sale of units in a futureregistered offering or, to the extent the future offering is unsuccessful, fromcash flow generated by operations subject to certain loan covenants,restrictions and tax distributions. The redemption price was $1,100 per unit. Inconnection with this capital contribution, the Company amended the OperatingAgreement to allow ICM, Inc. and Fagen, Inc. to appoint a total of threedirectors to the Company’s board of directors, subject to the Company’s abilityto terminate one of their director positions for every $2,000,000 dollars inredemption payments made to either or both of ICM, Inc. and Fagen, Inc. OnJanuary 19, 2005, the Company closed on the purchase of these units by ICM,Inc. and Fagen, Inc. and issued 3,125 units to Fagen, Inc. and 3,125 units toICM, Inc. at a purchase price of $1,000 per unit. The purchases were made withcash and the total amount of cash consideration for those securities was$6,250,000. On August 1, 2005, the Company redeemed the 6,250 units from ICM,Inc. and Fagen, Inc. at a price of $1,100 per unit for a total of $6,875,000.

 

OnDecember 16, 2004, the Company filed a registration statement on Form SB-2(Commission File 333-121323) with pre-effective amendments to the registrationstatement on February 1, 2005, April 6, 2005 and April 19, 2005, which becameeffective April 20, 2005.

 

TheCompany accepted units for an aggregate price of $10,000,100 and used theproceeds of the registered offering to redeem the units from ICM, Inc. andFagen, Inc. in accordance with the agreement and retained the balance of theproceeds 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 for the year ended December 31, 2005 when the liabilitywas paid.

 

**NOTE 5 - LONG-TERM DEBT**

 

OnNovember 23, 2004, the Company entered into a Credit Agreement with HomeFederal Savings Bank, establishing a construction loan facility for theconstruction of a 35 million gallon per year ethanol plant. The constructionfinancing is in the amount of $26,000,000 consisting of a $21,000,000conventional term loan and a $5,000,000 loan potentially guaranteed 80% by theUSDA, and is secured by substantially all of our assets.

 

Duringthe construction phase, the Company made monthly payments of interest only at avariable interest rate equal to prime plus 1.75% with a floor of 6%. OnSeptember 20, 2005, following construction completion, the loan was segmentedinto two loans (1) a $5,000,000 loan (Loan A) with a potential 80% USDA guarantee,and (2) a $21,000,000 conventional term loan (Loan B). The $5,000,000 loan hasan amortization period and maturity date of 10 years. The Company makes monthlypayments of principal and interest on the $5,000,000 loan at a variableinterest rate of prime plus 1.75%. This variable rate is adjusted quarterly. The$21,000,000 conventional loan has an amortization period of ten years but willmature at the end of five years. The Company makes monthly payments ofprincipal and interest on the $21,000,000 loan at a variable rate equal toprime plus 1.75% with a floor of 6%. The effective interest rate for both loansat December 31, 2005 was 8.75%.

 

TheCompany pays a $30,000 annual administration fee related to the creditfacility. The credit facility is secured by a mortgage on our real property anda security interest in all personal and intangible assets of the Company,including assignment of all material contracts.

 

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

 

38

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Duringthe term of the loan, all deposit accounts related to the Company must bemaintained at Home Federal Savings Bank. The Company is subject to certainfinancial loan covenants consisting of minimum working capital, minimum fixedcharge coverage, minimum current ratio, minimum debt service, minimum net worthand maximum debt to net worth covenants during the term of the loan. The Companyis also prohibited from making distributions to their members; however, theCompany is allowed to distribute 40% of our net income to our members after ourlender has received audited financial statements for the fiscal year. TheCompany must be in compliance with all financial ratio requirements and loancovenants before and after any distributions to the members. The lendertemporarily waived, through December 31, 2006, certain minimum net worth andmaximum debt to net worth covenants. With the waiver, the Company is incompliance with the applicable loan covenants as of December 31, 2005.

 

TheCompany is only allowed to make annual capital expenditures up to $400,000annually without the lender’s prior approval. During the term of the loan, theCompany is required to pay to the lender an annual amount equal to the greaterof: 1) 75% of any Commodity Credit Corporation Bio-Energy income paymentsreceived during the year, or 2) 25% of the Company’s free cash flow for eachyear. Payments consisting of USDA Commodity Credit Corporation Bio-Energyincome must be paid to the lender within 15 days of receipt of any suchpayments. These payments will continue until an aggregate sum of $7,500,000 hasbeen received by the lender. The Company is in compliance with the applicable loan covenants as of December31 2005.

 

OnMay 10, 2005 the Company entered into a contract with ICM, Inc. to purchase asteam 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 variableinterest rate will be adjusted quarterly on the first day of January, April,July and October. The note is secured by the equipment. The effective interestrate at December 31, 2005 was 8.0%.

 

Long-termobligations of the Company are summarized as follows at December 31, 2005:

 
| Loan B                                  |   | $          | 19,734,115 |   |
|-----------------------------------------|--------|------------|------------|--------|
| Loan A                                  |   | 4,706,173  |       |
| Equipment note  payable - related party |   | 1,613,584  |       |
|                                    |   |       |       |
| Less current  portion                   |   | (2,615,813 | )          |
|                                    |   |       |       |
| Long-term  portion                      |   | $          | 23,438,059 |   |

 

The estimatedmaturities of long-term debt at December 31, 2005, are as follows:

 

| **12 Month Period Ending 12/31** | ** ** | **Amount** | ** ** |
|------------------------------------------------------|------------|------------|------------|
|                                                 |       |       |       |
| 2006                                                 |       |       | $          | 2,615,813 |   |
| 2007                                                 |       |       | 2,800,651  |   |
| 2008                                                 |       |       | 2,855,638  |   |
| 2009                                                 |       |       | 2,635,618  |   |
| 2010                                                 |       |       | 12,558,616 |   |
| Thereafter                                           |       |       | 2,587,536  |   |
|                                                 |       |       |       |
|                                                 |       | $          | 26,053,872 |   |

 

39

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**NOTE 6 - MEMBERS’ EQUITY**

 

As specified in theCompany’s Operating Agreement, voting rights are one vote for each voting unitregistered in the name of such Member as shown on the Membership Registrationmaintained by the Company. No Member shall directly or indirectly own orcontrol more than 25% of the issued and outstanding voting membership interestin the Company at any time.

 

Income and losses of theCompany shall be allocated among the Members in proportion to each Member’srespective percentage of units when compared with the total Units issued.

 

The Company’s cash flowshall 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 orencumbrance of Capital Units is subject to certain restrictions, includingapproval by the board of directors.

 

In addition to transactionsdiscussed in Note 4, the Company issued during 2004 a total of 30 units forcompensation. The former project coordinator received 15 units in exchange foramounts previously owed for services. The current project coordinator (who is afull time employee of the Company) and former treasurer (who was a full timeemployee of the Company) received a total of 15 units as a bonus for theirservices related to the development and financing of the Company. Compensationexpense related to this bonus totaled $15,000 for the year ended December 31,2004.

 

During September 2004,the Company amended its Operating Agreement whereby the number of authorizedunits was increased from 20,000 to 40,000 units. In addition, the amendments tothe Operating Agreement provide for two classes of members of the board ofdirectors, Class A and Class B. Class A members of the board of directorsconsist of previously existing members of the board of directors, prior toamendment. Up to (3) Class B members of the board of directors may be appointedby Fagen, Inc., ICM, Inc., or both of these parties in conjunction with theiragreement to purchase units. Fagen, Inc. and ICM, Inc. relinquished certainClass B member board of director positions when the units subject to redemption(See Note 4) were redeemed.

 

The Company completedits initial public offering and escrow was broken in March 2004. A total of13,457 units were subscribed and paid for during the year ended December 31,2004. The Company completed its second public offering and escrow was broken inJuly 2005. A total of 9,091 units were subscribed and paid for during the yearended December 31, 2005.

 

Uponissuance of the units related to the initial public offering, costs related tothe issuance of the units of $264,129 was charged to members’ equity. 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.

