**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

** **

**Washington,D.C. 20549**

 

**FORM10-QSB**

 
| **ý**                                              | ** ** | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
|                                                    |       |                                                                                    |
| **For the  quarterly period ended September 30, 2004.** |
|                                                    |       |                                                                                    |
| **OR**                                                  |
|                                                    |       |                                                                                    |
| **o**                                                   | ** ** | **Transition  report under Section 13 or 15(d) of the Exchange Act.**                   |
|                                                    |
| **Commission file number 333-96703**                    |

** **

**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. Box 225,  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)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements 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 November 8, 2004, there were 14,707 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.** | **Unregistered Sales of Equity  Securities and Use of Proceeds** | ** ** |
| ** **                        | **Item 3.** | **Defaults Upon Senior  Securities** | ** ** |
| ** **                        | **Item 4.** | **Submission of Matters to a Vote  of Security Holders** | ** ** |
| ** **                        | **Item 5.** | **Other Information** | ** ** |
| ** **                        | **Item 6.** | **Exhibits** | ** ** |
|                              |        |
| **SIGNATURES**                    | ** **  |

 

----

 

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

 

**Item 1.****           Financial Statements**

 

# **EAST KANSASAGRI-ENERGY, LLC**

 

***UNAUDITEDFINANCIAL STATEMENTS***

***SEPTEMBER 30, 2004 AND 2003***

 

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**EAST KANSAS AGRI-ENERGY, LLC**

 

Table of Contents

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

 

----

 

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

**(A DEVELOPMENT STAGE COMPANY)**

#### **BALANCE SHEET****(UNAUDITED)**

#### **SEPTEMBER 30, 2004**

 
| **ASSETS**                                                                                                    |   |       |       |
|---------------------------------------------------------------------------------------------------------------|--------|------------|------------|
|                                                                                                          |   |       |       |
| CURRENT ASSETS                                                                                                |   |       |       |
| Cash and cash equivalents                                                                                     |   | $          | 9,093,646  |   |
| Grant receivable                                                                                              |   | 102,585    |       |
| Interest receivable                                                                                           |   | 30,846     |       |
| Prepaid expense                                                                                               |   | 11,160     |       |
| Total current assets                                                                                          |   | 9,238,237  |       |
|                                                                                                          |   |       |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                 |   |       |       |
| Land                                                                                                          |   | 1          |       |
| Office equipment                                                                                              |   | 16,490     |       |
| Construction in progress                                                                                      |   | 4,170,751  |       |
|                                                                                                          |   | 4,187,242  |       |
| Less accumulated depreciation                                                                                 |   | 5,963      |       |
|                                                                                                          |   | 4,181,279  |       |
| OTHER ASSETS                                                                                                  |   |       |       |
| Financing costs                                                                                               |   | 46,477     |       |
| Land option                                                                                                   |   | 20,000     |       |
|                                                                                                          |   | 66,477     |       |
|                                                                                                          |   |       |       |
| Total assets                                                                                                  |   | $          | 13,485,993 |   |
|                                                                                                          |   |       |       |
|                                                                                                          |   |       |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                      |   |       |       |
|                                                                                                          |   |       |       |
| CURRENT LIABILITIES                                                                                           |   |       |       |
| Current portion of long-term debt                                                                             |   | $          | —     |   |
| Accounts payable                                                                                              |   |       |       |
| Trade                                                                                                         |   | 87,172     |       |
| Related party                                                                                                 |   | 31,692     |       |
| Accrued expenses                                                                                              |   | 5,692      |       |
| Total current liabilities                                                                                     |   | 124,556    |       |
|                                                                                                          |   |       |       |
|                                                                                                          |   |       |       |
| MEMBERS’ EQUITY                                                                                          |   |       |       |
| Capital contributions, 40,000 units  authorized, 14,707 units issued and outstanding as of September 30, 2004 |   | 14,707,000 |       |
| Deficit accumulated during the development  stage                                                             |   | (1,345,563 | )          |
| Total members’ equity                                                                                    |   | 13,361,437 |       |
|                                                                                                          |   |       |       |
| Total liabilities and members’ equity                                                                    |   | $          | 13,485,993 |   |

 

See Notes to UnauditedFinancial Statements

 

1

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##### **EASTKANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

