**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**ý****Quarterly report underSection 13 or 15(d) of the Securities Exchange Act of 1934.**

 

**For thequarterly period ended March 31, 2005.**

 

**OR**

 

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

 

**Commissionfile number 000-51278**

 

**EASTKANSAS AGRI-ENERGY, L.L.C.**

(Exact name of small business issuer asspecified in its charter)

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

 

**P.O. Box225,  210 1/2 East 4th Ave. Garnett, Kansas 66032**

(Address of principal executive offices)

 

**(785) 448-2888**

(Issuer’s telephone number)

 

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                       o  No

 

State the number of shares outstanding for each of the issuer’s classesof common equity as of the latest practicable date:  As of May 13, 2005, there were 20,957 membership units outstanding.

 

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

 

 

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**INDEX**

 
| **PART I. FINANCIAL INFORMATION** | ** **                                               |
|----------------------------------------|----------------------------------------------------------|
| ** **                             | ** **                                               |
| **Item 1.**                            | **Financial Statements**                                 | ** ** |
| **Item 2.**                            | **Management’s Discussion and Analysis**            | ** ** |
| **Item 3.**                            | **Controls and Procedures**                              | ** ** |
| ** **                             | ** **                                               |
| **PART II. OTHER INFORMATION**    | ** **                                               |
| ** **                             | ** **                                               |
| **Item 1.**                            | **Legal Proceedings**                                    | ** ** |
| **Item 2.**                            | **Changes in Securities**                                | ** ** |
| **Item 3.**                            | **Defaults Upon Senior Securities**                      | ** ** |
| **Item 4.**                            | **Submission of Matters to a Vote of Security  Holders** | ** ** |
| **Item 5.**                            | **Other Information**                                    | ** ** |
| **Item  6.**                           | **Exhibits**                                             | ** ** |
| ** **                             | ** **                                               |
| **SIGNATURES**                         | ** **                                               |

 

2

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**PART I.****    FINANCIAL INFORMATION**

 

**Item 1.****           FinancialStatements**

 

**EAST KANSAS AGRI-ENERGY, LLC**

 

Table of Contents

 
| ***FINANCIAL STATEMENTS (UNAUDITED)***         | * * |
|------------------------------------------------|----------|
| Balance Sheet                                  |     |
| Statements of Operations                       |     |
| Statements of  Changes in Members’ Equity |     |
| Statements of Cash Flows                       |     |
| Notes to Unaudited Financial Statements        |     |

 

3

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**BALANCESHEET****(UNAUDITED)**

**MARCH 31, 2005**

 
| **ASSETS**                                                                                                     |   |       |       |
|----------------------------------------------------------------------------------------------------------------|--------|------------|------------|
|                                                                                                           |   |       |       |
| CURRENT ASSETS                                                                                                 |   |       |       |
| Cash and cash equivalents                                                                                      |   | $          | 90,041     |   |
| Prepaid offering costs                                                                                         |   | 98,992     |       |
| Prepaid expense                                                                                                |   | 3,013      |       |
| Total current assets                                                                                           |   | 192,046    |       |
|                                                                                                           |   |       |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                  |   |       |       |
| Land                                                                                                           |   | 190,322    |       |
| Office equipment                                                                                               |   | 16,998     |       |
| Construction in progress                                                                                       |   | 34,152,394 |       |
|                                                                                                           |   | 34,359,714 |       |
| Less accumulated depreciation                                                                                  |   | 7,656      |       |
|                                                                                                           |   | 34,352,058 |       |
| OTHER ASSETS                                                                                                   |   |       |       |
| Financing costs                                                                                                |   | 570,582    |       |
|                                                                                                           |   | 570,582    |       |
|                                                                                                           |   |       |       |
| Total assets                                                                                                   |   | $          | 35,114,686 |   |
|                                                                                                           |   |       |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                       |   |       |       |
|                                                                                                           |   |       |       |
| CURRENT LIABILITIES                                                                                            |   |       |       |
| Current portion of long-term debt                                                                              |   | $          | 895,173    |   |
| Accounts payable                                                                                               |   |       |       |
| Trade                                                                                                          |   | 595,756    |       |
| Related party                                                                                                  |   | 8,762,841  |       |
| Accrued payroll, taxes, and withholdings                                                                       |   | 6,623      |       |
| Accrued taxes                                                                                                  |   | 17,262     |       |
| Accrued interest                                                                                               |   | 17,226     |       |
| Total current liabilities                                                                                      |   | 10,294,881 |       |
|                                                                                                           |   |       |       |
| LONG-TERM DEBT (less current maturities)                                                                       |   | 5,531,221  |       |
|                                                                                                           |   |       |       |
| MEMBERS’ EQUITY                                                                                           |   |       |       |
| Capital contributions, 40,000 units  authorized, 20,957 units issued and outstanding as of March 31, 2005 |   | 20,957,000 |       |
| Deficit accumulated during the development  stage                                                              |   | (1,668,416 | )          |
| Total members’ equity                                                                                     |   | 19,288,584 |       |
|                                                                                                           |   |       |       |
| Total liabilities and members’ equity                                                                     |   | $          | 35,114,686 |   |

 

See Notes to UnauditedFinancial Statements

 

4

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**EASTKANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENTSTAGE COMPANY)**

**STATEMENTSOF OPERATIONS****(UNAUDITED)**

 
| ** **                                             | ** ** | **Three Months  Ended  March 31  2005** | ** **   | **Three Months  Ended  March 31  2004** | ** ** | **From January 3,  2001 (Date of  Inception) to  March 31,  2005** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------|--------------|----------------------------------------------|------------|------------------------------------------------------------------------------|------------|
|                                                   |       |                                         |         |                                         |       |                                                                         |       |
| REVENUE                                                | ** ** | **$**                                        | **—**   | ** **                                   | $          | —                                                                       |       | $ | — |   |
|                                                   |       |                                         | ** **   |                                         |       |                                                                         |       |
| OPERATING EXPENSES                                     |       |                                         | ** **   |                                         |       |                                                                         |       |
| Organizational expenses                                | ** ** | **—**                                   | ** **   | —                                       |       | 3,643                                                                        |       |
| Start-up expenses                                      | ** ** | **150,287**                                  | ** **   | 80,884                                       |       | 827,959                                                                      |       |
| ** **                                             |       | **150,287**                                  | ** **   | 80,884                                       |       | 831,602                                                                      |       |
| OTHER INCOME (EXPENSE)                                 |       |                                         | ** **   |                                         |       |                                                                         |       |
| Interest income                                        | ** ** | **852**                                      | ** **   | 10,324                                       |       | 54,500                                                                       |       |
| Interest expense                                       | ** ** | **—**                                   | ** **   | (1,219                                       | )          | (4,787                                                                       | )          |
| Other income                                           | ** ** | **—**                                   | ** **   | —                                       |       | 2,000                                                                        |       |
| ** **                                             |       | **852**                                      | ** **   | 9,105                                        |       | 51,713                                                                       |       |
|                                                   |       |                                         | ** **   |                                         |       |                                                                         |       |
| NET LOSS                                               | ** ** | **$**                                        | **(149,435** | **)**                                        | $          | (71,779                                                                      | )          | $ | (779,889 | ) |
|                                                   |       |                                         | ** **   |                                         |       |                                                                         |       |
| BASIC AND DILUTED LOSS PER UNIT                        | ** ** | **$**                                        | **(8**       | **)**                                        | $          | (30                                                                          | )          |   |   |
|                                                   |       |                                         | ** **   |                                         |       |                                                                         |       |
| WEIGHTED AVERAGE UNITS OUTSTANDING, BASIC  AND DILUTED |       | **19,707**                                   | ** **   | 2,356                                        |       |                                                                         |       |

 

See Notes to UnauditedFinancial Statements

 

5

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTS OF CHANGES IN MEMBERS’ EQUITY****(UNAUDITED)**

 
| ** **                                               | ** ** | **Units**  | ** ** | **Contributed  Capital** | ** **     | **Deficit  Accumulated  During the  Development  Stage** | ** ** | **Total**      | ** ** |
|----------------------------------------------------------|------------|------------|------------|--------------------------|----------------|----------------------------------------------------------|------------|----------------|------------|
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Balance, January 3, 2001 (Date of  Inception)       |       | —     |       | $                        | —         |                                                     | $          | —         |       | $ | — |   |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Net loss for the period ended  December 31, 2001    |       | —     |       | —                   |           | (30,484                                                  | )          | (30,484        | )          |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of December 31, 2001                     |       | —     |       | —                   |           | (30,484                                                  | )          | (30,484        | )          |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Units issued                                             |       | 1,220      |       | 610,000                  |           | —                                                   |       | 610,000        |       |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Impact of units issued at a discount                     |       | —     |       | 610,000                  |           | (610,000                                                 | )          | —         |       |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Cost of raising capital                                  |       | —     |       | —                   |           | (14,398                                                  | )          | (14,398        | )          |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Net loss for the year ended December 31,  2002      |       | —     |       | —                   |           | (127,123                                                 | )          | (127,123       | )          |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of December 31, 2002                     |       | 1,220      |       | 1,220,000                |           | (782,005                                                 | )          | 437,995        |       |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Net loss for the year ended December 31,  2003      |       | —     |       | —                   |           | (158,620                                                 | )          | (158,620       | )          |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of 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 as of December 31, 2004                     |       | 14,707     |       | 14,707,000               |           | (1,518,981                                               | )          | 13,188,019     |       |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Units issued                                             |       | 6,250      |       | 6,250,000                |           | —                                                   |       | 6,250,000      |       |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| Net loss for the three months ended March 31,  2005 |       | —     |       | —                   |           | (149,435                                                 | )          | (149,435       | )          |
|                                                     |       |       |       |                     |           |                                                     |       |           |       |
| **Balance as of March 31, 2005**                    | ** ** | **20,957** | ** ** | **$**                    | **20,957,000** | ** **                                               | **$**      | **(1,668,416** | **)**      | **$** | **19,288,584** | ** ** |

 

See Notes to Unaudited Financial Statements

 