 

**NOTE 7 - CONCENTRATION OF CREDITRISK**

 

The Company maintainscash balances at four financial institutions in its trade area. The accounts aresecured by the Federal Deposit Insurance Corporation up to $100,000. At times,the Company’s bank balance may exceed $100,000.

 

40

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**NOTE 8 - COMMITMENTS ANDCONTINGENCIES**

 

The Companyentered into an option agreement to purchase approximately 10 acres of land.The option was originally purchased for $5,000, plus $5,000 for an extensionduring 2003, and provided for a purchase price of $9,000 per acre, plus thecost to replace boundary fencing and relocate an existing structure along withwater and electric utilities. The option was extended to September 1, 2004 andthe Company paid an additional $5,000 for the extension. On September 1, 2004,the option was extended until such time as closing on the property would occur.The purchase price of the land will be reduced by amounts previously paid forthe option and extension. OnNovember 17, 2004, the Company exercised the land option and purchasedapproximately 19 acres of real estate in Anderson County, Kansas. The Companypaid $170,010, which excluded the cost to replace boundary fencing and relocatean existing structure along with water and electric utilities. Previousdeposits totaling $20,000 were applied to the purchase price of the land and asum of $150,010 was paid at closing. During the year ended December 31, 2005,the Company incurred costs totaling $20,311 for construction of boundaryfencing and structural improvements.

 

The Company entered intoa design-build contract with ICM, Inc., a related party, for a fixed price of$35,900,000, subsequently amended to $35,977,582, excluding certain ownerfurnished costs, pursuant to an agreement for the construction of the 35million gallon annual capacity ethanol plant. As of December 31, 2005, theCompany had incurred and paid for costs of $35,977,582.

 

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

 

OnNovember 12, 2004, the Company entered into a Distillers Grains MarketingAgreement with United Bio Energy Ingredients, LLC, an affiliated related party,pursuant to which United Bio Energy Ingredients, LLC will purchase all driedand wet distillers grains produced at the plant for a term of at least fiveyears at a price of 98% of the FOB plant price United Bio Energy Ingredients,LLC charges its buyers of dried distillers grains, and 95% of the FOB plantprice United Bio Energy Ingredients, LLC charges its buyers of wet distillersgrains. United Bio Energy Ingredients, LLC, will use its best efforts toachieve the highest resale price available under prevailing market conditions.The Company is responsible for supplying all labor and equipment to load orunload trucks or rail cars without charge to United Bio Energy Ingredients, LLCand is required to provide storage for at least 10 days production of wet anddry distiller grains. In addition, the distiller grains must meet qualityrequirements so that they will meet current industry standards for primaryanimal feed ingredients. If the Company fails to supply distiller grains thatcomply with industry standards, United Bio Energy Ingredients, LLC may rejectthem. The Company paid commissions of $121,953 for the year ended December 31,2005 related to this marketing agreement.

 

On November 12, 2004, theCompany entered into a Raw Grains Agreement with United Bio Energy Ingredients,LLC, an affiliated related party. The Raw Grains Agreement provides for theCompany to purchase all raw grains necessary for ethanol production from UnitedBio Energy Ingredients, LLC for a period of at least five years. Pursuant tothe agreement, United Bio Energy Ingredients, LLC will use its best efforts toarrange for the purchase of grain at the lowest price available underprevailing market conditions and we will supply all labor and equipmentnecessary to load or unload trucks or rail cars. For its service, the Companywill pay United Bio Energy Ingredients, LLC the actual cash procurement priceand all reasonable and necessary expenses to get the grain to the plant plus a$.02 per bushel fee. The title, risk of loss, and responsibility for thequality of grain will transfer to the Company when it unloads the grain at theplant. Prior to that time, United Bio Energy Ingredients, LLC will bear therisk of loss. All grain delivered to the plant shall meet certain qualitystandards and the Company will have the option to reduce the price the Companywill pay or fully reject any delivery that fails to conform to these standards,depending upon the severity of the noncompliance. For the year ended December31,

 

41

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2005, the Company paid$143,373 in brokerage fees for grain purchases made under this agreement.

 

On November 12, 2004, theCompany also entered into an Ethanol Agreement with United Bio Energy Fuels,LLC, an affiliated related party. The terms of the agreement provide thatUnited Bio Energy Fuels, LLC will market all fuel-grade ethanol produced at ourplant. In exchange, the Company agrees to pay United Bio Energy Fuels, LLC afee of $.01 for each gallon of ethanol produced at the Company’s plant duringthe term of the agreement. The Company expects that the term of the agreementwill be at least 5 years. United Bio Energy Fuels, LLC also agreed to use itsbest efforts to obtain the highest price for ethanol available under prevailingmarket conditions. For the year ended December 31, 2005, the Company paid$191,113 in marketing fees for ethanol marketing under this agreement.

 

On November 12, 2004, theCompany entered into a Management Agreement with United Bio Energy Management,LLC, a related party, in which United Bio Energy Management, LLC will superviseand direct the general operations of the plant for an anticipated period of atleast five years. United Bio Energy Management, LLC will provide the servicesof a full-time general manager to the plant. The Company has agreed tocompensate United Bio Energy Management, LLC an annual fee of $250,000 forthese services payable in monthly installments of $20,833, plus an incentivebonus based on the attainment of certain financial benchmarks. United BioEnergy Management, LLC will appoint a general manager to be based on site atour plant, and shall work exclusively for us. In the event of a dispute, theManagement Agreement provides that the Company will first attempt to amicablysettle any dispute or difference privately between United Bio EnergyManagement, LLC and the Company. If the Company cannot resolve the dispute as aresult of the discussions, then the Company must submit the matter tonon-binding mediation. In the event that the dispute is not settled throughmediation, the matter must be resolved by non-appealable arbitration inaccordance with the rules of the American Arbitration Association as applicablein the State of Kansas. The determination of the arbitrator is expected to befinal and may not be appealed to any court. The prevailing party in any arbitrationproceeding is entitled to recover reasonable attorneys’ fees and expensesincurred. The agreement commenced during March 2005. For the year ended December31, 2005, the Company incurred and paid for costs of $319,777 related to thisagreement including reimbursable expenses.

 

TheCompany has an agreement with the City of Garnett, Kansas to share the cost ofcertain highway improvements. Management estimates the obligation under thisagreement will be approximately $135,000.

 

On July 28, 2005, theCompany entered into an agreement with HDB Construction, Inc. for additionalwork on the railroad spur project not to exceed an amount of $1,567,268. As of December31, 2005 costs related to the project of $1,233,644 had been incurred and paid**.**

 

Due to a builder’s designchange during construction of the ethanol plant an extra beerwell was installedand remains the property of the design/builder. The Company has the option topurchase the beerwell as part of the expansion option in the originaldesign/build agreement. If the Company does not elect to exercise the expansionoption the purchase price will be negotiated at that time.

 

The Company has enteredinto an agreement with the City of Garnett seeking a Community DevelopmentBlock Grant (CDBG) for the purpose of financing a gray water reclamationproject. The estimated cost of the project is $750,000. If the grantapplication is successful, the Company will be responsible for $375,000 of theestimated project cost.

 

During January, 2006, theCompany has issued purchase orders in the amount of $351,215 for plannedcapital expenditures.

 

42

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Thefollowing is a schedule of the annual commitments related to the aboveagreements.

 

12 months ending December31,

 

| 2006       |   |   | $         | 687,025 |   |
|------------|--------|--------|-----------|---------|--------|
| 2007       |   |   | 664,108   |    |
| 2008       |   |   | 664,108   |    |
| 2009       |   |   | 664,108   |    |
| 2010       |   |   | 395,775   |    |
| Thereafter |   |   | 1,472,467 |    |
|       |   |   |      |
|       |   | $      | 4,547,591 |    |

 

TheCompany is involved in various claims arising in the normal course of business.Management believes that any financial responsibility that may be incurredwould not be material and therefore no additional accrual is deemed necessary.