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

 
| ** **                                             | ** ** | **Three Months  Ended  September 30,****2004** | ** **  | **Nine Months  Ended  September 30,****2004** | ** ** | **Three Months  Ended  September 30,****2003** | ** ** | **Nine Months  Ended  September 30,****2003** | ** ** | **From January 3,  2001 (Date of  Inception) to  September 30,****2004** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------|-------------|-----------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                                   |       |                                           | ** **  |                                          | ** ** |                                           |       |                                          |       |                                                                     |       |
| REVENUE                                                | ** ** | **$**                                          | **—**  | ** **                                    | **$**      | **—**                                     | ** ** | $                                             | —     |                                                                     | $          | — |   | $ | — |   |
|                                                   |       |                                           | ** **  |                                          | ** ** |                                           |       |                                          |       |                                                                     |       |
| OPERATING EXPENSES                                     |       |                                           | ** **  |                                          | ** ** |                                           |       |                                          |       |                                                                     |       |
| Organizational expenses                                | ** ** | **—**                                     | ** **  | **—**                                    | ** ** | —                                         |       | —                                        |       | 3,643                                                                    |       |
| Start-up expenses                                      | ** ** | **42,725**                                     | ** **  | **176,726**                                   | ** ** | 46,269                                         |       | 132,560                                       |       | 496,807                                                                  |       |
| ** **                                             | ** ** | **42,725**                                     | ** **  | **176,726**                                   | ** ** | 46,269                                         |       | 132,560                                       |       | 500,450                                                                  |       |
| OTHER INCOME (EXPENSE)                                 |       |                                           | ** **  |                                          | ** ** |                                           |       |                                          |       |                                                                     |       |
| Interest income                                        | ** ** | **13,197**                                     | ** **  | **39,573**                                    | ** ** | 227                                            |       | 1,643                                         |       | 46,200                                                                   |       |
| Interest expense                                       | ** ** | **(1,185**                                     | **)**       | **(3,656**                                    | **)**      | —                                         |       | —                                        |       | (4,786                                                                   | )          |
| Other income                                           | ** ** | **—**                                     | ** **  | **—**                                    | ** ** | —                                         |       | —                                        |       | 2,000                                                                    |       |
| ** **                                             | ** ** | **12,012**                                     | ** **  | **35,917**                                    | ** ** | 227                                            |       | 1,643                                         |       | 43,414                                                                   |       |
|                                                   |       |                                           | ** **  |                                          | ** ** |                                           |       |                                          |       |                                                                     |       |
| NET LOSS                                               | ** ** | **$**                                          | **(30,713** | **)**                                         | **$**      | **(140,809**                                   | **)**      | $                                             | (46,042    | )                                                                        | $          | (130,917 | ) | $ | (457,036 | ) |
|                                                   |       |                                           | ** **  |                                          | ** ** |                                           |       |                                          |       |                                                                     |       |
| BASIC AND DILUTED LOSS PER UNIT                        | ** ** | **$**                                          | **(2**      | **)**                                         | **$**      | **(15**                                        | **)**      | $                                             | (38        | )                                                                        | $          | (107 | ) |   |   |
|                                                   |       |                                           | ** **  |                                          | ** ** |                                           |       |                                          |       |                                                                     |       |
| WEIGHTED AVERAGE UNITS  OUTSTANDING, BASIC AND DILUTED | ** ** | **12,729**                                     | ** **  | **9,294**                                     | ** ** | 1,220                                          |       | 1,220                                         |       |                                                                     |       |

 

See Notes to UnauditedFinancial Statements

 

2

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

**(A DEVELOPMENT 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 nine months ended  September 30, 2002 |       | —     |       | —                   |           | (101,906                                                 | )          | (101,906       | )          |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of September 30, 2002                       |       | 1,220      |       | 1,220,000                |           | (756,788                                                 | )          | 463,212        |       |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| Net loss for the three months ended  December 31, 2002 |       | —     |       | —                   |           | (25,217                                                  | )          | (25,217        | )          |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of December 31, 2002                        |       | 1,220      |       | 1,220,000                |           | (782,005                                                 | )          | 437,995        |       |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| Net loss for the nine months ended  September 30, 2003 |       | —     |       | —                   |           | (130,917                                                 | )          | (130,917       | )          |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of September 30, 2003                       |       | 1,220      |       | 1,220,000                |           | (912,922                                                 | )          | 307,078        |       |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| Net loss for the three months ended  December 31, 2003 |       | —     |       | —                   |           | (27,703                                                  | )          | (27,703.00     | )          |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| 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 nine months ended  September 30, 2004 |       | —     |       | —                   |           | (140,809                                                 | )          | (140,809       | )          |
|                                                   |       |       |       |                     |           |                                                     |       |           |       |
| **Balance as of September 30, 2004**                   | ** ** | **14,707** | ** ** | **$**                    | **14,707,000** | ** **                                               | **$**      | **(1,345,563** | **)**      | **$** | **13,361,437** | ** ** |

 

See Notes to UnauditedFinancial Statements

 