6

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTSOF CASH FLOWS****(UNAUDITED)**

 
| ** **                                                                  | ** ** | **Three Months  Ended  March 31,  2005** | ** **   | **Three Months  Ended  March 31,  2004** | ** ** | **From January 3,  2001 (Date of  Inception) to  March 31,  2005** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------|--------------|-----------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                        |       |                                          |         |                                          |       |                                                                         |       |
| Net loss                                                                    | ** ** | **$**                                         | **(149,435** | **)**                                         | $          | (71,779                                                                      | )          | $ | (779,889 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |       |                                          | ** **   |                                          |       |                                                                         |       |
|                                                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| Depreciation                                                                | ** ** | **838**                                       | ** **   | 820                                           |       | 7,656                                                                        |       |
| Non-cash compensation for capital units                                     | ** ** | **—**                                    | ** **   | 30,000                                        |       | 30,000                                                                       |       |
| Increase in current assets                                                  |       |                                          | ** **   |                                          |       |                                                                         |       |
| Grants receivable                                                           | ** ** | **54,906**                                    | ** **   | (12,015                                       | )          | —                                                                       |       |
| Prepaid offering costs                                                      | ** ** | **(2,213**                                    | **)**        | —                                        |       | (2,213                                                                       | )          |
| Prepaid expense                                                             | ** ** | **1,925**                                     | ** **   | (4,070                                        | )          | (3,013                                                                       | )          |
| Increase (decrease) in current liabilities:                                 |       |                                          | ** **   |                                          |       |                                                                         |       |
| Accounts payable                                                            | ** ** | **(18,100**                                   | **)**        | 37,286                                        |       | 88,861                                                                       |       |
| Accrued expenses                                                            | ** ** | **(743**                                      | **)**        | 3,889                                         |       | 6,622                                                                        |       |
| Accrued taxes                                                               | ** ** | **—**                                    | ** **   | —                                        |       | 17,262                                                                       |       |
| Net cash (used in) operating activities                                     | ** ** | **(112,822**                                  | **)**        | (15,869                                       | )          | (634,714                                                                     | )          |
|                                                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| Purchase of equipment                                                       | ** ** | **—**                                    | ** **   | —                                        |       | (16,998                                                                      | )          |
| Purchase of land and land option payments                                   | ** ** | **—**                                    | ** **   | (5,000                                        | )          | (170,011                                                                     | )          |
| Construction in progress                                                    | ** ** | **(18,674,279**                               | **)**        | (1,570                                        | )          | (24,990,647                                                                  | )          |
| Net cash (used in) investing activities                                     | ** ** | **(18,674,279**                               | **)**        | (6,570                                        | )          | (25,177,656                                                                  | )          |
|                                                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| Cost of raising capital                                                     | ** ** | **—**                                    | ** **   | (10,909                                       | )          | (278,527                                                                     | )          |
| Payment of financing fees                                                   | ** ** | **(10,071**                                   | **)**        | (20,000                                       | )          | (562,456                                                                     | )          |
| Proceeds from notes payable                                                 |       | —                                        | ** **   | —                                        |       | 137,000                                                                      |       |
| Repayment of notes payable                                                  | ** ** | **—**                                    | ** **   | —                                        |       | (137,000                                                                     | )          |
| Proceeds from long-term debt                                                | ** ** | **6,426,394**                                 | ** **   | —                                        |       | 6,501,394                                                                    |       |
| Repayment of long-term debt                                                 | ** ** | **—**                                    | ** **   | —                                        |       | (75,000                                                                      | )          |
| Proceeds from units subject to redemption                                   | ** ** | **6,250,000**                                 | ** **   | —                                        |       | 6,250,000                                                                    |       |
| Capital contributions                                                       | ** ** | **—**                                    | ** **   | 11,707,000                                    |       | 14,067,000                                                                   |       |
| Net cash provided by (used in) financing activities                         | ** ** | **12,666,323**                                | ** **   | 11,676,091                                    |       | 25,902,411                                                                   |       |
|                                                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                       |       | **(6,120,778**                                | **)**        | 11,653,652                                    |       | 90,041                                                                       |       |
|                                                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                             |       | **6,210,819**                                 | ** **   | 42,587                                        |       | —                                                                       |       |
|                                                                        |       |                                          | ** **   |                                          |       |                                                                         |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                    |       | $                                             | **90,041**   | ** **                                    | $          | 11,696,239                                                                   |       | $ | 90,041 |   |

 

See Notes to UnauditedFinancial Statements

 

7

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTSOF CASH FLOWS (UNAUDITED) (page 2)**

 
| ** **                                                                | ** ** | **Three Months  Ended  March 31,  2005** | ** **    | **Three Months  Ended  March 31,  2004** | ** ** | **2001 (Date of  Inception) to  March 31,  2005** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------|---------------|-----------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                          |       |                                          |          |                                          |       |                                                   |       |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| Cash paid for interest, net of capitalized  interest of $106,376 for 2005 |       | **$**                                         | —        |                                          | $          | —                                                 |       | $ | 3,656 |   |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| NON CASH INVESTING AND FINANCING ACTIVITIES                               |       |                                          |          |                                          |       |                                                   |       |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| Deferred offering costs incurred                                          | ** ** | **$**                                         | **96,779**    |                                          | $          | —                                                 |       | $ | 96,779 |   |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| Financing costs incurred                                                  | ** ** | **$**                                         | **8,126**     |                                          | $          | —                                                 |       | $ | 8,126 |   |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| Property, Plant, and Equipment costs  incurred                            | ** ** | **$**                                         | **9,320,112** |                                          | $          | 33,898                                                 |       | $ | 9,320,112 |   |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| Cost of raising capital reclassified to  members’ equity             |       | **$**                                         | —        |                                          | $          | 264,129                                                |       | $ | 278,527 |   |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| Capital contributions issued at discount                                  | ** ** | **$**                                         | **—**    |                                          | $          | —                                                 |       | $ | 610,000 |   |
|                                                                      |       |                                          |          |                                          |       |                                                   |       |
| Capital contributions issued for  compensation                            | ** ** | ** **                                    | ** **    | ** **                                    | ** ** | ** **                                             | ** ** |
| Expensed during the 3 months ended March 31,  2004                   |       | **$**                                         | —        |                                          | $          | 15,000                                                 |       | $ | 15,000 |   |
| Liability converted to capital units                                      | ** ** | **—**                                    |          | 15,000                                        |       | 15,000                                                 |       |
| ** **                                                                |       | **$**                                         | **—**    |                                          | $          | 30,000                                                 |       | $ | 30,000 |   |

 

See Notes to Unaudited Financial Statements

 

8

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**NOTE1 -**                SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

** **

*Nature of Business*

 

East Kansas Agri-Energy, LLC, (a developmentstage Kansas limited liability company) to be located in Garnett, Kansas, wasorganized to pool investors to build a 20 million gallon ethanol plant withdistribution within the United States. East Kansas Agri-Energy, LLC (theCompany) anticipates completing construction by the summer of 2005. As of March 31,2005, the Company is in the development stage with its efforts beingprincipally devoted to financing and construction activities.

 

The Company was formally organized as a limited liability company as ofOctober 16, 2001. Prior to that date the Company operated as a generalpartnership with no formal partnership agreement.

 

*Basis of Accounting*

 

The unaudited financialstatements contained herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission. Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States of America.

 

In the opinion of management,all adjustments considered necessary for a fair presentation have been includedin the accompanying financial statements. The results of operations for thethree months ended March 31, 2005 and 2004, are not necessarily indicativeof the results expected for a full year.

 

These financial statements should be read in conjunction with thefinancial statements and notes included in the Company’s financial statementsfor the year ended December 31, 2004.

 

*Prepaid offering costs*

 

Costs incurred related to the sale of units are recorded as prepaidoffering costs until the related units are issued. Upon issuance of unitsoffering costs are deducted from additional paid-in capital, with any remainingamount applied to retained earnings (deficit accumulated during the developmentstage). Offering costs include direct costs related to the offering such aslegal fees, cost of meetings and materials and related costs associated withthe Company’s private offering and initial public offering.

 

*Estimates*

 

Management uses estimates and assumptions inpreparing financial statements. Those estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses. Actual results could differ from the estimatesused.

 

*Earnings Per Unit*

 

Earnings per unit are calculated based on theperiod of time units have been issued and outstanding. For purposes ofcalculating diluted earnings per capital unit, units subscribed for but notissued are included in the computation of outstanding capital units. As of March 31,2005, there was not a difference between basic and diluted earnings per unitsince calculation of diluted earnings per unit for the effect of unitssubscribed but not issued would have been anti-dilutive.

 

9

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

*Stock based compensation*

 

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

 

**NOTE2 -**                UNITS SUBJECT TOREDEMPTION

** **

OnOctober 11, 2004, the Company executed a Unit Purchase and RedemptionAgreement with ICM, Inc. and Fagen, Inc. in which the Company agreedto issue a total of 6,250 units to them in exchange for their combined capitalcontribution of $6,250,000. The Company also agreed to redeem all 6,250 unitsfrom ICM, Inc. and Fagen, Inc. using the proceeds from the sale ofunits in a future registered offering or, to the extent the future offering isunsuccessful, from cash flow generated by operations subject to certain loancovenants, restrictions and tax distributions. The redemption price will be$1,100 per unit if the Company is able to raise at least $6,875,000 in thefuture offering. Otherwise, the redemption price will be based on a currentfair market value of the units. In connection with this capital contribution,the Company amended the Operating Agreement to allow ICM, Inc. and Fagen, Inc.to appoint a total of three directors to the Company’s board of directors,subject to the Companies ability to terminate one of their director positionsfor every $2,000,000 dollars in redemption payments made to either or both ofICM, Inc. and Fagen, Inc. On January 19, 2005, the Companyclosed on the purchase of these units by ICM, Inc. and Fagen, Inc.and issued 3,125 units to Fagen, Inc. and 3,125 units to ICM, Inc. ata purchase price of $1,000 per unit. The purchases were made with cash and thetotal amount of cash consideration for those securities was $6,250,000.

 

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 became effective April 20, 2005.

 

TheCompany is offering units at an aggregate minimum price of $2,000,000 and anaggregate maximum price of $10,000,100 and intend to use the proceeds of theregistered offering to redeem units from ICM, Inc. and Fagen, Inc. inaccordance with the agreement and retain the balance of any proceeds forworking capital. Upon completion of the offering and resolution ofcontingencies related to the unit purchase and redemption agreement, theseunits will be accounted for as a liability until repaid.