 

**NOTE 9 - VALUE ADDED GRANT**

 

During the year ended December 31, 2003, the Company receivednotification of award of a United States Department of Agriculture Value-AddedAgricultural Product Market Development Grant (the Grant) for approximately$450,000. The Grant can be used to pay for certain organizational, offering andstart-up costs related to the formation and capitalization of the Company. Forthe year ended December 31, 2005 the Company did not qualify for anyreimbursement of costs incurred. For the year ended December 31, 2004 theCompany qualified for reimbursement of $209,221 of which $1,409 related to costof raising capital.

 

**NOTE 10 - SALE / LEASEBACKTRANSACTION**

 

OnDecember 20, 2005, the Company completed an industrial revenue bond financingwith the City of Garnett, Kansas that will provide property tax savings for 10years on the plant site. As part of the financing, title to the plant site andimprovements have been transferred to the City of Garnett, Kansas, as securityfor the repayment of the bonds, and the Company is leasing back the site in anamount that is equal to the amount of the principal and interest to be paid onThe City of Garnett, Kansas bonds. Home Federal Savings Bank consented to thistransaction, and the bonds have been pledged to Home Federal Savings Bank assecurity for any obligations under the Home Federal Savings Bank CreditAgreement. As part of the financing, the Company paid the bond underwriter,Gilmore & Bell, P.C. $40,000. The maximum principal amount of the bonds is$50,000,000. The bonds were initially issued in the principal amount of$47,866,117, which is the amount of the Company’s expenditures on the plant asof December 20, 2005. Additional project costs of $2,133,883 are planned andare expected to be eligible for submission for the bond trustee for additionalbond issuances.

 

The$40,000 of financing fees paid to the bond underwriter and $16,840 of legal andother cost associated with the bond closing will be amortized over theapproximately 10.5 year life of the bonds. A total of $448 of amortizationexpense related to these costs was recognized during the year ended December31, 2005.

 

Fromthe proceeds of the bond, the Company purchased the bonds as an investment. TheCompany, as holder of the industrial revenue bonds, is due interest at 8.0% perannum with interest payable semi-annually on June 1st and December 1st,commencing June 1, 2006. The interest income is directly offset by the leasepayments on the 

 

43

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plant.Both the bond and the corresponding lease have terms commencing December 20,2005 and terminating on June 1, 2016. The entire outstanding principal is dueupon termination of the bonds. The outstanding principal at December 31, 2005was $47,866,117. The lease qualifies as a capital lease. Interest incomerecognized on the Industrial Revenue Bonds for the year ended December 31, 2005was $314,736. This amount is equal to the lease expense of the plant.

 

Futuredebt service requirements on the Industrial Revenue Bonds at December 31, 2005are as follows:

 

| **12 months ending  December 31,** | ** ** | **Interest  Rate** | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total**   | ** ** |
|---------------------------------------------------|------------|--------------------|------------|---------------|------------|--------------|------------|-------------|------------|
|                                              |       |               |       |          |       |         |       |        |       |
| 2006                                              |       |               | 8          | %             | $          | —       |       | $           | 3,893,681  |   | $ | 3,893,681 |   |
| 2007                                              |       |               | 8          | %             | —     |         | 3,893,681  |        | 3,893,681  |   |
| 2008                                              |       |               | 8          | %             | —     |         | 3,893,681  |        | 3,893,681  |   |
| 2009                                              |       |               | 8          | %             | —     |         | 3,893,681  |        | 3,893,681  |   |
| 2010                                              |       |               | 8          | %             | —     |         | 3,893,681  |        | 3,893,681  |   |
| Thereafter                                        |       |               | 8          | %             | 47,866,117 |         | 21,415,246 |        | 69,281,363 |   |
|                                              |       |               |       |          |       |         |       |        |       |   |
| Totals                                            |       |               |       |          | $          | 47,866,117   |       | $           | 40,883,651 |   | $ | 88,749,768 |   |
|                                              |       |               |       |          |       |         |       |        |       |
| Amount  representing interest                     |       |               |       |          |       |         |       | (40,883,651 | )          |
|                                              |       |               |       |          |       |         |       |        |       |
| Long-Term  Obligation                             |       |               |       |          |       |         |       | $           | 47,866,117 |   |

 

**NOTE 11 - INCOME TAXES**

 

As of December 31, 2005 the book basis of assets exceeded the tax basisof assets by approximately $5,012,000. At December 31, 2004 the tax basis ofassets exceeded the book basis of assets by approximately $670,000. There wereno significant differences between the book basis and tax basis of liabilitiesas of December 31, 2005 or 2004.

 

**NOTE 12 – RETIREMENT PLAN**

 

During 2005, the Company began a SIMPLE 401(k), Savings Incentive MatchPlan for Employees, retirement plan for all eligible employees. All employees areeligible to participate in the plan. The Company makes a matching contributionof 3% of participants’ eligible wages. The employees are fully vested uponcontribution to the plan. The Company match for the year ended December 31,2005 was $18,097.

 

**NOTE 13 – SUBSEQUENT EVENTS**

 

On March 1, 2006 the outstanding balance of the equipment note payablewas paid in full. The principal payment totaled $1,466,894.

 

On March 27, 2006 the board of directors approved the redemption of1,900 units from a member. The redemption represents the member’s entire unitbalance.

 

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**ITEM 8. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

 

Eide BaillyLLP has been our independent registered public accounting firm since ourinception and is our independent registered public accounting firm at thepresent time. We have had no disagreements with our auditors.

 

**ITEM 8A. CONTROLS AND PROCEDURES.**

 

**DisclosureControls and 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.These disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that the information required to be disclosedis accumulated and communicated to management, including our PrincipalExecutive Officer, Principal Financial Officer and General Manager, to allowfor timely decisions regarding required disclosure. In designing and evaluatingthe disclosure controls and procedures, the Principal Executive Officer, PrincipalFinancial Officer and General Manager recognize that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is necessarily required to apply judgment in evaluating thecost-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 inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)), as of the end of the period coveredby this Annual Report on Form 10-KSB. 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.

 

**Changesin Internal Control over Financial Reporting**

 

In ourAnnual Report on Form 10-KSB for the year ended December 31, 2004 andin our subsequent quarterly reports on Form 10-QSB for the quarters endedMarch 31, June 30 and September 30, 2005, management concludedthat our internal control over financial reporting was not effective for suchperiod because of the material weaknesses identified in such reports. Duringthe fourth quarter of 2005, we completed our remediation efforts with respectto those material weaknesses. During the second quarter of 2005, we engagedKennedy & Coe, LLC to provide our accounting and tax services. We hiredThomas D. Leitnaker as our Controller in July 2005, and appointed him tothe position of Chief Financial Officer in August 2005. Hisresponsibilities include review of the accounting functions, reconciliationsand preparation of the financial statements and footnotes. We believe thatthese changes provided us with the resources necessary to maintain effectiveinternal control over financial reporting as of December 31, 2005.

 

**ITEM 8B. OTHER INFORMATION.**

 

None.

 

**PART III**

 

**ITEM 9. DIRECTORS, EXECUTIVEOFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITHSECTION 16(A) OF THE EXCHANGE ACT.**

 

**Identification of Directors,Executive Officers and Significant Employees**

 

In connection with the capital contribution by ICM, Inc. andFagen, Inc. pursuant to the Unit Purchase and Redemption Agreement datedSeptember 27, 2004, we amended our Operating Agreement to allowICM, Inc. and 

 

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Fagen, Inc.to appoint a total of three directors to our board of directors, subject to thetermination of one of their director positions for every $2,000,000 dollars inredemption payments made to either or both of ICM, Inc. andFagen, Inc. Effective January 24, 2005, Douglas L. Strickler andJames A. Westagard resigned as directors of East Kansas Agri-Energy, LLC. Mr. Strickler and Mr. Westagard hadserved as directors since our inception. Following their resignations,on February 1, 2005, ICM, Inc. and Fagen, Inc. appointed theirthree directors - Brian Thome, Dave Vander Griend, and Jerry Jones. OnAugust 1, 2005, we redeemed all 6,250 units from Fagen, Inc. andICM, Inc. at a total redemption price of $6,875,000. Therefore, pursuantto the Agreement, the terms of directors Brian Thome, Jerry Jones, and DaveVander Griend expired. However, the board of directors re-appointed Jerry Jonesto the board of directors on August 22, 2005 for a term ending with theelection of directors by our members at the 2006 annual meeting of members.Mr. Thome and Mr. Vander Griendare no longer serving on our board of directors.