3

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

**(A DEVELOPMENT STAGE COMPANY)**

**STATEMENTS OF CASH FLOWS****(UNAUDITED)**

** **
| ** **                                                                  | ** ** | **Nine Months  Ended  September 30,  2004** | ** **    | **Nine Months  Ended  September 30,  2003** | ** ** | **From January 3,  2001 (Date of  Inception) to  September 30,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|---------------|---------------------------------------------|------------|------------------------------------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| Net loss                                                                    | ** ** | **$**                                       | **(140,809**  | **)**                                       | $          | (130,917                                                               | )          | $ | (457,036 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |       |                                        | ** **    |                                        |       |                                                                   |       |
| Depreciation                                                                | ** ** | **2,469**                                   | ** **    | 2,265                                       |       | 5,963                                                                  |       |
| Non-cash compensation for capital units                                     | ** ** | **30,000**                                  | ** **    | —                                      |       | 30,000                                                                 |       |
| Increase in current assets                                                  |       |                                        | ** **    |                                        |       |                                                                   |       |
| Grants receivable                                                           | ** ** | **(75,526**                                 | **)**         | (25,853                                     | )          | (102,585                                                               | )          |
| Interest receivable                                                         | ** ** | **(30,846**                                 | **)**         | —                                      |       | (30,846                                                                | )          |
| Prepaid expense                                                             | ** ** | **(9,741**                                  | **)**         | (4,656                                      | )          | (11,160                                                                | )          |
| Increase (decrease) in current liabilities                                  |       |                                        | ** **    |                                        |       |                                                                   |       |
| Accounts payable                                                            | ** ** | **1,685**                                   | ** **    | (25,479                                     | )          | 72,194                                                                 |       |
| Accrued expenses                                                            | ** ** | **(1,049**                                  | **)**         | 5,236                                       |       | 5,692                                                                  |       |
| Net cash (used in) operating activities                                     | ** ** | **(223,817**                                | **)**         | (179,404                                    | )          | (487,778                                                               | )          |
|                                                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| Purchase of equipment                                                       | ** ** | **—**                                  | ** **    | (11,470                                     | )          | (16,490                                                                | )          |
| Purchase of land                                                            | ** ** | **(1**                                      | **)**         | —                                      |       | (1                                                                     | )          |
| Purchase of land option                                                     | ** ** | **(10,000**                                 | **)**         | (5,000                                      | )          | (20,000                                                                | )          |
| Construction in progress                                                    | ** ** | **(4,049,386**                              | **)**         | (10,676                                     | )          | (4,124,081                                                             | )          |
| Net cash (used in) investing activities                                     | ** ** | **(4,059,387**                              | **)**         | (27,146                                     | )          | (4,160,572                                                             | )          |
|                                                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
|                                                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| Cost of raising capital                                                     | ** ** | **(1,260**                                  | **)**         | (108,663                                    | )          | (278,527                                                               | )          |
| Payment of financing fees                                                   | ** ** | **(46,477**                                 | **)**         | —                                      |       | (46,477                                                                | )          |
| Proceeds from notes payable                                                 |       | **—**                                  | ** **    | —                                      |       | 137,000                                                                |       |
| Repayment of notes payable                                                  | ** ** | **—**                                  | ** **    | —                                      |       | (137,000                                                               | )          |
| Proceeds from long-term debt                                                | ** ** | **—**                                  | ** **    | —                                      |       | 75,000                                                                 |       |
| Repayment of long-term debt                                                 | ** ** | **(75,000**                                 | **)**         | —                                      |       | (75,000                                                                | )          |
| Capital contributions                                                       | ** ** | **13,457,000**                              | ** **    | —                                      |       | 14,067,000                                                             |       |
| Net cash provided by (used in) financing activities                         | ** ** | **13,334,263**                              | ** **    | (108,663                                    | )          | 13,741,996                                                             |       |
|                                                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                       | ** ** | **9,051,059**                               | ** **    | (315,213                                    | )          | 9,093,646                                                              |       |
|                                                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                             | ** ** | **42,587**                                  | ** **    | 374,190                                     |       | —                                                                 |       |
|                                                                        |       |                                        | ** **    |                                        |       |                                                                   |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                    | ** ** | **$**                                       | **9,093,646** | ** **                                  | $          | 58,977                                                                 |       | $ | 9,093,646 |   |

 

(continued on next page)

 