 

**NOTE3 -**                LONG-TERM DEBT

** **

Long-term obligations of the Company aresummarized as follows at March 31, 2005:

 
| Construction  note payable - see below |   | $       | 6,426,936 |   |
|----------------------------------------|--------|---------|-----------|--------|
|                                   |   |    |      |
| Less: Current portion                  |   | 895,173 |      |
|                                   |   |    |      |
| Long-term portion                      |   | $       | 5,531,763 |   |

 

The estimated maturities of long-term debt atMarch 31, 2005, assuming the entire amount available under theconstruction financing is drawn on September 1, 2005, when it is convertedto term loans are as follows:

 

| 2005       |   | $          | 895,173    |   |
|------------|--------|------------|------------|--------|
| 2006       |   | 1,892,545  |       |
| 2007       |   | 2,037,487  |       |
| 2008       |   | 2,193,539  |       |
| 2009       |   | 2,361,552  |       |
| Thereafter |   | 16,619,704 |       |
|       |   | $          | 26,000,000 |   |

 

10

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

AtMarch 31, 2005 the Company had $19,573,604 available to borrow under theCredit Agreement.

 

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 USDA 80% guaranteed loan, and issecured by substantially all of our assets.

 

 During the construction phase, the Companywill make monthly payments of interest only at a variable interest rate equalto prime plus 1.75% with a floor of 6%. The construction phase shall end nolater than September 1, 2005. Following construction completion, the loanwill be segmented into two loans (1) a $5,000,000 USDA 80% guaranteedloan, and (2) a $21,000,000 conventional term loan. The $5,000,000 USDAguaranteed loan will have an amortization period and maturity date of 10 years.The Company will make monthly payments of principal and interest on the$5,000,000 loan at a variable interest rate of prime plus 1.25%. This variablerate will be adjusted quarterly. The $21,000,000 conventional loan will have anamortization period of ten years but will mature at the end of five years. TheCompany will make monthly payments of principal and interest on the $21,000,000loan at a variable rate equal to prime plus 1.75% with a floor of 6%.

 

TheCompany will pay 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.

 

Duringthe construction phase, a 1% prepayment penalty of the total construction loanof $26,000,000 will be assessed if the loan is placed with a lender other thanHome Federal Savings Bank. After the construction phase, the $5,000,000 USDA80% guaranteed loan will impose a prepayment penalty depending on the year ofrefinancing starting with the 5% penalty in year one and decreasing to 1% inyear five. With respect to the $21,000,000 conventional loan, a prepaymentpenalty will be imposed starting with a 3% penalty in year one and decreasingto 1% in year three.

 

Duringthe term of the loan, all deposit accounts related to the Company must bemaintained at Home Federal Savings Bank. The Company will also be subject tocertain financial loan covenants consisting of minimum working capital, minimumfixed charge coverage, minimum current ratio, minimum debt service, minimum networth and maximum debt to net worth covenants during the term of the loan. TheCompany will also be prohibited from making distributions to their members,however, the Company will be allowed to distribute 40% of our net income to ourmembers after our lender has received audited financial statements for thefiscal year. The Company must be in compliance with all financial ratiorequirements and loan covenants before and after any distributions to themembers.

 

Afterthe construction phase, the Company will only be allowed to make annual capitalexpenditures up to $400,000 annually without the lender’s prior approval.During the term of the loan, the Company is required to pay to the lender anannual amount equal to the greater of (1) 75% of any Commodity CreditCorporation Bio-Energy income payments received during the year or (2) 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 will continueuntil an aggregate sum of $7,500,000 has been received by the lender.

 

11

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

**NOTE4 -**                MEMBER’S EQUITY

** **

As specified in the Company’s Operating Agreement, voting rights areone vote for each voting unit registered in the name of such Member as shown onthe Membership Registration maintained by the Company. No Member shall directlyor indirectly own or control more than 25% of the issued and outstanding votingmembership interest in the Company at any time.

 

Income and losses of the Company shall be allocated among the Membersin proportion to each Member’s respective percentage of Units when comparedwith the total Units issued.

 

The Company’s cash flow shall first be applied to the payment of theCompany’s operating expenses (including debt service) and then to maintenanceof adequate cash reserves as determined by the board of directors in its solediscretion, and then shall be distributed from time to time to the Members inproportion to their respective percentage Units. No member has the right todemand and receive any distribution from the Company other than in cash. Nodistribution shall be made if, as a result thereof, the Company would be inviolation of any loan agreement, of if the Company would be in violation of anyloan agreement, of if the Company’s total assets would be less than the sum ofits total liabilities.

 

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

 

Initial investors purchased their units at $500 per unit subject to aprivate placement memorandum. As part of the Company’s initial public offering,units were offered at a minimum of $1,000 per unit. The difference has beenreflected as a discount on the units and has been recorded as a distribution.

 

Upon completion of the private placement memorandum, costs related tothe issuance of the units of $14,398 were charged to members’ equity.

 

In addition to transactions discussed in Note 2, the Company issuedduring 2004 a total of 30 units for compensation. The former projectcoordinator received 15 units in exchange for amounts previously owed forservices.

 

The current project coordinator and treasurer (who are full timeemployees 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 Agreementwhereby the number of authorized units was increased from 20,000 to 40,000units. In addition, the amendments to the Operating Agreement provide for twoclasses of members of the board of directors, Class A and Class B. Class Amembers of the board of directors consist of previously existing members of theboard of directors, prior to amendment. Up to (3) Class B members ofthe board of directors may be appointed by Fagen, Inc., ICM, Inc., orboth of these parties in conjunction with their agreement to purchase units.

 

The Company has entered into a Unit Purchase and Redemption Agreementfor membership units with Fagen, Inc. and ICM, Inc. See Note 2.

 

Upon issuance of the units related to theinitial public offering, costs related to the issuance of the units of $264,129were charged to members’ equity.

 

12

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

**NOTE5 -**                CONCENTRATION OFCREDIT RISK

** **

The Company maintains cash balances at a financial institution in itstrade area. The account is secured by the Federal Deposit Insurance Corporationup to $100,000. At times, the Company’s bank balance may exceed $100,000.

 

**NOTE6 -**                RELATED PARTYTRANSACTIONS

** **

The former project coordinator (Note 4) purchased membership unitsduring the period ended December 31, 2002.

 

Otheragreements with related parties and affiliates are discussed in Note 7.

 

**NOTE7 -**                COMMITMENTS ANDCONTINGENCIES

** **

The Company has entered into an optionagreement to purchase approximately 10 acres of land. The option was originallypurchased for $5,000, plus $5,000 for an extension during 2003, and providesfor a purchase price of $9,000 per acre, plus the cost to replace boundaryfencing and relocate an existing structure along with water and electricutilities. The option was extended to September 1, 2004 and the Companypaid an additional $5,000 for the extension. On September 1, 2004, theoption was extended until such time as closing on the property would occur. Thepurchase price of the land will be reduced by amounts previously paid for theoption and extension. On November 17, 2004, the Company exercised the land option andpurchased approximately 19 acres of real estate in Anderson County, Kansas. TheCompany paid $170,010, which excluded the cost to replace boundary fencing andrelocate an existing structure along with water and electric utilities.Previous deposits totaling $20,000 were applied to the purchase price of theland and a sum of $150,010 was paid at closing. During the period ended March 31,2005, the Company incurred costs totaling $20,311 for construction of boundaryfencing and structural improvements.

 

On May 14, 2002, the Company enteredinto an option to purchase real property for the plant site with a fair valueof approximately $172,500. The option was for the purchase of approximately 23acres within the Golden Prairie Industrial Park of the City of Garnett, Kansasfor $1. On May 27, 2004, the Company gave notice of exercise of theoption, and received title to the property on September 1, 2004.

 

During the year ended December 31, 2003,the Company terminated its agreement with Value Added Ventures, LLC (VAV). TheCompany has been notified by VAV requesting payment for services from theinception of the contract through the date of termination totaling $33,380. TheCompany and VAV are negotiating settlement of this contract. The Company has aliability related to this agreement of $5,847 as of March 31, 2005.

 

During the year ended December 31, 2003, the Company negotiatedwith a board member to perform certain consulting services, which were to beginon October 1, 2003. The parties did not execute a contract for theseservices. Subsequent to December 31, 2003, the board member resigned andthe Company received a claim for the payment of approximately $50,000,consisting of approximately $2,000 and 48 Units of the Company. The Companycontends that since a contact was not executed and services were not performedrelated to the proposed agreement, no liability exists. The Company intends tovigorously defend itself against the claim.

 

The Company completed its initial public offering and escrow was brokenin March 2004. A total of 13,457 units were subscribed and paid for duringthe year ended December 31, 2004.

 

13

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

The Company has increased its expected annual production of fuel gradeethanol from 25 million gallons to 35 million gallons. Based on the increasedcapacity of the ethanol plant, the Company expects that the project will costapproximately $48,000,000 instead of the $37,000,000 previously planned.

 

The Company has entered into a design-build contract with ICM, Inc fora fixed price of $35,900,000, subsequently amended to $35,942,582, excludingcertain owner furnished costs, pursuant to an agreement for the construction ofthe 35 million gallon annual capacity ethanol plant. As of March 31, 2005,the remaining obligation on the contract was approximately $5,048,540 and theCompany had incurred costs of $30,894,042 of which $7,665,440 is included inaccounts payable. The Company also has an accounts payable for time andmaterials construction totaling $1,047,376 as of March 31, 2005.

 

On September 3, 2004, the Company entered into an agreement withAntioch International, Inc. for design services related to the railroadspur for a fixed price of $32,486, subsequently amended to $50,876. As of March 31,2005, the Company incurred costs under the contract of $50,876 and additionalservices of $18,063, of which $7,630 is included in accounts payable.

 

On November 12, 2004,the Company 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 96% 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.

 

OnNovember 12, 2004, the Company entered into a Raw Grains Agreement withUnited Bio Energy Ingredients, LLC, an affiliated related party. The Raw GrainsAgreement provides for the Company to purchase all raw grains necessary forethanol production from United Bio Energy Ingredients, LLC for a period of atleast five years. Pursuant to the agreement, United Bio Energy Ingredients, LLCwill use its best efforts to arrange for the purchase of grain at the lowestprice available under prevailing market conditions and we will supply all laborand equipment necessary to load or unload trucks or rail cars. For its service,the Company will pay United Bio Energy Ingredients, LLC the actual cashprocurement price and all reasonable and necessary expenses to get the grain tothe plant plus a $.02 per bushel fee. The title, risk of loss, andresponsibility for the quality of grain will transfer to the Company when itunloads the grain at the plant. Prior to that time, United Bio EnergyIngredients, LLC will bear the risk of loss. All grain delivered to the plantshall meet certain quality standards and the Company will have the option toreduce the price the Company will pay or fully reject any delivery that failsto conform to these standards, depending upon the severity of thenoncompliance.