 

On May 5, 2005 and inconnection with Ethanol Capital Partners, L.P.’s purchase of 4,550 membershipunits in our registered offering, the board of directors agreed to appoint tworepresentatives from Ethanol Capital Partners, L.P. to fill expected vacancieson the board of directors resulting from the departure of the Fagen, Inc.and ICM, Inc. appointed directors in connection with redemption of unitsfrom Fagen, Inc. and ICM, Inc. Effective August 22, 2005, theboard of directors appointed Scott Brittenham, and Charles Torrey to fill theseseats. Their terms will end with the election of directors by our members atthe 2006 annual meeting of members.

 

Our current executive officers and directors are asfollows:

 
| **Board Member** | ** ** | **Role**                                                         | ** ** |
|-----------------------|------------|------------------------------------------------------------------|------------|
| William R. Pracht     |       | Director,  Chairman/President & Chief Executive Officer |       |
| Roger J. Brummel      |       | Director &  Vice Chairman/Vice President                |       |
| Daniel V. Morgan      |       | Director &  Secretary                                   |       |
| Jill A. Zimmerman     |       | Director                                                         |       |
| Scott A. Burkdoll     |       | Director                                                         |       |
| Glenn A. Caldwell     |       | Director                                                         |       |
| Daniel L. Guetterman  |       | Director                                                         |       |
| Donald S. Meats       |       | Director                                                         |       |
| Jerry Jones           |       | Director                                                         |       |
| Scott Brittenham      |       | Director                                                         |       |
| Charles P. Torrey     |       | Director                                                         |       |
| Thomas D. Leitnaker   |       | Controller and  Chief Financial Officer                          |       |

 

Mostof our directors have held their positions since the formation of East Kansas.All officers have been elected to serve until the next succeeding annualmeeting following substantial completion of the plant, the 2006 annual meetingof members, and until their successors have been elected and qualified.

 

Thefollowing is a brief description of the business experience and background ofthe above individuals — Unless otherwise disclosed below, you should assumethat each director has served since our inception.

 

***William R. Pracht, Age 48*** — For the past five years, Mr. Prachthas been a self-employed farmer/rancher working near Westphalia, Kansas. He isone of the community leaders of the Cherry Mound 4-H Club as well as amember of the Anderson County Fair Board. Mr. Pracht serves as member ofthe board of directors of Valley Agri-Service, Inc. He has previouslyserved on the Kansas Livestock Association Board of Directors and Chairman ofthe Tax Committee.

 

***Roger J. Brummel, Age 45*** — Mr. Brummel has been the manager ofthe family owned business, Brummel Farm Service, since 1995.

 

***Jill A. Zimmerman, Age32*** — SinceJanuary 2006, Ms. Zimmerman has been employed as the executivedirector of the Kansas FFA Foundation. Previously, she was employed as acertified lender for United Cooperatives, Inc. Farm Service sinceSeptember 2005. From February 2003 to August 2005, she wasemployed as our equity drive coordinator. For the year prior to that, she wasthe Director of Value-Added Programs for the Kansas Corn Growers Association inGarnett. From May 1996 to January 2002, Ms. Zimmerman was theCounty Extension Agent, Agriculture for Kansas State Research and Extension,Anderson County. In addition, 

 

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Ms. Zimmermanis a partner with her brother in Zimmerman Farms, a small grain farmingoperation consisting of wheat and grain sorghum in Sumner County, Kansas.

 

Ms. Zimmermanserved as our treasurer and Chief Financial Officer from our inception untilAugust 1, 2005, when the board of directors appointed Thomas Leitnaker tothe position of Chief Financial Officer and terminated the position oftreasurer. The duties and responsibilities of the treasurer’s office have beenreassigned to the Chief Financial Officer.

 

***Daniel V. Morgan, Age 34*** — Mr. Morgan is co-owner of H&MAngus Farms, Inc., a registered Angus seedstock producer in easternKansas. He is also a certified crop advisor and shares a Pioneer Seeddealership with his father. He is a director of United Cooperatives andcurrently is its board secretary.

 

***Scott A. Burkdoll, Age 49*** — Mr. Burkdoll, is an owner andoperator of Burkdoll Bros., Inc. a Kansas family farm corporation.Mr. Burkdoll has served as Vice President for this company since 1978. Heis part owner and has served since 1989 as Secretary/Treasurer ofSunflower Pork, Inc., which produces 75,000 head of market hogs annually.Mr. Burkdoll has been President of BG-5, an oil and gas production companyin east central Kansas, since 1994. Mr. Burkdoll is an owner and hasserved since 1998 as managing member of J-6 Cattle Ranch LLC. He isalso an owner and managing member of Sunflower Central, LLC.

 

***Glenn A. Caldwell, Jr., Age 58***— Mr. Caldwell has served as the Vice-President of CaldwellEnterprises Inc. since 2000 and, in that capacity, oversees the operationof crude oil production on several oil leases in two counties. Since 1982, hehas served as the President and General Manager of Caldwell Farms, Inc.operating several thousand tillable acres in 3 counties.

 

***Daniel L. Guetterman, Age53*** — Mr. Guettermanhas been farming in northeast Kansas since 1969 and has been the owner/operatorof DKG Farms, Inc. since 1999. In 1978, he formed Guetterman BrothersElevator and built a grain elevator in Bucyrus. Some of his duties consisted ofbuying and selling grain, fertilizer, seed and chemicals. Mr. Guettermanserved 9 years on the board of the Kansas Soybean Association and iscurrently serving his fourth year on the Kansas Corn Commission as treasurer.

 

***Donald S. Meats, Age 62*** — Mr. Meats lives on a farm near LeRoy,Kansas and operates a stocker program. He retired in 2001 from the LeRoy Coopafter 36 years of employment; 33 years as general manager. He iscurrently employed by the First National Bank of LeRoy as an Agriculture LoanOfficer.

 

***Jerry Jones, Age 55*** — Mr. Jones has served as the ChiefFinancial Officer for ICM, Inc. since July 2000.

 

Mr. Jones was initially appointed as a directorto our board by Fagen, Inc. and ICM, Inc. on February 1, 2005,which term expired on August 1, 2005 when we redeemed all 6,250units from Fagen, Inc. and ICM, Inc. pursuant to the Agreement. OnAugust 22, 2005, the board of directors re-appointed Jerry Jones to theboard of directors for a term ending with the election of directors by ourmembers at the 2006 annual meeting of members.

 

***Scott Brittenham, Age 55*** — Mr. Brittenham has served as thePresident for Ethanol Capital Partners, L.P. since April 2003. For thefive years prior to that, he served as the President of Fidelity MortgageCorporation.

 

OnAugust 22, 2005, theboard of directors appointed Mr. Brittenham for a term ending with theelection of directors by our members at the 2006 annual meeting of members.

 

***Charles P. Torrey, Age59*** — Mr. Torreyhas spent his career in the securities and energy sectors as founder andpast-Chairman/CEO of Energy Search, Inc. Currently Mr. Torrey servesas President of Alternative Energy Management, LLC.

 

OnAugust 22, 2005, theboard of directors appointed Mr. Torrey to the board of directors for aterm ending with the election of directors by our members at the 2006 annualmeeting of members.

 

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**Executive Officers**

 

***Thomas D. Leitnaker, Age52*** —Mr. Leitnaker joined us on July 1, 2005 as Controller, and commencedhis duties as Chief Financial Officer on August 1, 2005.Mr. Leitnaker was employed as the controller for Kalmar IndustriesUSA, Inc. from 1990 to June 2004.