4

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

** **
| ** **                                                                                              | ** ** | **Nine Months  Ended  September 30,  2004** | ** **  | **Nine Months  Ended  September 30,  2003** | ** ** | **From January 3,  2001 (Date of  Inception) to  September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|---------------------------------------------|------------|------------------------------------------------------------------------|------------|
|                                                                                                    |       |                                        |        |                                        |       |                                                                   |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                                       |       |                                        |        |                                        |       |                                                                   |       |
|                                                                                                    |       |                                        |        |                                        |       |                                                                   |       |
| Cash paid for interest                                                                                  | ** ** | **$**                                       | **3,338**   |                                        | $          | —                                                                 |       | $ | 3,656 |   |
|                                                                                                    |       |                                        |        |                                        |       |                                                                   |       |
| NON CASH INVESTING AND FINANCING ACTIVITIES                                                             |       |                                        |        |                                        |       |                                                                   |       |
|                                                                                                    |       |                                        |        |                                        |       |                                                                   |       |
| Prepaid expenses reclassified to deferred  offering costs                                               | ** ** | **$**                                       | **—**  |                                        | $          | —                                                                 |       | $ | 35,754 |   |
|                                                                                                    |       |                                        |        |                                        |       |                                                                   |       |
| Property, Plant and Equipment costs  incurred                                                           | ** ** | **$**                                       | **46,670**  |                                        | $          | —                                                                 |       | $ | 46,670 |   |
|                                                                                                    |       |                                        |        |                                        |       |                                                                   |       |
| 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 nine months ended September 30, 2004 | ** ** | **$**                                       | **15,000**  |                                        | $          | —                                                                 |       | $ | 15,000 |   |
| Liability converted to capital units                                                                    | ** ** | **15,000**                                  |        | —                                      |       | 15,000                                                                 |       |
| ** **                                                                                              |       | **$**                                       | **30,000**  |                                        | $          | —                                                                 |       | $ | 30,000 |   |

 

See Notes to UnauditedFinancial Statements

 

5

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATEMENTS**

 

**NOTE 1 -****                  SUMMARYOF SIGNIFICANT 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 ofSeptember 30, 2004, the Company is in the development stage with its effortsbeing principally 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 and nine months ended September 30, 2004 and 2003, are notnecessarily indicative of 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, 2003.

 

*Estimates*

 

Management uses estimates andassumptions in preparing financial statements. Those estimates and assumptionsaffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses. Actual results could differ fromthe estimates used.

 

*PrepaidOffering Costs*

 

Costs incurred related to thesale of units are recorded as prepaid offering costs until the related unitsare issued. Upon issuance of units offering costs are deducted from additionalpaid-in capital, with any remaining amount applied to retained earnings(deficit accumulated during the development stage). Offering costs includedirect costs related to the offering such as legal fees, cost of meetings andmaterials and related costs associated with the Company’s private offering andinitial public offering.

 

*FinancingCosts*

 

Costs incurred related toorigination of debt financing are recorded as an asset and amortized tointerest capitalized during construction or interest expense over the expectedterm of the debt.

 

6

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

*Earnings Per Unit*

 

Earnings per unit arecalculated based on the period of time units have been issued and outstanding.For purposes of calculating diluted earnings per capital unit, units subscribedfor but not issued are included in the computation of outstanding capitalunits. As of September 30, 2004, there were no units includable in dilutedearnings per unit related to subscribed units as the calculation would havebeen antidilutive.

 

*Stock Based Compensation*

 

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

 

**NOTE 2 -****                  COMMITMENTS AND CONTINGENCIES**

 

The Company has entered into an option agreement to purchaseapproximately 10 acres of land. The option was originally purchased for $5,000,plus $5,000 for an extension during 2003, and provides for a purchase price of$9,000 per acre, plus the cost to replace boundary fencing and relocate anexisting structure along with water and electric utilities. The option wasextended to September 1, 2004 and the Company paid an additional $5,000 for theextension. On September 1, 2004, the option was extended until such time asclosing on the property would occur. The purchase price of the land will bereduced by amounts previously paid for the option and extensions.

 

On May 14, 2002, the Company entered into an option to purchase realproperty for the plant site with a fair value of approximately $172,500. Theoption is for the purchase of approximately 23 acres within the Golden PrairieIndustrial Park of the City of Garnett, Kansas for $1. On May 27, 2004, toCompany gave notice of exercise of the option, and received title to theproperty on September 1, 2004.

 

The Company entered into an agreement for preliminary engineering forthe proposed ethanol plant with Fagan Engineering LLC. As of September 30, 2004approximately $22,000 had been incurred.

 

During the year ended December 31, 2003, the Company terminated itsagreement with Value Added Ventures, LLC (VAV). The Company has been notifiedby VAV requesting payment for services from the inception of the contractthrough the date of termination totaling $33,380. The Company and VAV arenegotiating settlement of this contract. The Company has recorded a liabilityrelated to this agreement of $5,847 as of September 30, 2004.