 

14

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

OnNovember 12, 2004, the Company also entered into an Ethanol Agreement withUnited Bio Energy Fuels, LLC, an affiliated related party. The terms of theagreement provide that United Bio Energy Fuels, LLC will market all fuel-gradeethanol produced at our plant. In exchange, the Company agrees to pay UnitedBio Energy Fuels, LLC a fee of $.01 for each gallon of ethanol produced at theCompany’s plant during the term of the agreement. The Company expects that theterm of the agreement will be at least 5 years. United Bio Energy Fuels, LLCalso agreed to use its best efforts to obtain the highest price for ethanolavailable under prevailing market conditions.

 

OnNovember 12, 2004, the Company entered into a Management Agreement withUnited Bio Energy Management, LLC, a related party, in which United Bio EnergyManagement, LLC will supervise and direct the general operations of the plantfor an anticipated period of at least five years. United Bio Energy Management,LLC will provide the services of a full-time general manager to the plant.United Bio Energy Management, LLC is wholly owned by ICM, Inc. and Fagen, Inc.Accordingly, the Company may not be able to negotiate any further transactionsat arms length, as the Company would be able to do with an independent party.The Company has agreed to compensate United Bio Energy Management, LLC anannual fee of $250,000 for these services payable in monthly installments of$20,833, plus an incentive bonus based on the attainment of certain financialbenchmarks. United Bio Energy Management, LLC will appoint a general manager tobe based on site at our plant, and shall work exclusively for us. In the eventof a dispute, the Management Agreement provides that the Company will firstattempt to amicably settle any dispute or difference privately between UnitedBio Energy Management, LLC and the Company. If the Company cannot resolve thedispute as a result of the discussions, then the Company must submit the matterto non-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 asapplicable in the State of Kansas. The determination of the arbitrator isexpected to be final and may not be appealed to any court. The prevailing partyin any arbitration proceeding is entitled to recover reasonable attorneys’ feesand expenses incurred. The agreement commenced during March 2005. For theperiod ended March 31, 2005, the Company incurred costs of $21,392 relatedto this agreement including reimbursable expenses which is included in accountspayable.

 

OnFebruary 24, 2005, the Company entered into a facility construction,ownership and operating agreement Southern Star Central Gas Pipeline. Inc. toconstruct, install, operate and maintain a measurement station capable offlowing natural gas in sufficient hourly quantities to meet the total dailyrequirements and design specifications requested by the Company. The Companywill pay for the actual cost of construction of the facilities which iscurrently estimated to be $312,471 less the deposit of $25,000 already paid bythe Company. As of March 31, 2005, the Company incurred and paid totalcosts of $312,471.

 

OnFebruary 28, 2005, the Company entered into an agreement with Kansas CityPower & Light Company to provide electric utility service and installelectrical facilities to the plant. The Company has agreed to have Kansas CityPower & Light Company provide electric service to the plant for a termof fifteen years. In exchange for the installation of electrical facilities tothe plant and the electric service agreement, the Company has agreed to payKansas City Power & Light Company $515,720 payable in five equalinstallments. In addition, the Company is liable for actual costs incurred thatexceed $515,720 as a direct result of discovering rock during the installationof the facilities. However, the Company’s total liability for the project islimited to $813,837. As of March 31, 2005, the Company has recognizedtotal cost of $515,720 with $412,576 included in accounts payable.

 

OnMarch 25, 2005, the Company entered into an agreement with GasDistribution Contractors to construct a connecting gas pipeline system thatreceives natural gas from Southern Star Central Gas Pipeline facilities anddelivers this gas to the plant for a price of $39,000. As of March 31,2005, no costs had been incurred under the contract.

 

15

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

OnMarch 30, 2005, the Company entered into two agreements with Kinder MorganInterstate Gas Transmission LLC for discounted interruptible storage service ofnatural gas. The contracts provide for a maximum storage quantity totaling191,500 dth for the period from April 1, 2005 through February 28,2006 at a cost of $.0338 per dth daily average storage.

 

OnMarch 31, 2005, the Company entered into an agreement with Shafer, Kline &Warren, Inc. to provide engineering services in connection with theconstruction of the natural gas pipeline system to the plant. The amount of thecontract is for $16,000 plus reimbursable material and expenses. As of March 31,2005, no costs had been incurred under the contract.

 

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.

 

**NOTE 8 -**                      VALUE ADDED GRANT

** **

During the year ended December 31, 2003,the Company received notification of award of a United States Department ofAgriculture Value-Added Agricultural Product Market Development Grant (theGrant) for approximately $450,000. The Grant can be used to pay for certainorganizational, offering and start-up costs related to the formation andcapitalization of the Company. For the period ended March 31, 2005, theCompany did not qualify for any reimbursement of costs incurred. For the periodfrom inception though March 31, 2005, the Company qualified forreimbursement of $450,000 of costs, of which $61,602 related to cost of raisingcapital and $333,492 was recorded as a reduction of start-up costs, and $54,906reduced loan origination fees.

 

**NOTE 9 -****                      SUBSEQUENTEVENTS**

 

On April 13, 2005, the Company closed on a real estate contractwith an unrelated party to purchase land in Anderson County, Kansas. The sum of$90,000 was paid at the time of closing. The Company entered into a promissorynote agreement in the amount of $90,000 with Patriots Bank to finance thepurchase of the land. The entire principal amount along with accrued interestat 7% is due on June 12, 2005. The note is secured by a mortgage on realestate.

 

On April 18, 2005, the Company entered into an agreement with ICM, Inc.to provide services enumerated in the agreement related to a Safety and HealthProgram for the Company for the period from April 18, 2005 until November 11,2005. The Company will pay $20,000 to ICM, Inc. related to this agreement.

 

As discussed in Note 2, the Company is undertaking a registeredoffering for additional membership units which became effective on April 20,2005. As of May 13, 2005, we have received subscriptions for 6,899 units,for a total of $7,588,900, and have deposited subscription proceeds in theamount of $758,900 in our escrow account. We have not yet accepted anysubscriptions for units related to this registered offering.

 

16

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**Item 2.****           Management’sDiscussion And Analysis**

 

This report contains forward-looking statements that involve futureevents, our future performance and our expected future operations andactions.  In some cases you can identifyforward-looking statements by the use of words such as “may,” “will,” “should,”“anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,”“predict,” “hope,” “potential,” “continue,” or the negative of these terms orother similar expressions.  Theseforward-looking statements are only our predictions and involve numerousassumptions, risks and uncertainties. Our actual results or actions may differ materially from theseforward-looking statements for many reasons, including the reasons described inthis report.  We are not under any dutyto update the forward-looking statements contained in this report.  We cannot guarantee future results, levels ofactivity, performance or achievements. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.  You should read this report and the documentsthat we reference in this report and have filed as exhibits, completely andwith the understanding that our actual future results may be materiallydifferent from what we currently expect. We qualify all of our forward-looking statements by these cautionarystatements.

 

**Overview**

 

EastKansas Agri-Energy, LLC was formed as a Kansas limited liability company on October 16,2001, for the purpose of constructing and operating an ethanol plant nearGarnett, Kansas. Subsequent to the end of the period covered by thisreport, we filed a Form 8-A registration statement with the Securities andExchange Commission indicating that we have total assets exceeding $10 millionand more than 500 unit-holders.  Inaddition to filing periodic reports, we will now have to comply with the proxyand tender offer rules and our directors, officers and significantunit-holders will have additional reporting obligations.

 

Wehave begun construction of a corn- and milo-based ethanol plant that willproduce ethanol, distillers grains and carbon dioxide. Our plant is expected tohave a capacity to produce 35 million gallons of denatured fuel-gradeethanol.  Our anticipated date ofstart-up of operations is currently June, 2005.

 

Ourplant is expected to use field corn, which is a tall growing cereal graincontaining both hard and soft starches. We also expect to use milo or grainsorghum which is a coarse annual cereal grass with large white or yellowgrains. One bushel of milo produces approximately as much ethanol as one bushelof corn and the distillers grains produced from corn and milo has equivalentuses.

 

Weexpect that the project will cost approximately $46,793,000. This includesapproximately $36,340,000 to build the plant. We are still in the developmentphase, and until the proposed ethanol plant is operational, we will generate norevenue. We anticipate that accumulated losses will continue to increase untilthe ethanol plant is operational.

 

OnNovember 23, 2004, we entered into a debt financing arrangement with HomeFederal Savings Bank of Rochester, Minnesota consisting of a term loan of$26,000,000.  To supplement our debtfinancing and complete our capitalization plan we entered into a Unit Purchaseand Redemption Agreement with ICM, Inc. of Colwich, Kansas and Fagen, Inc.of Granite Falls, Minnesota.  ICM, Inc.is the design/builder of our plant and Fagen, Inc. is the primarysubcontractor. In the Unit Purchase and Redemption Agreement we agreed to issueup to 6,250 of our units to ICM, Inc. and Fagen, Inc. at a purchaseprice of $1,000 per unit in exchange for a combined capital contribution fromthem of up to $6,250,000. This is in addition to units already owned byICM, Inc., Fagen, Inc. and related entities or individuals. Wealso agreed to redeem the 6,250 units from ICM, Inc. and Fagen, Inc.using the proceeds from the sale of units in a registered offering or, to theextent the offering is unsuccessful, from cash flow generated by operationssubject to certain loan covenants, restrictions and tax distributions.  The redemption price will be $1,100 per unitif we are able to raise at least $6,875,000 in the registered offering.  Otherwise, the redemption price will be basedon a current fair market value of the units. Pursuant to the Unit Purchase and Redemption Agreement, ICM, Inc.and Fagen, Inc. each purchased 3,125 units at a price of $1,000 per unit andunits

 

17

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were issued on January 19, 2005. Toraise the proceeds necessary to redeem the units in accordance with the termsof Unit Purchase and Redemption Agreement, we are now undertaking a second registeredoffering for additional membership units. Our registered offering becameeffective subsequent to the period covered by this report on April 20,2005 and we began our efforts to sell the registered membership units shortlythereafter.  Investors have begunsubscribing for units and we have deposited subscription proceeds in our escrowaccount. We have not yet issued units in this registered offering.