 

**Significant Employees**

 

***General Manager***

 

Pursuant tothe Management Agreement we entered into with UBE Management, UBE Managementsupervises and directs the general operations of the plant, including hiringand employing a full-time general manager, who is based on site at our plantand who works exclusively for us. Accordingly, the general manager is not our employee.UBE Management hired Mike Goblirsch as the general manager for our plant. Priorto his employment with UBE Management, Mr. Goblirsch spent 20 years indomestic and international management positions with ConAgra Foods andCargill, Inc. where he had responsibility for consumer foods and commodityfeedstuffs.

 

***Plant Manager***

 

Under ourManagement Agreement with United Bio Energy Management, LLC, we are responsiblefor hiring and employing our plant manager. On May 5, 2005, DerekPeine joined us as our plant manager. Prior to joining us, Mr. Peine wasemployed with Cargill, Inc. since 1997. At Cargill, Inc., he heldprogressively responsible positions, leaving as the Water/Wastewater Managerfor Cargill, Inc.’s Eddyville, Iowa plant.

 

**Involvement in CertainLegal Proceedings**

 

One of ourdirectors, Donald S. Meats, is subject to a continuing Cease and Desist Orderoriginally entered by the State of Kansas Securities Commissioner onNovember 27, 1996. This order required him to cease and desist from thesale of unregistered securities. Mr. Meats, along with others, was foundto have participated in a program several years before his involvement with ourorganization which was determined to have violated the securities laws of theState of Kansas as it constituted the unlawful sale of unregistered securities.Mr. Meats cooperated in the investigation of this matter and no furtheraction was taken against him. Mr. Meats did not participate in the sale ofour membership units during our previous offerings and will not participate inthe sale of our membership units for any future offering.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), requires our officers and directors, and personswho own more than 10% of a registered class of our equity securities, tofile reports of ownership and changes in ownership with the Securities andExchange Commission (the “SEC”). Officers, directors and greater than 10%beneficial owners are required by SEC regulations to furnish us with copies ofall Section 16(a) forms they file. To our knowledge, based solely ona review of the copies of such reports furnished to us and writtenrepresentations from our officers and directors, all Section 16(a) filingrequirements were complied with during the fiscal year ended December 31,2005

 

**Adoptionof Code of Ethics**

 

Our Board of Directors has adopted a code of ethics that applies to ourprincipal executive officer, William Pracht, our principal financial officer,Thomas D. Leitnaker, our vice president, Roger J. Brummel, and our secretary,Daniel V. Morgan. Each of these individuals signed an acknowledgment of his orher receipt of our code of ethics. Wefiled a copy of our Code of Ethics with the Securities Exchange Commission byincluding the Code of Ethics as Exhibit 14.1 to our Annual Report ofForm 10-KSB for the fiscal year ended December 31, 2003, and it isincluded as a current exhibit 14.1 to this Report by incorporation byreference.

 

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**AuditCommittee and Audit Committee Financial Expert**

 

On March 22, 2004, the Board of Directors appointed an auditcommittee consisting of Daniel V. Morgan, Doug Strickler, Glenn A. Caldwell,and Daniel L. Guetterman. Doug Strickler resigned effective January 24,2005 and no replacement has yet been appointed to the Audit Committee. Theaudit committe is exempt from independence listing standards because oursecurities are not listed on a national securities exchange or listed in anautomated inter-dealer quotation system of a national securities association orto issuers of such securities. We do not have an audit committee financialexpert serving on our audit committee because no member of our Board of Directorshas the requisite experience and education to qualify as an audit committeefinancial expert as defined in Item 401 of Regulation S-K and the Board ofDirectors has not yet created a new director position expressly for thispurpose. The Board of Directors intends to consider such qualifications infuture nominations to our Board of Directors and appointments to the auditcommittee.

 

**ITEM 10. EXECUTIVE COMPENSATION.**

 

**Compensationof Named Executive Officers**

 

The following table set forth all compensation paid or payable by usduring the last three fiscal years to our Chairman and Chief Executive Officer.We did not have any compensatory security option plan for our executiveofficers and directors in place as of December 31, 2005. Further, as of December 31,2005, none of our directors or officers had any options, warrants, or othersimilar rights to purchase securities of East Kansas.

 
| ** **                                       | ** ** | **Annual Compensation** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| **Name & Principal Position** | ** ** | **Fiscal Year**         | ** ** | **Salary** | ** ** | **Bonus** | ** ** |
| William R. Pracht,                               |       | 2005                         |       | $ | 1,200 |   | $ | 1,500 |   |
| Chairman and Chief Executive Officer             |       | 2004                         |       | $ | 1,200 |   | 0 |   |
|                                             |       | 2003                         |       | $ | 800 |   | 0 |   |
|                                                  |            |                              |            |  |  |  |  |  |  |

 

**Compensationof Directors**

 

In May 2003, our board of directors approved a directorcompensation policy. The policy provided for payment to directors of a $100 feebased on attendance at the regular monthly board meeting and reimbursement ofour directors and officers for reasonable out-of-pocket expenses incurred relating to servicesrendered on our behalf. In addition, in December 2005, we awarded a cashbonus to our current directors of $1,500 each.

 

On January 23, 2006, our board of directors approved arevised director compensation policy effective for fiscal year 2006. Therevised policy also provides for payment to directors of a fee based onattendance at the regular monthly board meeting. The fees we pay to ourdirectors under the revised policy are as follows: $400.00 per meeting attendedto the Chairman, $300.00 per month to our directors who are also serve asofficers (Secretary and Vice-President) and $200.00 per month to the otherdirectors. We also pay directors $100 per meeting for attendance at committeemeetings. We will not pay the fee if the director does not attend the monthlymeeting or committee meeting. We will also pay for mileage to and from the meetingat the standard mileage rate established from time to time by the IRS and willpay quarterly travel expenses for board members who reside outside of Kansas. We will continue to reimburse ourofficers and directors for reasonable out-of-pocket expenses incurred relatingto services rendered on our behalf.

 

**EmploymentAgreements with Directors or Officers**

 

On February 10, 2003, we entered into anemployment agreement with Jill A. Zimmerman, one of our directors and ourformer Treasurer and Chief Financial Officer. Under the agreement, we engagedMs. Zimmerman as a full-time equity drive coordinator and her duties asequity drive coordinator included monitoring project development, publicrelations and other on-site development issues. In July 2005, we terminatedour employment agreement with Ms. Zimmerman upon completion of our equitydrive. The contract provided that we pay Ms. Zimmerman $37,700.00 annuallyplus a $101.75 monthly stipend for her services. Pursuant to her employmentagreement with us, Ms. Zimmermanwas compensated a total of $33,202.02, $45,692.72 and $33,951.23 in cash infiscal years 2003, 2004 and 2005, respectively. She also received 5 unitstotaling $5,000 as a bonus for her services in fiscal year 2004.

 

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On June 29, 2005, we entered into an employmentagreement with our controller, Thomas D. Leitnaker. Pursuant to his employmentagreement, Mr. Leitnaker will receive a base salary and will be eligiblefor an annual bonus based on overall financial performance of East Kansascompared to budgeted guidelines. On August 1, 2005, our board of directorsappointed Mr. Leitnaker to the position of Chief Financial Officer andterminated the position of Treasurer, formerly held by Jill A. Zimmerman, oneof our directors. The duties formerly performed by the Treasurer have beentransferred to the Chief Financial Officer.

 

We do not have any employmentagreements with any other officer or director.