 

During the year ended December31, 2003, the Company negotiated with a board member to perform certainconsulting services which were to begin on October 1, 2003. The parties did notexecute a contract for these services. Subsequent to December 31, 2003, theboard member resigned and the Company received a claim for the payment ofapproximately $50,000, consisting of approximately $2,000 and 48 units of theCompany. The company contends that since a contact was not executed andservices were not performed related to the proposed agreement, no liabilityexists. The Company intends to vigorously defend itself against the claim.

 

The Company completed itsinitial public offering and escrow was broken in March 2004. A total of 13,457units were subscribed, with subscriptions receivable of $0 related remainingunpaid as of September 30, 2004.

 

The Company entered into arepurchase agreement with Garnett State Savings Bank to provide security forcash balances held in anticipation of construction. The Company hasapproximately $9,065,000, included in cash and cash equivalents, under therepurchase agreement.

 

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

The Company has increased itsexpected annual production of fuel grade ethanol from 25 million gallons to 35million gallons. Based on the increased capacity of the ethanol plant, theCompany expects that the project will cost approximately $48,000,000 instead ofthe $37,000,000 previously planned.

 

Due to the increase of projectcost and overall capitalization, the Company will need to increase debt andequity financing and is completing negotiations with Home Federal Savings Bankon its loan commitment. The Company expects that the new debt financingcommitment, when it is received, will consist of term debt and/or a line ofcredit totaling approximately $26,000,000 and that the senior debt facilitywill be secured by substantially all of the assets. In addition to this debt,additional financing will be required, as discussed in Note 3.

 

The Company has entered into adesign-build contract with ICM, Inc. for a fixed price of $35,900,000 pursuantto an agreement for the construction of the 35 million gallon annual capacityethanol plant.

 

**NOTE 3 -****                  MEMBERS’ EQUITY**

 

In addition to transactions discussed in Note 2, the Company issuedduring 2004 a total of 30 units for compensation during 2004. The formerproject coordinator received 15 units in exchange for amounts previously owedfor services.

 

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 nine months ended September30, 2004.

 

During September 2004, the Company amended its Operating Agreementwhereby the number of authorized units was amended from 20,000 to 40,000 units.In addition, the amendments to the Operating Agreement provide for two classesof members of the Board of Directors, Class A and Class B. Class A members ofthe board of directors consist of previously existing members of the Board ofDirectors, prior to amendment. Up to three (3) Class B members of the Board ofDirectors may be appointed by Fagan, Inc., ICM, Inc., or both of these partiesin conjunction with their agreement to purchase additional units.

 

The Company has entered into a Unit Purchase and Redemption Agreementfor membership units with Fagan, Inc. and ICM, Inc. The total number of unitssubject to the agreement shall not exceed 6,250 units at $1,000 per unit, fortotal proceeds of $6,250,000. The Company also has an obligation to repurchasethe units from the proceeds of a proposed equity offering or from the cash flowprovided by the operations of the ethanol plant, at a rate of $1,100 per unit,or a total $6,875,000. For each $2,000,000 of units related to this agreement,ICM, Inc. and Fagan, Inc., are entitled to one board member. As the units arerepurchased by the Company, the number of Class B Board members is reduced byone for each $2,000,000 of units repurchased. The proceeds from the issuance ofthese units is scheduled to occur at such time as the proceeds from the initialpublic offering are expended for construction and related costs and theremaining balance of cash from the initial public offering is reduced to$1,000,000.

 

**NOTE 4 -****                  CONCENTRATION OF CREDIT 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.

 

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**NOTE 5 -****                  VALUE ADDED GRANT**

 

During the year ended December 31, 2003, theCompany 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 nine months ended September 30, 2004 and2003, the Company qualified for reimbursement of $132,149 and $119,387,respectively, of which $1,409 and $34,240, respectively, related to cost ofraising capital. For the period from inception though September 30, 2004, theCompany qualified for reimbursement of $408,896 of costs, of which $61,602related to cost of raising capital and $347,294 was recorded as a reduction ofstart-up costs.

 

9

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**Item 2.****           Management’s Discussion 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.

 

**Application of Critical Accounting Policies**

 

Management uses estimates and assumptions in preparing our financialstatements, in accordance with generally accepted accounting principles.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.