 

Wehave engaged United Bio Energy Management, LLC, United Bio Energy Fuels, LLC,United Bio Energy Ingredients, LLC and United Bio Energy Trading, LLC toprovide us services including ethanol plant general management, ethanol anddistillers grains marketing, grain origination services and overall risk management.These companies are owned by United Bio Energy, LLC of Wichita, Kansas. UnitedBio Energy, LLC was owned by an affiliate of ICM, Inc. and an affiliate ofFagen, Inc.  However, in April 2005,United Bio Energy, LLC announced its intention to merge with US BioEnergyCorporation of Brookings, South Dakota which builds and operates biofuelproduction facilities which may be in competition with our plant. We are highlydependent on United Bio Energy, LLC and its subsidiaries.  A merger between United Bio Energy, LLC and USBioEnergy Corporation could result in a conflict of interest with our companyand adversely affect our ability to make a profit.

 

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

 

Inthe next 12 months, we plan to focus on three primary activities: (1) completingconstruction of the plant, site development and permitting; (2) implementingour financing plan including the sale of additional equity in our second publicoffering and redemption of 6,250 units from ICM, Inc. and Fagen, Inc.;and (3) preparing for and commencing start-up operations.

 

*Plant Construction, Site Development and Permitting*

 

OnSeptember 28, 2004, we instructed ICM, Inc. to commence constructionof the ethanol plant on our 59-acre site located in the Golden PrairieIndustrial Park on the outskirts of Garnett, Kansas. ICM, Inc. is servingas the design/builder and Fagen, Inc. is serving as the principalsubcontractor. In the first fiscal quarter we have spent significant funds onplant construction and equipment.  We expectto purchase additional equipment in the second fiscal quarter, all of whichwill be necessary for successful plant operations. We expect the plant to besubstantially complete, which means ready for occupancy and ethanol production,in June of 2005.

 

Wehave been and will be required to make progress payments to ICM, Inc.based upon applications of payment made by ICM, Inc. for all workperformed as of the date of the application. Initially we retained 10% of theamount submitted in each application for payment. However, when 50% of the workwas completed, we stopped withholding a retainage amount. Once ICM, Inc.has substantially completed the project, we will make a payment to ICM, Inc.equal to 100% of the contract, less $500,000. We will also withhold amounts forany defective work. We will pay $250,000 of the $500,000 to ICM, Inc. oncewe are satisfied that ICM, Inc. has satisfied its obligations under thecontract. We will pay the remaining $250,000 to ICM, Inc. after we receivea written emissions compliance report documenting compliance with theapplicable atmospheric emission criteria.

 

Thefollowing chart summarizes our progress on the construction of our plant as of May 11,2005.

 
| **Projects**                                                             | ** ** | **Percentage of  Completion** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------|------------|
| Install Dryer                                                            |       | 100                           |       |
| Install Energy Center Structural Steel,  Electrical, and Instrumentation |       | 95                            |       |
| Install Distillers Dried Grains Equipment                                |       | 100                           |       |
| Install Chiller and Master Control Center                                |       | 100                           |       |
| Install Fermenters                                                       |       | 100                           |       |
| Install Distillers                                                       |       | 100                           |       |
| Process Building Structural Steel                                        |       | 100                           |       |
| Work on Electrical System                                                |       | 90                            |       |
| Erect office building                                                    |       | 35                            |       |
| Install Cooling Tower                                                    |       | 100                           |       |
| Install Piping for Fermentation                                          |       | 100                           |       |
| Set Distillers and Install Piping for them                               |       | 100                           |       |
| Work on Alcohol Storage                                                  |       | 50                            |       |
| Work on Energy Center                                                    |       | 100                           |       |
| Install Centrifuges and Process Equipment                                |       | 100                           |       |
| Install Piping, Electric, and  Instrumentation for Piping                |       | 100                           |       |
| Work on Fermenters                                                       |       | 100                           |       |
| Work on field-erected tanks                                              |       | 80                            |       |
| Work on Installation of Cooling Tower                                    |       | 100                           |       |
| Install Evaporators                                                      |       | 100                           |       |
| Install Electric and Instrumentation of  Distillers                      |       | 100                           |       |
| Install Rail Spur                                                        |       | 0                             |       |
| Install Pumps on Cooling Towers                                          |       | 40                            |       |
| Install Truck Scales                                                     |       | 100                           |       |
| Complete Distillers Dried Grains Building                                |       | 100                           |       |
| Train Plant Personnel                                                    |       | 85                            |       |
| Complete Administration Building                                         |       | 35                            |       |
| Finalizing Project                                                       |       | 80                            |       |
| Fire Loop                                                                |       | 80                            |       |
| Roads                                                                    |       | 100                           |       |

 

18

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OnNovember 18, 2004, we purchased approximately 19 acres of real estatein Anderson County, Kansas to allow the placement of a railroad spur from theproposed plant site to existing Union Pacific Railroad track in Garnett,Kansas. We purchased the real estate pursuant to an option at a price of $9,000per acre. We obtained the option at a cost of $5,000. The real estate was usedas a surface dumpsite many years ago resulting in the need to move and burywaste. The clean-up required has now been completed and paid for by grant fundsapplied for and received by the City of Garnett, Kansas.

 

OnSeptember 2, 2004, we finalized our purchase of 23 acres of land inthe Golden Prairie Industrial Park on the edge of Garnett, Kansas where we areconstructing our ethanol plant. Subsequent to the period covered by thisreport, on April 13, 2005, we purchased an additional 17 acres ofreal estate adjacent to the site where we are constructing our plant for apurchase price of $90,000.  We intend touse this land for our metering station and for a portion of our railroadspur.  In order to finance the purchase ofthis land, we obtained a loan from Patriots Bank in Garnett, Kansas for $90,000at a fixed interest rate of 7% to be paid on June 12, 2005.  We granted a mortgage on the real estate tothe bank to secure the loan.

 

Subsequentto the period covered by this report, on April 5, 2005, we received aneasement from the State of Kansas in exchange for $1.00 which will allow us toconstruct and operate a railroad spur line across state park property owned bythe State of Kansas.  However, we havenot yet received the necessary approval from Union Pacific Railroad of ourtrack plans and crossings. As such, it is unlikely our rail service will beoperational when our plant begins production. We expect to be reliant upontrucks to transport grain and ethanol until our rail service is completed.  This may negatively affect our ability to makea profit due to the higher cost associated with transport by trucks.

 

Weengaged Natural Resource Group of Minneapolis, Minnesota to coordinate andassist us with proper permitting. It submitted the application for the NPDESWastewater Discharge Permit to the Kansas Department of Health and Environment(“KDHE”) and worked with the KDHE to modify the construction air permitpreviously issued for the ethanol plant to accommodate the anticipatedincreased production capacity of our ethanol plant. This approval of themodification was received from the KDHE on August 5, 2004.  On March 29, 2005, we entered into anagreement with Natural Resource Group to perform certain environmental servicesas we near our anticipated date for start-up of operations.  This includes the preparation of a RiskManagement Plan, a Spill Prevention, Control and Countermeasures Plan, a StormWater Pollution Prevention Plan and an Integrated Contingency Plan.  In exchange for these services, we expect topay $14,200.

 

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Beforewe can begin operations, we must comply with applicable Bureau of Alcohol,Tobacco, and Firearms regulations. These regulations require that we first makeapplication for and obtain an alcohol fuel producer’s permit. The applicationmust include information identifying the principal persons involved in ourventure and a statement as to whether any of them have ever been convicted of afelony or misdemeanor under federal or state law. The term of the permit isindefinite until terminated, revoked, or suspended. We have applied for analcohol fuel producer’s permit and are working with the Bureau to obtain ourpermit.

 

*Preparation for Plant Operations*

 

Wehave entered into agreements for the operation of the ethanol plant with UnitedBio Energy Management, LLC; United Bio Energy Fuels, LLC; United Bio EnergyIngredients, LLC; and United Bio Energy Trading, LLC. United Bio EnergyManagement, LLC will manage the ethanol plant and United Bio Energy Fuels, LLCwill provide us ethanol marketing services. United Bio Energy Ingredients, LLCwill provide us distillers grains marketing and grain origination services.United Bio Energy Trading, LLC will provide us with overall risk management. InMarch 2005, United Bio Energy Management, LLC began providing usmanagement services in exchange for payment as provided in our ManagementAgreement. We are very dependent on these companies. As a result, ouragreements were not arms’ length transactions and may not be as favorable asthose negotiated with an independent third party. Furthermore, an announcedmerger between United Bio Energy, LLC and US BioEnergy Corporation mayadversely affect our project.

 

Weengaged U.S. Energy Services, Inc. of Wayzata, Minnesota, to provideconsulting and energy management services for supplies of electricity andnatural gas.

 

Basedon engineering specifications produced by ICM, Inc., the proposed plantwill require electricity equal to approximately 20,000,000 kilowatt hours peryear. We have entered into an agreement with Kansas City Power and LightCompany to provide for our electricity needs. Kansas City Power and LightCompany has agreed to provide electric utility service for a term of15 years. They have also agreed to install facilities capable of providingsuch electrical service on or before May 1, 2005 in exchange for ourpayment of $515,720, payable in five installments. In addition, we have agreedto pay costs reasonably incurred as a result of discovery of rock, not toexceed $298,117. We expect to qualify for an economic development incentivewhich is expected to result in a discount on our purchase for electric servicesfor the first five years. Based on an estimate of the load rate and usage wewill require, we expect to pay per kWh on average approximately $0.0276 inyear 1, $0.0295 in year 2, $0.0314 in year 3, $0.0335 inyear 4 and $0.0335 in year 5. After year 5 the discount will nolonger apply and we expect to pay $0.0394 per kWh thereafter. The actual amountswe pay may vary from our estimates. Kansas City Power & Light Company is currently completinginstallation of the electric facilities and a back-up system has been installedpending this completion.

 

Toaccess sufficient supplies of natural gas to operate the plant, aninterconnection will be completed with Southern Star Central Gas Pipeline’sfacilities. We have entered into an agreement with Southern Star Central GasPipeline to design and build a measurement station capable of flowing naturalgas in sufficient hourly quantities to meet the total daily requirementsindicated above and to construct, install, operate and maintain the side valve,orifice meter, regulation, flow computer, flow control, SCADA equipment, valvesand other appurtenances necessary to tap the main line. We have agreed to payactual costs of construction estimated at $312,471.  The plant will need natural gas odorizationequipment, regulation equipment, and 1,000 feet or less of natural gas fuelline immediately downstream of Southern Star Central Gas Pipeline’s measurementstation. We have engaged an engineering firm, Shafer, Kline & Warren, Inc.,to design and construct these facilities. Gas Distribution Contractors of Kansas City, Missouri will construct aconnecting gas pipeline system from Southern Star Central Gas Pipeline’sfacilities to our plant for a price of $39,000. Subsequent to the period covered by this report, on April 15, 2005,we entered into an agreement for certain services related to natural gas withKansas Municipal Utilities of McPherson, Kansas.  On March 30, 2005 we executed twoInterruptible Storage and Service Agreements with Kinder Morgan Interstate GasTransmission, LLC, which run through February 28, 2006.