 

**ITEM 11. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS.**

 

**SecurityOwnership of Certain Beneficial Owners**

 

Thefollowing table sets forth certain information regarding the beneficialownership of our units as of March 27, 2006, by each person or entityknown by us to be the beneficial owner of more than 5% of the outstandingunits:

 
| **Title of Class** | ** ** | **Name and Address**                                                                                         | ** ** | **Amount and Nature ofBeneficial Owner** | ** ** | **Percent of Class** | ** ** |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------|------------|
| Membership Units   |       | Energy Investors, LLC310 N. First StreetP.O. Box 397Colwich, KS 67030                                   |       | 1,900                                    |       | 8.0                  | %          |
| Membership Units   |       | Ethanol Capital Partners, LPRockefeller Center1230 Avenue of the Americas, 7th FloorNew York, New York 10020 |       | 5,550                                    |       | 23.3                 | %          |

 

**SecurityOwnership of Management**

 

Thefollowing table sets forth certain information regarding the beneficialownership of our units as of March 27, 2006, by our directors andexecutive officers:

 
| **Title of Class**   | ** ** | **Name of Beneficial  Owner(1)** | ** ** | **Amount and Nature of  Beneficial Ownership(2)** | ** ** | **Percent of Class** |   |
|----------------------|------------|----------------------------------|------------|---------------------------------------------------|------------|----------------------|--------|
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | William R. Pracht                |       | 85 Units                                          | (3)        |                 | *      |
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | Roger J. Brummel                 |       | 110 Units                                         | (4)        |                 | *      |
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | Jill A. Zimmerman                |       | 20 Units                                          |       |                 | *      |
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | Daniel V. Morgan                 |       | 10 Units                                          | (5)        |                 | *      |
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | Scott A. Burkdoll                |       | 115 Units                                         | (6)        |                 | *      |
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | Glenn A. Caldwell                |       | 100 Units                                         | (7)        |                 | *      |
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | Daniel L. Guetterman             |       | 86 Units                                          | (8)        |                 | *      |
|                 |       |                             |       |                                              |       |                 |   |
| Membership Units     |       | Donald S. Meats                  |       | 10 Units                                          |       |                 | *      |
|                 |       |                             |       |                                              |       |                 | *      |
| **Membership Units** | ** ** | **All directors**                | ** ** | **536 Units**                                     | ** ** | **2.3**              | **%**  |

 

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(1)           Theaddress of each individual is in care of us at P.O. Box 225, 1304 S. Main, Garnett, Kansas 66032.

 

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(2)           Beneficialownership is determined in accordance with SEC rules and generally includesholding voting and investment power with respect to the securities.

(3)           Units held in joint tenancy with spouse.

(4)           Units held by Brummel Farm Service, Inc. and Mr. Brummell is aprincipal of that business.

(5)           Includes 10 units held in the name of H & M AngusFarms, Inc., and Mr. Morgan is a principal of that business.

(6)           Includes 60 units held in joint tenancy with spouse, 50 units held byBurkdoll Bros., Inc. and 5 units held by Sunflower Pork, Inc.Mr. Burkdoll is an owner of Burkdoll Bros., Inc. and SunflowerPork, Inc.

(6)           Includes 50 units held in the name of Caldwell Enterprises, Inc.and 50 units held in the name of Caldwell Farms, Inc. Mr. Caldwell isa majority owner of these businesses.

(7)           Includes 30 units held in the name of DKG Farms, Inc., of whichMr. Guetterman is the sole owner, and 56 units held in the name of FuelFor the Future Investments, of which Mr. Guetterman is a principal owner.

 

* Lessthan 1%.

 

**ITEM 12. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS.**

 

No family relationships exist between any of the directors of theboard, officers, or key employees of East Kansas. We consider all of ourdirectors, other than Messrs. Jones, Brittenham and Torrey, to be ourfounders and promoters. We also consider two of our former directors, DouglasL. Strickler and James A. Westagard, as our founders and may be consideredpromoters. Since our inception, we have engaged in a number of transactionswith related parties, including our promoters, directors, officers or 5% unitholders and their affiliates. Management believes that these transactions wereas favorable as those that could have been obtained in an arms-lengthtransaction.

 

The following is adiscussion of the transactions we have engaged in during the past two years orplan to engage in with related parties:

 

***Project Coordinator Agreementwith Jill A. Zimmerman***

 

On February 10, 2003, we entered into anemployment agreement with Jill A. Zimmerman, one of our directors and ourformer Treasurer and principal financial officer. Ms. Zimmerman is also amember of the Company. Under the agreement, we engaged Ms. Zimmerman as afull-time equity drive coordinator until July 2005 when we terminated oursecond registered offering. See EXECUTIVE COMPENSATION – Employment Agreements withDirectors and Officers” for a more detailed discussion of our employmentagreement with Ms. Zimmerman and her compensation thereunder.

 

***Agreement with Mike Burns***

 

In June 2005, we entered into a preliminaryverbal agreement with Mike Burns, a member of East Kansas, for compacted fillto be used in connection with dirt work for our rail spur. On October 11,2005, we entered into a definitive written agreement with Mr. Burns forapproximately 720,000 cubic yards of compacted fill in exchange for payment of$300,000 to be paid in three equal payments of $100,000. As ofDecember 31, 2005, we have paid all amounts due under the agreement.

 

***Agreementswith United Bio Energy, LLC Subsidiaries***

 

We have entered intooperating contracts with UBE Management, UBE Fuels, UBE Ingredients and UBETrading, all subsidiaries of United Bio Energy, LLC, of Wichita, Kansas. Underthe terms of these agreements, we will be paying subsidiaries of United BioEnergy, LLC a significant amount in fees for the management of our plant,marketing of our ethanol and distillers grains and overall risk managementservices. United Bio Energy, LLC was majority owned by Dave Vander Griendthrough ICM Marketing, Inc. and by Ron Fagen through Fagen Management,LLC. However, in the second quarter of 2005, United Bio Energy, LLC merged withUS BioEnergy Corporation. US BioEnergy Corporation builds and operates biofuelproduction facilities which may be in competition with our plant. See“DISCRIPTION OF BUSINESS” for a more detailed discussion of these agreements.

 

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***Purchasesof Raw Grains***

 

On November 12, 2004we entered into a Raw Grains Agreement with United Bio Energy Ingredients, LLC(“UBE Ingredients”). The Raw Grains Agreement provides for our purchase of allraw grains necessary for ethanol production from UBE Ingredients for a periodof at least 5 years. Pursuant to the agreement, UBE Ingredients will use itsbest efforts to arrange for the purchase of grain at the lowest price availableunder prevailing market conditions. From time to time, UBE Ingredients has andmay continue to contract to purchase corn and/or milo from individualsserving on our board of directors, as well as our members. However, thesecontracts have been and will continue to be on the same terms and conditions ascontracts with non-affiliated third parties. For the year endingDecember 31, 2005, UBE Ingredients purchased approximately 384,000 bushelsof corn and milo from our promoters, directors, officers or 5% unit holders andtheir affiliates, which constitutes approximately 5% of the aggregate corn andmilo purchases by UBE Ingredients on our behalf.

 

***Design-Build Agreement withICM, Inc. and Fagen, Inc.***

 

On August 9, 2004,we executed a design/build agreement with ICM, Inc. to design and buildour ethanol plant using Fagen, Inc. as principal subcontractor.ICM, Inc. is majority owned and controlled by Dave Vander Griend andFagen, Inc. is owned and controlled by Ron Fagen. Pursuant to the terms ofthe design/build agreement, we will pay ICM, Inc. $35,900,000 to designand build our ethanol plant and we expect a significant portion of the contractprice to be paid by ICM, Inc. to Fagen, Inc. for its work as ourprincipal subcontractor. As of December 31, 2005, we had incurred and paid$35,977,582 to ICM, Inc.