 

**Overview**

 

East Kansas Agri-Energy, LLC was formed as aKansas limited liability company on October 16, 2001, for the purpose ofconstructing and operating an ethanol plant near Garnett, Kansas.  We have begun construction of a corn-basedethanol plant that will produce ethanol, distillers grains and carbondioxide.  We originally expected to builda 20 million gallon per year ethanol plant. We subsequently revised our business plan to expand the plant capacityto produce 25 million gallons of denatured fuel grade ethanol.  After further review, we determined thatincreasing our production capacity to 35 million gallons of denatured fuelgrade ethanol would likely result in more efficient operations for our ethanolplant.  We do not expect this change todelay our anticipated date of start-up operation, which is currently summer of2005.

 

Based on the increased capacity of our ethanol plant, we now expectthat the project will cost approximately $46,793,000 instead of the $37,000,000previously planned.  This includesapproximately $36,340,000 to build the plant. We are still in the development phase, and until the proposed ethanolplant is operational, will generate no revenue.

 

Due to the increase in our anticipated total project cost, we havereceived an increase in our written debt financing commitment from $20,000,000to $26,000,000.  To supplement this debtfinancing, we have entered into an agreement to secure additional equityproceeds of $6,250,000 from Fagen, Inc, our principal contractor, and ICM,Inc., our design builder.  As an incentivefor ICM, Inc. and Fagen, Inc. to contribute equity capital to purchase ourunits, we intend to engage 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 riskmanagement.  These companies are owned byUnited Bio Energy, LLC, of Wichita, Kansas. The majority owners of United Bio Energy, LLC are Fagen, Inc., and ICM,Inc.  As such, we expect to be verydependent on United Bio Energy, LLC, and its subsidiaries.

 

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

 

We expect to spend thenext 12 months constructing the ethanol plant, finalizing our criticaloperating contracts, including those with United Bio Energy, LLC and closing onour debt financing agreements with Home Federal Savings Bank of Rochester,Minnesota.  We also plan to register anoffering for additional membership units. We intend to use up to $6,875,000 of the proceeds from the sale of theseunits to redeem the units purchased by ICM, Inc. and Fagen, Inc.  We intend to use any additional proceeds wereceive from this offering for other operating expenses.

 

*Plant Construction*

 

On August 9,2004, we executed a design-build agreement with ICM, Inc., to provideengineering services, labor, materials and equipment to design, construct andstart-up a dry mill ethanol plant capable of producing no less than 35 milliongallons per year of ethanol and no less than 68,000 tons per year of drieddistillers grains.  On September 28, 2004 we issued aNotice to Proceed to ICM, Inc. and commenced construction of the ethanol plantwith ICM, Inc. serving as the design-builder and Fagen, Inc. serving asour principal subcontractor.  We expect the plant to besubstantially complete, i.e., sufficiently complete for occupancy and ethanolproduction, no later than 345 days after September 28, 2004 (early August –late September 2005) assuming a constant availability of supplies and labor andassuming reasonable winter weather.

 

Under the terms of the design buildagreement, we expect to pay ICM, Inc. up to an anticipated maximum of$35,900,000 to design and construct the plant, subject to any change orders weapprove. If ICM, Inc. encounters “differing site conditions,” it will beentitled to an adjustment in the contract price and time of performance, ifsuch conditions adversely affect its costs and performance time. “Differingsite conditions” is defined in the contract as any concealed physical conditionsat the site that are materially different from the conditions indicated in ourgeotechnical report for the project site or any unusual conditions which differmaterially from the conditions ordinarily encountered in similar work.

 

We will make progress and final payments toICM, Inc., based upon applications for payment we receive from ICM, Inc.covering work completed under the design build agreement as of the date of theapplication.  Initially we will retain 10%of the amount submitted in each application for payment.  When at least 50% of the work has beencompleted, we will no longer withhold a retainage amount.  Once ICM, Inc. has substantially completedthe project, we will make a payment to ICM, Inc. equal to 100% of the contract,less $500,000.  We will also withholdamounts for any defective work.  We willpay $250,000 of the $500,000 to ICM, Inc. once we are satisfied that ICM, Inc.has satisfied its obligations under the contract.  We will pay the remaining $250,000 to ICM,Inc. after we receive a written emissions compliance report documentingcompliance with the applicable atmospheric emission criteria.

 

There is noassurance that defects in materials and/or workmanship in the plant will notoccur.  Under the terms of thedesign-build agreement, ICM, Inc. warrants that the material and equipmentfurnished to build the plant will be new, of good quality, and free frommaterial defects in the material and workmanship at the time of delivery.  Though the design-build agreement requiresICM, Inc. to correct all defects in material or workmanship for a period of oneyear after substantial completion of the plant, material defects in thematerial or workmanship may still occur. The design-build agreement provides that the maximum amount of damageswe may recover from ICM, Inc. for defective construction is $2,500,000. Suchdefects could cause us to delay the commencement of operations of the plant,or, if such defects are discovered after operations have commenced, to halt ordiscontinue the plant’s operation.  Anysuch event may have a material adverse effect on our operations, cash flows,and financial performance.