 

Wehave signed an agreement with U.S. Water Services for the provision ofwater treatment chemicals and services for a price of $84,633 annually and aone time fee of $10,000.

 

Wealso intend to execute an agreement with ICM, Inc. for the purchase of asteam turbine generator. We expect to sign a promissory note for $1,760,274 atan interest rate of 1% plus the prime rate payable to ICM, Inc. We expectthat the note will call for installment payments with the balance due on July 1,2008. We also intend to grant

 

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ICM, Inc. a security interest in thegenerator. We expect that the generator will generate approximately 68% of theplant’s electricity needs and anticipate that the generator will result inenergy savings.

 

Wealso plan to market and distribute the carbon dioxide that will be produced atthe plant as a by-product of our ethanol production. On January 28, 2004,we entered in to a letter of intent with BOC Group, Inc. of Murray Hill,New Jersey. The terms of the letter of intent provide that we will makeavailable to BOC Group, Inc. for purchase all of the carbon dioxideproduced at the plant. The letter of intent contemplates that BOC Group, Inc.will purchase a substantial quantity of our raw carbon dioxide gas annually andwill construct a carbon dioxide liquefaction plant. We expect to lease a parcelof our land adjacent to our ethanol plant to BOC Group, Inc. forconstruction of the liquefaction plant. The letter of intent has been extendedby agreement of the parties to up to and including May 13, 2005. We expectthat this will be extended by mutual agreement of the parties. We are currentlynegotiating a legally binding contract with BOC Group, Inc. However, thereis no guarantee that a final contract will be executed or that it will be executedupon terms as favorable as those currently anticipated. If we do execute afinal contract, it is likely that the sale of carbon dioxide will not beginuntil at least Spring 2006 or later.

 

Subsequentto the period covered by this report, on April 25, 2005 we entered into anagreement with Pearson Risk Consulting to provide risk managementservices.  As part of this agreement,Pearson Risk Consulting agreed to develop and maintain our insurance program,interview and select brokers to implement the program, assist in maintainingfire protection standards, develop and maintain risk-sharing methods, andinform us of risk management issues in exchange for payment of $3,750 for theperiod of April 11 through November 11, 2005.  In addition, we have obtained property,casualty, automobile, general liability, umbrella liability, pollution andworkers compensation insurance coverages through November 11, 2005.

 

Wehave engaged ICM, Inc. to provide certain safety and health programmaterials related to our plant and its employees in exchange for payment of anaggregate fee of $20,000.

 

*Administration and Employees*

 

We currentlyhave an office staff comprised of two full-time and two part-timeemployees.  One of the full-timeemployees, Jill Zimmerman, is also our Treasurer, principal financial officerand member of the company.  We haveexecuted an employment agreement with Jill Zimmerman.  The term of this agreement was extendedthrough July 1, 2005.  Before webegin operations, we expect to employ a controller and a total of approximatelyfour secretary/clerical personnel. Subsequent to the date of this report, our manager, United Bio EnergyManagement, LLC, who has the primary responsibility for hiring of employees,has hired the majority of our production employees many of whom are currentlyparticipating in job training in anticipation for the start-up ofoperations.  Subsequent to the periodcovered by this report, on May 5, 2005, we entered into an employmentagreement with our plant manager, Derek Peine, wherein we agreed to pay him abase salary and a one-time payment for moving expenses.  He will also be eligible for an annual bonusbased on achievement of certain performance conditions.

 

Under our Management Agreement, United BioEnergy Management, LLC hires and employs our general manager and our distillersgrains manager.  In anticipation of ourexpected start-up of operations in June 2005, United BioEnergy Management,LLC has selected a general manager and a distillers grain merchandiser for ourplant who have begun working on our project.

 

Thefollowing table represents positions within the plant and the minimumnumber of individuals we expect will occupy each position prior to start-up ofoperations:

 

| **Position**              | ** ** | **# Employed** |
|---------------------------|------------|----------------|
| General Manager           |       | 1              |
| Plant Manager             |       | 1              |
| Distillers Grains Manager |       | 1              |
| Controller                |       | 1              |
| Lab Manager               |       | 1              |
| Lab Technician            |       | 2              |
| Secretary/Clerical        |       | 4              |
| Shift Supervisors         |       | 4              |
| Maintenance Supervisor    |       | 1              |
| Maintenance Craftsmen     |       | 4              |
| Plant Operators           |       | 12             |
| **TOTAL**                 | ** ** | **32**         |

 

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*Trends and Uncertainties Impacting theEthanol Industry and Our Future Revenues*

 

As we transition in the next fiscal quarter from a development-stagecompany to an operating company, our revenues will consist of sales of ethanoland distillers grains.  We expect ethanolsales to constitute the bulk of our revenues. The supply of ethanol is currently outpacing ethanol demand.  Recent market values for ethanol have fallen30% to 40% from the values experienced in the last quarter.  Demand increases may continue to lagproduction maintaining downward pressure on ethanol prices in the short to midterm.  Based upon the number of newethanol plants scheduled to begin production and the expansion of current plants,we do not expect a return to strong ethanol prices in the short to midterm.  Areas where demand may increaseare new markets in Atlanta, Nashville, Baton Rouge and Houston.  Minnesota may also generate additional demandbecause the Minnesota legislature has passed legislation mandating a 20%ethanol blend in its gasoline by the year 2013.

 

Potential increases in demand do not include national implementation ofa Renewable Fuels Standard or similar legislation, which could cause increasesin demand to be greater than currently projected.  If the use of MTBE is phased out on anational level in the next few years and the reformulated gasoline oxygenaterequirement remains unchanged, the anticipated growth may yield a doubling ofethanol demand much sooner than currently anticipated.  However, even as new markets develop, theindustry continues to grow rapidly and national production is expected to riseby 750,000 gallons over the next year from 3.4 billion gallons to 4.15 billiongallons annually.  In addition, none ofthese new markets is assured nor is the timing of any other new demand in theethanol industry.

 

We currently benefit from federal ethanol supports and federal taxincentives. Changes to these supports or incentives could significantly impactdemand for our ethanol.  In March 2005,a bi-partisan bill containing a proposed Renewable Fuels Standard (“RFS”) wasintroduced in the U.S. Senate.  The RFSbill would require the use of 4 billion gallons of renewable fuels in 2006increasing to 8 billion gallons by 2012. The bill 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.  In addition, the bill eliminates thereformulated gasoline (“RFG”) oxygenate standard, enhances RFG air qualityrequirements and improves the credit and waiver provisions of the RFSpackage.  There is no assurance orguarantee that Congress will pass RFS legislation or that any RFS legislationapproved by Congress will contain provisions sufficiently favorable to theethanol industry to cause a sustainable increase in ethanol demand.

 

Demand for ethanol may also increase as a result of increasedconsumption of E85 fuel.  E85 fuel is ablend of 70% to 85% ethanol and gasoline. According to the Energy Information Administration, E85 consumption isprojected to increase from a national total of 11 million gallons in 2003 to 47million gallons in 2025.  E85 is used asan aviation fuel and as a hydrogen source for fuel cells.  In the U.S., there are currently about 3million flexible fuel vehicles capable of operating on E85 and 400 retailstations supplying it.  Automakers haveindicated plans to produce an estimated 2 million more flexible fuel vehiclesper year.

 

Ethanol production continues to grow as additional plants becomeoperational. Demand for ethanol has been supported by higher oil prices and itsrefined components and by clean air standards mandated by federal agencies haverequired highly populated areas to blend ethanol into their gasoline suppliesas an oxygenate. The intent of the air standards is to reduce harmful emissionsinto the atmosphere. These mandates have been challenged in severalmetropolitan areas, and are currently being reviewed by the courts. In thefuture, the combination of additional supply, successful challenges to theclean air standards and stagnant or reduced demand may adversely affect ourrevenues, profit margin and ability to maintain positive cash flows.

 

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*Technology Developments*

 

Anew technology has recently been introduced by Vortex Dehydration Technology ofHanover, Maryland, to remove corn oil from concentrated thin stillage (abyproduct of “dry milling” ethanol processing facilities) which would be usedas an animal feed supplement or possibly as an input for bio-dieselproduction.  Although the recovery of oilfrom the thin stillage may be economically feasible, it fails to produce theadvantages of removing the oil prior to the fermentation process.  The FWS Group of Companies, headquartered outof Canada with offices in the United States, is currently working on a starchseparation technology that would economically separate a corn kernel into itsmain components. The process removes the germ, pericarp and tip of the kernelleaving only the endosperm of kernel for the production of ethanol.  This technology has the capability to reducedrying costs and the loading of volatile organic compounds.  The separated germ would also be availablethrough this process for other uses such as high oil feeds or bio-dieselproduction.  Each of these newtechnologies is currently in its early stages of development.  There is no guarantee that either technologywill be successful or that we will be able to implement the technology in ourethanol plant.

 

*Trends and Uncertainties Impacting theNatural Gas Markets and Our Future Cost of Goods Sold*

 

As we transition from a development-stage company to an operationalcompany in the next fiscal quarter, natural gas will be an important inputcommodity to our manufacturing process. We will use natural gas to dry our distiller’s grain products tomoisture contents at which they can be stored for long periods of time, and canbe transported greater distances.  Drydistiller’s grains have a much broader market base, including the westerncattle feedlots, and the dairies of California and Florida.  Recently, the price of natural gas has risenalong with other energy sources.  Naturalgas prices are considerably higher than the 10-year average.  We look for continued volatility in thenatural gas market, led mainly by the speculators who are taking advantage ofthis market, and any increases in the price of natural gas will increase ourcost of production and negatively impact our profit margins.  We have secured an energy consultant for ournatural gas, and will work with them to develop ways to protect our businessagainst adverse price risk.