 

***UnitPurchase and Redemption Agreement with ICM, Inc. and Fagen, Inc.***

 

OnOctober 11, 2004, we executed a Unit Purchase and Redemption Agreementwith ICM, Inc. and Fagen, Inc. in which we agreed to issue a total of6,250 units to them in exchange for their combined capital contribution of$6,250,000. On January 19, 2005, we issued 6,250 of our units toICM, Inc. and Fagen, Inc. at a purchase price of $1,000 per unit inexchange for a combined capital contribution from them of $6,250,000. Pursuantto the Unit Purchase and Redemption Agreement, we agreed to redeem all 6,250units from ICM, Inc. and Fagen, Inc. using the proceeds from the saleof units in a registered offering or, to the extent the offering was unsuccessful,from cash flow generated by operations subject to certain loan covenants,restrictions and tax distributions. Under the Unit Purchase and RedemptionAgreement, we agreed to redeem the units at a redemption price of $1,100 perunit if we were able to raise at least $6,875,000 in a future registeredoffering, or if the offering was unsuccessful at the fair market value of theunits at the time of redemption. In connection with this capital contribution,we amended our operating agreement to allow ICM, Inc. and Fagen, Inc.to appoint a total of 3 directors to our board of directors, subject to ourability to terminate one of their director positions for every $2,000,000 inredemption payments made to either or both of ICM, Inc. andFagen, Inc. ICM, Inc. and Fagen, Inc. appointed their threedirectors on February 1, 2005. On August 1, 2005, we redeemed all6,250 units from Fagen, Inc. and ICM, Inc. at a total redemptionprice of $6,875,000. Therefore, pursuant to the Agreement, the terms of directorsappointed by ICM, Inc. and Fagen, Inc. expired.

 

***Promissory Note and Security Agreement with ICM, Inc.***

 

On May 10, 2005, we entered into an agreement with ICM, Inc.for the purchase of a steam turbine generator. In order to finance the purchaseof the generator, we executed a promissory note payable to ICM, Inc andgranted a security interest in a steam turbine generator to ICM, Inc. ascollateral for the loan. See “MANAGEMENT’S DISCUSSION AND ANALYSIS – Liquidityand Capital Resources, Debt Financing” for a more detailed discussion of thisnote.

 

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**ITEM 13. EXHIBITS.**

 

**ExhibitsFiled as Part of this Report and Exhibits Incorporated by Reference**

 

The following exhibits are filed as part of this report. Exhibitspreviously filed are incorporated by reference, as noted.

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                      |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 3.1                  |       | Articles of  Organization of registrant. Filed as Exhibit 3.1 to the registrant’s  initial registration statement on Form SB-2 (Commission File 333-96703)  and incorporated by reference herein.                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 3.2.1                |       | Amended and Restated Operating Agreement of the registrant. Filed as  Exhibit 3.2 to the registrant’s initial registration statement on  Form SB-2 (Commission File 333-96703) and incorporated by reference  herein.                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 3.2.2                |       | First Amendment to Amended and Restated Operating Agreement of East  Kansas Agri-Energy, L.L.C., dated September 16, 2004. Filed as  Exhibit 3.2.1 to the registrant’s quarterly report on Form 10-QSB  dated September 30, 2004 and incorporated by reference herein.                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 4.1                  |       | Form of  Membership Unit Certificate. Filed as Exhibit 4.1 to the registrant’s  registration statement on Form SB-2 (Commission File 333-96703) and  incorporated by reference herein.                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.1                 |       | Employment Agreement dated February 10, 2003 between East Kansas  Agri-Energy, LLC and Jill Zimmerman. Filed as Exhibit 10.6 to the  registrant’s annual report dated December 31, 2003 on Form 10-KSB  and incorporated by reference herein                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.2                 |       | Option to Purchase Real Estate from Clarence L. White and Berniece F.  White dated July 1, 2004. Filed as Exhibit 10.10 to registrant’s  quarterly report dated June 30, 2004 on Form 10-QSB and  incorporated by reference herein.                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.3                 |       | Agreement between Owner and Design/Builder on the Basis of a Stipulated  Price dated August 9, 2004 between East Kansas Agri-Energy, L.L.C. and  ICM, Inc. Filed as Exhibit 10.11 to registrant’s quarterly report  dated September 30, 2004 on Form 10-QSB and incorporated by  reference herein. |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.4                 |       | Unit Purchase and Redemption Agreement dated October 11, 2004  between East Kansas Agri-Energy, L.L.C., ICM, Inc., and Fagen, Inc.  Filed as Exhibit 10.12 to registrant’s quarterly report dated  September 30, 2004 on Form 10-QSB and incorporated by reference  herein.                   |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.5                 |       | Management Agreement dated November 12, 2004 between East Kansas  Agri-Energy, L.L.C. and United Bio Energy Management, LLC. Filed as  Exhibit 10.11 to registrant’s Pre-Effective Amendment No. 2  filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.            |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.6                 |       | Raw Grains Agreement dated November 12, 2004 between East Kansas  Agri-Energy, L.L.C. and United Bio Energy Ingredients, LLC. Filed as  Exhibit 10.12 to registrant’s Pre-Effective Amendment No. 2  filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.           |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.7                 |       | Ethanol Agreement dated November 12, 2004 between East Kansas  Agri-Energy, L.L.C. and United Bio Energy Fuels, LLC. Filed as  Exhibit 10.13 to registrant’s Pre-Effective Amendment No. 2  filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                    |
|                 |       |                                                                                                                                                                                                                                                                                                                             |
| 10.8                 |       | Distillers  Grains Marketing Agreement dated November 12, 2004 between East Kansas  Agri-Energy, L.L.C. and United Bio Energy Ingredients, LLC. Filed as Exhibit 10.14 to Pre-Effective  Amendment No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.            |

 

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| 10.9   |   | Trading  Agreement dated November 12, 2004 between East Kansas Agri-Energy,  L.L.C. and United Bio Energy Trading, LLC. Filed as Exhibit 10.15 to registrant’s Pre-Effective  Amendment No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.10  |   | Credit Agreement  dated November 23, 2004 between East Kansas Agri-Energy, L.L.C. and Home  Federal Savings Bank. Filed as  Exhibit 10.16 to registrant’s Pre-Effective Amendment No. 2  filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.11  |   | Disbursing  Agreement dated November 23, 2004 between East Kansas Agri-Energy,  L.L.C. and Home Federal Savings Bank. Filed  as Exhibit 10.17 to registrant’s Pre-Effective Amendment  No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.12  |   | Security  Agreement dated November 23, 2004 between East Kansas Agri-Energy,  L.L.C. and Home Federal Savings Bank. Filed  as Exhibit 10.18 to registrant’s Pre-Effective Amendment  No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.13  |   | Mortgage—Collateral  Real Estate Mortgage dated November 23, 2004 between East Kansas  Agri-Energy, L.L.C. and Home Federal Savings Bank. Filed as Exhibit 10.19 to Pre-Effective Amendment  No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.14  |   | Facility  Construction, Ownership and Operating Agreement dated February 24, 2005  between East Kansas Agri-Energy, LLC and Southern Star Central Gas  Pipeline, Inc. Filed as  Exhibit 10.20 to registrant’s Pre-Effective Amendment No. 2  filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.15  |   | Service  Agreement dated February 28, 2005 between East Kansas Agri-Energy, LLC  and Kansas City Power & Light Company. Filed as Exhibit 10.21 to registrant’s Pre-Effective  Amendment No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.16  |   | U.S. Water  Services Agreement between East Kansas Agri-Energy, LLC and US Water Services.  Filed as Exhibit 10.22 to registrant’s  Pre-Effective Amendment No. 2 filed on April 6, 2005 (Commission  File 333-96703) and incorporated by  reference herein.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.17  |   | Real Estate  Contract dated February 16, 2005 between East Kansas Agri-Energy, LLC and  City of Garnett, KS. Filed as  Exhibit 10.23 to registrant’s Pre-Effective Amendment No. 2  filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Letter Agreement  with Derek Peine dated May 5, 2005. Filed as Exhibit 10.5 to registrant’s quarterly report dated  March 31, 2005 on Form 10-QSB and incorporated by reference herein.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.19  |   | Grant of  Easement and Right of Way Agreement dated April 5, 2005 between East  Kansas Agri-Energy, LLC and the State of Kansas. Filed as Exhibit 10.2 to registrant’s quarterly report dated  June 30, 2005 on Form 10-QSB and incorporated by reference herein.                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.20  |   | Contract for  Sale of Equipment dated May 10, 2005 between East Kansas Agri-Energy,  LLC and ICM, Inc. Filed as Exhibit 10.3  to registrant’s quarterly report dated June 30, 2005 on Form 10-QSB  and incorporated by reference herein.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.21  |   | Letter Agreement  with Kennedy and Coe, LLC dated May 17, 2005. Filed as Exhibit 10.4 to registrant’s quarterly report dated June 30,  2005 on Form 10-QSB and incorporated by reference herein.                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.22  |   | Letter Agreement  with Kennedy and Coe, LLC dated May 17, 2005. Filed as Exhibit 10.5 to registrant’s quarterly report dated  June 30, 2005 on Form 10-QSB and incorporated by reference herein.                                                                                                                                           |