 

Both we and ICM, Inc. are solelyresponsible for our own conduct, including our own fault, as to any aspect ofthe design-build agreement.  If a claimis made or an action is filed by a third party arising out of the design-buildor the services performed under it, we and ICM, Inc. will each be responsiblefor our own defense.  If either of us isfound liable and ordered to pay damages for the fault of the other, then weeach agree to indemnify and hold harmless the other for any payment it has tomake, including the payment of attorney’s fees incurred in resisting, settling,or otherwise disposing of the demand, on account of the other’s default.

 

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*Site Development, Permitting and Utilities*

 

On September 2, 2004, we finalized ourpurchase of23 acres of land in the Golden Prairie Industrial Park on the edge of Garnett,Kansas where we are constructing our ethanol plant.  We are currently negotiating an agreementwith the City of Garnett, Kansas, which we expect will provide for improvementsto the real estate, grants, tax abatement and bonds.

 

We also plan to purchase ten acres of realestate in Anderson County, Kansas to allow the placement of a railroad spurfrom the plant site to existing Union Pacific Railroad track in Garnett,Kansas.  We have received an option topurchase the real estate from Clarence L. White and Berniece F. White.  That option granted us the right to purchaseapproximately ten acres for $9,000 per acre and was obtained at a cost of$5,000.  We have paid a total of $15,000for subsequent extensions of this option. On September 1, 2004, we extended the option until closing on the realestate occurs.  The purchase price of theland will be reduced by the amounts paid for the option and extensions.  The real estate was used as a surface dumpsitemany years ago resulting in the need to move and bury waste.  The clean-up required has now been completedand paid for by grant funds applied for and received by the City of Garnett,Kansas.

 

ICM, Inc. provided the preliminary civilengineering and site development for the ethanol plant and continues to provideassistance in this area.  A Phase 1Environmental Study on our proposed site was completed on April 23, 2004.  Natwick & Associates of Fargo, NorthDakota conducted an appraisal of the property and we engaged Taylor DesignGroup of Ottawa to conduct a survey of the property**.**

 

Environmental Resource Group of Minneapolis,Minnesota, whom we engaged to coordinate and assist us with proper permitting,submitted an application for the NPDES Wastewater Discharge Permit to theKansas Department of Health and Environment and worked with the KansasDepartment of Health and Environment to modify the construction air permitpreviously issued for the ethanol plant. This modification was necessary to accommodate the anticipated increasedproduction capacity of our ethanol plant.

 

We expect to negotiate and execute contractsfor the provision of electricity, natural gas, water and other utilities to thesite in the coming months.  We arecurrently working with Kansas City Power & Light and Southern Star CentralGas Pipeline Company to finalize utility prices for plant operations.  We have engaged U.S. Energy Services, Inc. ofWayzata, Minnesota, to provide consulting and energy management services forsupplies of electricity and natural gas. We have also executed a Letter of Agreement with Southern Star CentralGas Pipeline for a complete engineering evaluation related to the costs ofdelivering natural gas to the site. We are currently negotiating with U.S.Water Services for the provision of water treatment chemicals and services.

 

*Operating Contracts*

 

We are currently negotiating contracts forthe operation of the ethanol plant with United Bio Energy Management, LLC,United Bio Energy Fuels, LLC, United Bio Energy Ingredients, LLC, and UnitedBio Energy Trading, LLC.  We expect thatUnited Bio Energy Management, LLC, will manage the ethanol plant and United BioEnergy Fuels, LLC, will provide us ethanol marketing services.  In addition, we expect that United Bio EnergyIngredients, LLC, will provide us distillers grains marketing and grainorigination services.  United Bio EnergyTrading, LLC, is expected to provide us with overall risk management.  We expect to be very dependent on thesecompanies after we begin operations.  Asa result, any agreements negotiated will not be arms-length transactions andmay not be as favorable as those negotiated with an independent third party.

 

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 aletter of intent with BOC Group, Inc. of Murray Hill, New Jersey.  The terms of the letter of intent providethat we will make available to BOC Group, Inc. for purchase all of the carbondioxide produced at the plant.  Theletter of intent contemplates that BOC Group, Inc. will purchase a substantialquantity of our raw carbon dioxide gas annually and will construct a carbondioxide liquefaction plant.  We expect tolease a parcel of our land adjacent to our ethanol plant to BOC Group, Inc. forconstruction of the liquefaction plant. The letter of intent has been extended to December 31, 2004. We are 

 

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currently negotiating a legally binding contract with BOC Group,Inc.  However, there is no guarantee thata final contract will be executed or that it will be executed upon terms asfavorable as those currently anticipated.