 

**Liquidity and Capital Resources**

 

Asof March 31, 2005, we had cash and cash equivalents of $90,041 and totalcurrent assets of $192,046. We sold units in our initial public offering with aprice of $13,457,000 and raised an additional $610,000 in seed capital. Weraised an additional $6,250,000 in a combined capital contribution from ICM, Inc.and Fagen, Inc. These funds are being used to finance construction of theethanol plant. Subsequent to March 31, 2005, we expect to sell additionalunits as part of our second public offering which became effective on April 20,2005, but we have not yet completed the sale of these units.

 

Asof March 31, 2005, we had current liabilities of $10,294,881 consistingprimarily of our accounts payable. Since our inception through March 31,2005, we have an accumulated deficit of $1,668,416. We have reduced members’equity by $264,129, the amount of the prepaid offering costs related to ourinitial public offering. Total members’ equity as of March 31, 2005, was $19,288,584.Since our inception, we have generated no revenue from operations. For the fiscalquarter ended March 31, 2005, we have a net loss of $149,435 primarily dueto start-up business costs.

 

*Application of Critical Accounting Policies*

 

Managementuses estimates and assumptions in preparing our financial statements inaccordance with generally accepted accounting principles.  These estimates and assumptions affect thereported amount of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses. Actual amounts coulddiffer from the estimates used.

 

*Debt Financing*

 

OnNovember 23, 2004 we entered into a Credit Agreement with Home FederalSavings Bank, establishing a construction loan facility for the construction ofa 35 million gallon per year ethanol plant. The construction financing isin the amount of $26,000,000 consisting of a $21,000,000 conventional term loanand a $5,000,000 USDA 80% guaranteed loan, and is secured by substantially allof our assets.

 

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Duringthe construction phase, we will make monthly payments of interest only at avariable interest rate equal to prime plus 1.75% with a floor of 6%. Theconstruction phase shall end no later than September 1, 2005. Followingconstruction completion, the loan will be segmented into two loans (1) a$21,000,000 conventional term loan, and (2) a $5,000,000 USDA 80%guaranteed loan. The $5,000,000 USDA guaranteed loan will have an amortizationperiod and maturity date of 10 years. We will make monthly payments ofprincipal and interest on the $5,000,000 loan at a variable interest rate ofprime plus 1.25%. This variable rate will be adjusted quarterly. The$21,000,000 conventional loan will have an amortization period of 10 yearsbut will mature at the end of 5 years. We will make 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%.

 

Underthe Credit Agreement, we agreed to pay an origination fee of $367,750 to HomeFederal Savings Bank, an $80,000 origination fee for the USDA loan guaranteeand a $30,000 annual administration fee related to the credit facility. Thecredit facility is secured by a mortgage on our real property and a securityinterest in all personal and intangible assets of the Company, includingassignment of all material contracts.

 

Duringthe construction phase, a 1% prepayment penalty of the total construction of$26,000,000 will be assessed if the loan is placed with a lender other thanHome Federal Savings Bank. After the construction phase, the $5,000,000 USDA80% guaranteed loan will impose a prepayment penalty depending on the year ofrefinancing starting with the 5% penalty in year one and decreasing to 1% inyear 5. With respect to the $21,000,000 conventional loan, a prepayment penaltywill be imposed starting with a 3% penalty in year one and decreasing to 1% inyear 3.

 

Wewill be subject to certain financial loan covenants consisting of minimumworking capital, minimum fixed coverage, minimum current ratio, minimum networth and maximum debt/net worth covenants during the term of the loan. We willalso be prohibited from making distributions to our members, however, we willbe allowed to distribute 40% of our net income to our members after our lenderhas received audited financial statements for the fiscal year. We must be incompliance with all financial ratio requirements and loan covenants before andafter any distributions to the members.

 

Afterthe construction phase, the Company will only be allowed to make annual capitalexpenditures up to $400,000 annually without the lender’s prior approval.During the term of the loan, we are required to pay to the lender an annualamount equal to the greater of (1) 75% of any Commodity Credit CorporationBio Energy income payments received during the year or (2) 25% of theCompany’s free cash flow for each year. Payments consisting of USDA CommodityCredit Corporation Bio Energy income must be paid to the lender within15 days of receipt of any such payments. These payments will continueuntil an aggregate sum of $7,500,000 has been received by the lender.

 

Subsequentto the period covered by this report, on April 13, 2005, we entered into apromissory note with Patriots Bank in Garnett, Kansas in the amount of $90,000payable at a fixed interest rate of 7% to be paid on June 12, 2005.  We used these funds to purchase additionalreal estate adjacent to our plant site. We also granted a mortgage on this realestate to the bank to secure the loan.

 

*RaisingAdditional Capital*

 

Wehave issued units to ICM, Inc. and Fagen, Inc. in exchange for theircombined capital contribution of $6,250,000. Pursuant to a Unit Purchase andRedemption Agreement executed with ICM, Inc. and Fagen, Inc., we haveagreed to redeem the 6,250 units from ICM, Inc. and Fagen, Inc.using the proceeds from the sale of units in a registered offering or, to theextent the offering is unsuccessful, from cash flow generated by operationssubject to certain loan covenants, restrictions and tax distributions.  The redemption price will be $1,100 per unitif we are able to raise at least $6,875,000 in the registered offering.  Otherwise, the redemption price will be basedon a current fair market value of the units. These units are currently includedin equity but will be accounted for as a liability upon satisfaction of thecontingencies related to the redemption of the units until such time as theunits are redeemed. To raise theproceeds necessary to redeem the units in accordance with the terms of Unit Purchaseand Redemption Agreement, we are now undertaking a registered offering foradditional membership units. Our registered offering became effective on April 20,2005 and we began our efforts to sell the registered membership units shortlythereafter.  As of May 13, 2005, wehave received subscriptions for 6,899 units and have deposited subscriptionproceeds in the amount of $758,900 in our escrow account which representsapproximately 10% of the total subscription price. We have not yet issued unitsin this registered offering.

 

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Tothe extent that we obtain proceeds of less than $6,875,000 in the registeredoffering, we intend to redeem the units through a distribution of our net cashflow from operations at a redemption price equal to the fair market value ofthe units as of the date of the redemption. The amount of yearly net cash flowavailable for redemption will be subject to a reduction due to distributions toour members (including ICM, Inc. and Fagen, Inc.) in an aggregateamount equal to 40% of our net income for the purpose of paying income taxesrelated to the ownership of our units. The amount of yearly net cash flowavailable for redemption will be subject to a further reduction equal to the greaterof 75% of any Commodity Credit Corporation Bio Energy income payments wereceive during such year or 25% of our free cash flow. Any redemption of ourunits by us is further subject to the terms and conditions of any and all debtfinancing agreements executed between our lenders and us.

 

In connection with the capital contribution by ICM, Inc. and Fagen, Inc.,we amended our Operating Agreement to allow ICM, Inc. and Fagen, Inc.to appoint a total of three directors to our board of directors, subject to ourability to terminate one of their director positions for every $2,000,000dollars in redemption payments made to either or both of ICM, Inc. andFagen, Inc. Two of our initial directors resigned from our board in January 2005,and ICM, Inc. and Fagen, Inc. appointed their three directors on February 1,2005.

 

*Grants, Government Programs and Tax Rebates*

 

Wereceived a Value-Added Agricultural Product Market Development Grant of$450,000 from the USDA, which is a matching grant to be used for start-up costs.We have applied with the City of Garnett, Kansas under the NeighborhoodRevitalization Program for a rebate of any additional property taxesattributable to our site improvements. The City of Garnett, Kansas was awardedan Economic Development grant and loan through the U.S. Small Cities CommunityDevelopment Block Program for $750,000 to assist with water infrastructureimprovements at the plant site. The City has also received approval from theKansas Department of Transportation for grant funds to assist with highwayimprovements. The program provides that the state will contribute 85% of theactual project construction and engineering costs. We have entered into anagreement with the City of Garnett, and Anderson County to share equally the totalremaining funds that will be required which has been estimated at a total of$400,000. We have agreed to pay one-third of this obligation in installmentpayments.  Our portion of this obligationis estimated at approximately $135,000.

 

Wehave applied for a grant from the USDA’s Commodity Credit Corporation. Underthe grant program, the Commodity Credit Corporation will reimburse eligibleethanol producers of less than 65 million gallons of bioenergy one bushelof corn for every two and one-half bushels of corn used for the increasedproduction of ethanol. Under the program, no eligible producer may receive morethan $7,500,000 in any fiscal year. However, some ethanol producers havereceived more than this amount when the start-up period has extended over morethan one fiscal year of the U.S. government. Because we expect to be aneligible producer and to annually utilize approximately 13 million bushelsof corn in the increased production of ethanol, we expect to potentiallyreceive a maximum award of approximately $7,500,000. However, the CommodityCredit Corporation may award only $150,000,000 annually and any award wereceive may be reduced based upon the volume of applications from othereligible producers. In addition, payments under the program in any one fiscalyear may be less if Congress does not fully fund the program for that fiscalyear (funding for the program is subject to an annual appropriation). Accordingto the Farm Service Agency, payments under the program in fiscal year 2004totaled nearly $150,000,000 and approved federal funding for fiscal year 2005is set at $100,000,000. We expect to be eligible to receive an award under theprogram only once during the life of our project. The Commodity CreditCorporation Bio Energy Program is scheduled to expire on September 30,2006. The grants available under the program may not continue beyond theirscheduled expiration date or if they do continue, the grants may not be at thesame level. If our ethanol plant is not operational by the expiration of theprogram or has not had substantial operations, we may not be eligible for thegrants or may receive a reduced amount.

 

*Sources of Funds*

 

Thefollowing schedule sets forth our estimated sources of funds. This schedule couldchange in the future depending on whether we receive additional grants. The schedule mayalso change depending on the level of additional equity raised.

 

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| **Source of Funds**                                                                 | ** ** | ** ** | ** **     | **Percent of Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|----------------|----------------------|------------|
| Seed Capital Proceeds                                                               |       | $          | 610,000        |                 | 1.30       |   |
| Initial Registered Offering Proceeds                                                |       | $          | 13,457,000     |                 | 28.76      |   |
| Proceeds from additional units purchased by  ICM, Inc. and Fagen, Inc.(1) |       | $          | 6,250,000      |                 | 13.36      |   |
| Term Debt                                                                           |       | $          | 26,000,000     |                 | 55.56      |   |
| Grants                                                                              |       | $          | 476,000        |                 | 1.02       |   |
| **Total Sources of Funds**                                                          | ** ** | **$**      | **46,793,000** | ** **           | **100.00** | **%** |

 

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(1)                                  These units are subject to our redemptionobligations described in MANAGEMENT’S DISCUSSION AND ANALYSIS: PLAN OFOPERATIONS.