 

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| 10.23  |   | Letter Agreement  with Diane Allen dated May 1, 2005. Filed as Exhibit 10.6 to registrant’s quarterly report dated  June 30, 2005 on Form 10-QSB and incorporated by reference herein.                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                |
| 10.24  |   | Letter Agreement  with Thomas Leitnaker dated June 29, 2005. Filed as Exhibit 10.8 to registrant’s quarterly report dated  June 30, 2005 on Form 10-QSB and incorporated by reference herein.              |
|   |   |                                                                                                                                                                                                                                |
| 10.25  |   | Letter Agreement  with Ethanol Capital Partners, L.P. dated May 5, 2005. Filed as Exhibit 10.9 to registrant’s  quarterly report dated June 30, 2005 on Form 10-QSB and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                |
| 10.26  |   | Agreement with  Mike Burns dated October 11, 2005. Filed as Exhibit 10.1 to registrant’s quarterly report dated  June 30, 2005 on Form 10-QSB and incorporated by reference herein.                        |
|   |   |                                                                                                                                                                                                                                |
| 10.27  |   | Bill of Sale  dated December 20, 2005 between East Kansas Agri-Energy, LLC and the  City of Garnett, Kansas. Filed as an exhibit herewith.                                                                                |
|   |   |                                                                                                                                                                                                                                |
| 10.28  |   | Warranty Deed  dated December 20, 2005 between East Kansas Agri-Energy, LLC and the  City of Garnett, Kansas. Filed as an exhibit herewith.                                                                               |
|   |   |                                                                                                                                                                                                                                |
| 10.29  |   | Lease Agreement  dated December 1, 2005 between East Kansas Agri-Energy, LLC and the City  of Garnett, Kansas. Filed as an exhibit herewith.                                                                              |
|   |   |                                                                                                                                                                                                                                |
| 10.30  |   | Tax Abatement  Agreement dated December 1, 2005 between East Kansas Agri-Energy, LLC  and the City of Garnett, Kansas. Filed as an exhibit herewith.                                                                      |
|   |   |                                                                                                                                                                                                                                |
| 14.1   |   | Code of Ethics  of East Kansas Agri-Energy, LLC, adopted March 22, 2004, filed as an  exhibit to the registrant’s  annual report dated December 31, 2003 on Form 10-KSB and incorporated by  reference herein.            |
|   |   |                                                                                                                                                                                                                                |
| 31.1   |   | Certificate  pursuant to 17 CFR 240.15d-14(a).                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                |
| 31.2   |   | Certificate  pursuant to 17 CFR 240.15d-14(a).                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                |
| 31.3   |   | Certificate  pursuant to 17 CFR 240.15d-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.                                                                                                                                                                               |

 

**ITEM 14. PRINCIPAL INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM FEES AND SERVICES.**

 

Theaggregate fees billed by the principal independent registered publicaccountants (Eide Bailly LLP) to East Kansas for the fiscal year endedDecember 31, 2005, and the fiscal year ended December 31, 2004 are asfollows:

 

| **Category**       | ** ** | **Year** | ** ** | **Fees** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees         |       | 2005     |       | $        | 70,522     |   |
|               |       | 2004     |       | $        | 44,080     |   |
| Audit-Related Fees |       | 2005     |       | $        | 5,555      |   |
|               |       | 2004     |       | $        | 9,328      |   |
| Tax Fees           |       | 2005     |       | $        | 0          |   |
|               |       | 2004     |       | $        | 0          |   |
| All Other Fees     |       | 2005     |       | $        | 0          |   |
|               |       | 2004     |       | $        | 0          |   |

 

55

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Prior to engagement of theprincipal independent registered public accountants to perform auditservices for East Kansas, the principal accountant was pre-approved by ourAudit Committee pursuant to our policy requiring such approval.

 

100% of all audit services,audit-related services and tax-related services were pre-approved by our AuditCommittee.

 

 

**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:  |   March 27,  2006 |                                   |  /s/  William R. Pracht |
|   |   |                             |                                   |  William R.  Pracht, President   (Principal Executive Officer) |
|   |   |                             |                                   |   |
|   | Date:  |   March 27,  2006 |                                   |  /s/ Thomas  D. Leitnaker |
|   |   |                             |                                   |  Thomas D.  Leitnaker, Controller & Chief Financial Officer   (Principal Financial and Accounting Officer) |
|   |   |                             |                                   |   |
|   | Date:  |   March 27,  2006 |                                   |  /s/ Mike  Goblirsch |
|   |   |                             |  Mike  Goblirsch, General Manager |

 

In accordancewith the Exchange Act, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
|   | Date:  |   March 27,  2006 |   |  /s/  William R. Pracht       |
|--------|--------|----------------------------------|--------|------------------------------------|
|   |   |                             |   |  William R.  Pracht, Director |
|   |   |                             |   |                               |
|   |   |                             |   |                               |
|   | Date:  |   March 27,  2006 |   |  /s/ Daniel  V. Morgan        |
|   |   |                             |   |  Daniel V.  Morgan, Director  |
|   |   |                             |   |                               |
|   |   |                             |   |                               |
|   | Date:  |   March 27,  2006 |   |  /s/ Jill  A. Zimmerman       |
|   |   |                             |   |  Jill A.  Zimmerman, Director |
|   |   |                             |   |                               |
|   |   |                             |   |                               |
|   | Date:  |   March 27,  2006 |   |  /s/ Roger  J. Brummel        |
|   |   |                             |   |  Roger J.  Brummel, Director  |

 

56

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|   | Date:  |   March 27,  2006 |                              |  /s/ Scott  A. Burkdoll                 |
|--------|--------|----------------------------------|-----------------------------------|----------------------------------------------|
|   |   |                             |                              |  Scott A.  Burkdoll, Director           |
|   |   |                             |                              |                                         |
|   |   |                             |                              |                                         |
|   | Date:  |   March 27,  2006 |                              |  /s/ Glenn  A. Caldwell, Jr.       |
|   |   |                             |                              |  Glenn A.  Caldwell, Jr., Director |
|   |   |                             |                              |                                         |
|   |   |                             |                              |                                         |
|   | Date:  |   March 27,  2006 |                              |  /s/ Daniel  L. Guetterman              |
|   |   |                             |                              |  Daniel L.  Guetterman, Director        |
|   |   |                             |                              |                                         |
|   |   |                             |                              |                                         |
|   | Date:  |   March 27,  2006 |                              |  /s/ Donald  S. Meats                   |
|   |   |                             |                              |  Donald S.  Meats, Director             |
|   |   |                             |                              |                                         |
|   |   |                             |                              |                                         |
|   | Date:  |   March 27,  2006 |                              |  /s/ Jerry  Jones                       |
|   |   |                             |                              |  Jerry  Jones, Director                 |
|   |   |                             |                              |                                         |
|   |   |                             |                              |                                         |
|   | Date:  |   March 27,  2006 |                              |  /s/  Charles P. Torrey                 |
|   |   |                             |                              |  Charles P.  Torrey, Director           |
|   |   |                             |                              |                                         |
|   |   |                             |                              |                                         |
|   | Date:  |   March 27,  2006 |                              |  /s/ Scott  Brittenham                  |
|   |   |                             |  Scott  Brittenham, Director |

 

57

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