 

*Use of Funds*

 

Weexpect the total funding required for the plant to be $46,793,000. We estimatethat we will need approximately $36,340,000 to construct the plant, whichincludes the $35,900,000 payable to ICM, Inc. under the design/buildagreement, and a total of approximately $10,453,000 to cover all capitalexpenditures necessary to complete the project, make the plant operational andproduce revenue. We expect to payapproximately $42,000 for the construction of our administration building dueto an increase in costs related to revisions to the original design. We expectto pay this increased costs out of proceeds from our second public offering oroperating revenue. We do not expect the construction of our administrationbuilding to be completed at the time our ethanol plant commences operations.

 

Basedupon initial registered offering proceeds of $13,457,000, seed capital proceedsof $610,000, additional equity from ICM, Inc. and Fagen, Inc. of$6,250,000, a term loan of $26,000,000, and grant financing of $476,000, weexpect that we will have approximately $46,793,000 of debt and equity availablewhich would provide us with sufficient cash on hand to cover construction andrelated start-up costs necessary to make the plant operational.  We expect to incur significant expensesrelated to start-up of operations as we move from a development stage companyand become operational in the next fiscal quarter.

 

Thefollowing is our estimate of our costs and expenditures through commencement ofoperations. These estimates are based upon consultation with ICM, Inc. andFagen, Inc. It is only an estimate and our actual expenses could be muchhigher due to a variety of factors including those described elsewhere in thisprospectus.

 

**USE OF FUNDS**

 

| Plant construction                       |       | $          | 36,340,000     |       |
|------------------------------------------|------------|------------|----------------|------------|
| Land & site development costs   |       | 1,510,000  |           |
| Railroad                                 |       | 1,500,000  |           |
| Fire Protection / Water Supply           |       | 280,000    |           |
| Construction insurance costs             |       | 96,000     |           |
| Construction contingency                 |       | 582,000    |           |
| Capitalized interest                     |       | 350,000    |           |
| Rolling stock                            |       | 190,000    |           |
| **Start up costs:**                      | ** ** | ** ** | ** **     |
| Financing costs                          |       | 578,000    |           |
| Organization costs                       |       | 1,002,000  |           |
| Pre Production period costs              |       | 385,000    |           |
| Spare parts—process equipment       |       | 250,000    |           |
| Working capital                          |       | 1,900,000  |           |
| Inventory—corn and milo             |       | 830,000    |           |
| Inventory—chemicals and ingredients |       | 250,000    |           |
| Inventory—Ethanol and DDG           |       | 750,000    |           |
| **Total**                                | ** ** | **$**      | **46,793,000** | ** ** |

 

**Off-Balance Sheet Arrangements**

 

We do not haveany off-balance sheet arrangements other than those described in the notes toour Financial Statements as of March 31, 2005.

 

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**Item 3. Controls And Procedures**

 

Our management,including our President (the principal executive officer), William Pracht, andour Treasurer (the principal financial officer), Jill Zimmerman, have reviewedand evaluated the effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this report. Based upon this review and evaluation, these officers believe that ourdisclosure controls and procedures are effective in ensuring that materialinformation related to us is recorded, processed, summarized and reported withinthe time periods required by the forms and rules of the Securities andExchange Commission except that our management has noted the following materialweaknesses in our internal controls for the period covered by this report: 1)there is a lack of segregation of duties due to the limited number of personnelinvolved in processing of accounting data; 2) certain costs were expensedinstead of capitalized; and 3) disclosures included in the notes to the draftfinancial statements prepared by the Company included incorrect information.Corrections to the draft financial statements were made and the correctinformation is reflected in the Unaudited Financial Statements of March 31,2005 included herein.

 

Our management, including our principal executive officer and principalfinancial officer, have reviewed and evaluated any changes in our internalcontrol over financial reporting that occurred as of the end of the periodcovered by this report and there has been no change that has materiallyaffected or is reasonably likely to materially affect our internal control overfinancial reporting.

 

**PART II.****                                                OTHERINFORMATION**

 

**Item 1.****           LegalProceedings**

 

None.

 

**Item 2.****           UnregisteredSales of Equity Securities and Use of Proceeds**

 

*Unregistered Sales of Equity Securities*

 

We previously disclosed on Form 8-Kfiled October 15, 2004 the unregistered sale of our units to ICM, Inc.and Fagen, Inc. pursuant to the Unit Purchase and Redemption Agreemententered into on October 11, 2004. The units were issued to ICM, Inc. and Fagen, Inc. inexchange for their combined capital contribution of $6,250,000 on January 19,2005. Pursuant to the Unit Purchase and Redemption Agreement, we have agreed toredeem all 6,250 units from ICM, Inc. and Fagen, Inc. usingthe proceeds from the sale of units in a registered offering or, to the extentthe offering is unsuccessful, from cash flow generated by operations subject tocertain loan covenants, restrictions and tax distributions.  The redemption price will be $1,100 per unitif we are able to raise at least $6,875,000 in the registered offering.  Otherwise, the redemption price will be basedon a current fair market value of the units.

 

*Use of Proceeds*

 

The Securities and Exchange Commissiondeclared our registration statement on Form SB-2 (SEC Registration No. 333-96703)effective on January 24, 2003.  Wecommenced our public offering shortly thereafter.

 

The following is a breakdown of membershipunits registered and the membership units sold in that offering:

 
| **Amount Registered** | ** ** | **Aggregate price of the  amount registered** | ** **     | **Amount Sold** | ** ** | **Aggregate price of the  amount sold to date** | ** ** |
|-----------------------|------------|-----------------------------------------------|----------------|-----------------|------------|-------------------------------------------------|------------|
| **18,000**            | ** ** | **$**                                         | **18,000,000** | ** **      | **13,457** | ** **                                      | **$**      | **13,457,000** | ** ** |
|                       |            |                                               |                |                 |            |                                                 |            |  |  |

 

On January 24,2004, we closed the offering and stopped selling units registered under ourregistration statement.  Duringthe offering we sold 13,457 units for an aggregate price of $13,457,000.  Wesold the units without the assistance of an underwriter.

 

In additionto the units sold, we issued a total of thirty membership units forcompensation.  Jill Zimmerman, a full timeemployee who is also our Treasurer, principal financial officer and a member,was awarded five membership units as part of her bonus for services related toour development and financing.  Weawarded ten

 

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units to our employee and projectcoordinator, Diane Allen, as part of her bonus. Finally, we issued fifteen units to a former project coordinator, BillBarnes, in exchange for amounts previously owed for services.

 

We releasedfunds from escrow and issued 13,487 units in the Company,including 13,457 units sold in our offering and an additional thirty unitsissued for compensation.  As of March 31, 2005, we had used netoffering proceeds of approximately $12,488,447 for construction of plant,building and facilities, $75,000 for repayment of indebtedness, $570,653 forfinancing costs and $322,900 for operating expenses.  All of these payments were direct or indirectpayments to others.

 

On December 16, 2004, we filed a registrationstatement on Form SB-2 (Commission File 333-121323).  The Securities and Exchange Commissiondeclared our registration statement effective on April 20, 2005.  We commenced our public offering shortlythereafter.  We are currently offering units at a minimum aggregate price of $2,000,900and a maximum aggregate price of $10,000,100. We intend to use the proceeds of the registered offering to redeem unitsfrom ICM, Inc. and Fagen, Inc. in accordance with our agreement andretain the balance of any proceeds for working capital.  As of March 13, 2005, we have receivedsubscriptions for 6,899 units and have deposited subscription proceeds in theamount of $758,900 in our escrow account which represents approximately 10% ofthe total subscription price.  As of May13, 2005 we have not yet completed any sales of securities in this registeredoffering.

 

**Item 3.****           DefaultsUpon Senior Securities**

 

None.

 

**Item 4.****          ****Submission of Matters to a Voteof Security Holders**

 

None.

 

**Item 5.****          ****Other Information**

 

None.

 

**Item6.****          ****Exhibits.**

 

Thefollowing exhibits are filed as part of this report.  Exhibits previously filed are incorporated byreference, as noted.

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Facility Construction, Ownership and Operating Agreement dated  February 24, 2005, between East Kansas Agri-Energy, LLC and Southern  Star Central Gas Pipeline, Inc. previously submitted as an  Exhibit to registrant’s Pre-Effective Amendment No. 3 filed on  April 19, 2005 and incorporated by reference herein. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                 |
| 10.2                 |       | Service Agreement dated February 28, 2005 between East Kansas  Agri-Energy, LLC and Kansas City Power & Light Company previously  submitted as an Exhibit to registrant’s Pre-Effective Amendment  No. 3 filed on April 19, 2005 and incorporated by reference herein.                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                 |
| 10.3                 |       | U.S. Water Services Agreement between East Kansas Agri-Energy, LLC  and US Water Services previously submitted as an Exhibit to registrant’s  Pre-Effective Amendment No. 3 filed on April 19, 2005 and  incorporated by reference herein.                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                 |
| 10.4                 |       | Real Estate Contract dated February 16, 2005 between East Kansas  Agri-Energy, LLC and City of Garnett, KS previously submitted as an  Exhibit to registrant’s Pre-Effective Amendment No. 3 filed on  April 19, 2005 and incorporated by reference herein.                                                                 |

 

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| 10.5   |   | Letter Agreement with Derek Peine dated May 5, 2005. |
|--------|--------|-----------------------------------------------------------|
|   |   |                                                      |
| 31.1   |   | Certificate Pursuant to 17 CFR 240.13(a)-14(a)            |
|   |   |                                                      |
| 31.2   |   | Certificate Pursuant to 17 CFR 240.13(a)-14(a)            |
|   |   |                                                      |
| 32.1   |   | Certificate Pursuant to 18 U.S.C.  Section 1350      |
|   |   |                                                      |
| 32.2   |   | Certificate Pursuant to 18 U.S.C.  Section 1350      |

 

**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:  | May 16, 2005 |                                                    | /s/ William Pracht |
|   |              | WilliamPracht                                           |
|   |              | President  (Principal Executive Officer)                |
|   |              |                                                    |
|   |              |                                                    |
| Date:  | May 16, 2005 |                                                    | /s/ Jill Zimmerman |
|   |              | Jill Zimmerman                                          |
|   |              | Treasurer  (Principal Financial and Accounting Officer) |

 

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