 

*Financing Plan*

 

Due to the increase of our project cost and overall capitalization, ourfinancing needs have changed.  HomeFederal Savings Bank of Rochester, Minnesota has provided us with a revisedwritten debt financing commitment consisting of a term loan of$26,000,000.  We anticipate closing thisloan next quarter.  To supplement ourdebt financing and complete our capitalization plan we entered into aUnit Purchase and Redemption Agreement with ICM, Inc. and Fagen, Inc.  In theUnit Purchase and Redemption Agreement we agree to issue up to 6,250 of ourunits to ICM, Inc. and Fagen, Inc. at a purchase price of $1,000 per unit inexchange for a combined capital contribution from them of up to$6,250,000.  The closing of thepurchase of these units by ICM, Inc. and Fagen, Inc. is conditioned upon usdepleting the proceeds that we raised from our initial registered offering to$1,000,000 or less.  To raise the proceeds necessary toredeem the units in accordance with the terms of Unit Purchase and RedemptionAgreement, we intend to register an offering for additional membership unitsand use the sales proceeds of those membership units to redeem the unitspurchased by ICM, Inc. and Fagen, Inc**.**

 

*Sources and Uses of Funds*

 

With receipt of the previously stated debtand equity financing, we expect to have sufficient cash available to cover ourcosts over the next 12 months, including construction, staffing, office,audit, legal, compliance costs and start up working capital costs.  The following is our estimate of our costsand expenditures for the next 12 months. These estimates are based upon consultation with ICM, Inc. and Fagen,Inc.  It is only an estimate and ouractual expenses could be higher due to a variety of factors including thosedescribed elsewhere in this Report.

 
| 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 DDGS          |   | 750,000   |       |
|                                       |   |      |       |
|                                       |   | $         | 46,793,000 |   |

 

We expect the total funding required for theplant 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-build agreement,and a total of approximately $10,453,000 to cover all capital expendituresnecessary to complete the project, make the plant operational and producerevenue.  The total project cost hasincreased by $9,793,000 due to the increase in plant production capacity.  The change includes a $8,640,000 increase inplant construction costs, a $610,000 increase in land and site developmentcosts, and a $480,000 increase to Inventory and Working Capital resulting fromour decision to increase our expected annual production of fuel grade ethanolfrom 25 million gallons to 35 million gallons.

 

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Based upon initial registered offeringproceeds of $13,457,000, seed capital proceeds of $610,000, additional equityof $6,250,000, a term loan of $26,000,000, 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.

 

*Administration*

 

We currently have an office staff comprisedof two full-time and two part-time employees. One of the full-time employees, Jill Zimmerman, is also our Treasurer,principal financial officer and member of the company.  We have executed an employment agreement withJill Zimmerman.  The term of thisagreement was extended through July 1, 2005.

 

*Employees*

 

Upon completion of the ethanol plant, weintend to hire approximately 31 full-time employees.  Approximately three of our employees will beinvolved primarily in management and administration and the remainder will beinvolved primarily in plant operations. We expect that United Bio Energy Management, LLC will also employ andprovide our General Manager.  Accordingly,we expect approximately a total of 32 full-time personnel at the ethanol plant,including the General Manager.

 

The following table represents some of the anticipated positions withinthe plant and the minimum number of individuals we intend will occupy eachposition:

 

| **Position**            | ** ** | **# Employed** | ** ** |
|-------------------------|------------|----------------|------------|
| General  Manager        |       | 1              |       |
| Plant  Manager          |       | 1              |       |
| Commodities  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**         | ** ** |

 

# ***Liquidity and Capital Resources***

 

As of September 30, 2004, we had cash andcash equivalents of $9,093,646 and total current assets of $9,238,237.  To date, we have sold units in our publicoffering with a price of $13,457,000 and have raised an additional $610,000 inseed capital.  We releasedproceeds of our equity offering from escrow on March 22, 2004, and issued atotal of 13,487 membership units, including 13,457 units sold in our offeringand an additional 30  units issued forcompensation.  We placed $150,000 of theproceeds in our money market account with Garnett State Savings Bank to coverour short-term development needs.  Theremaining proceeds were placed in a separate account with Garnett State SavingsBank and will be held and invested pursuant to a Master Repurchase Agreementexecuted with Garnett State Savings Bank on March 16, 2004.  In September 2004 we began drawing on thesefunds as we commenced construction of the ethanol plant.

 

As ofSeptember 30, 2004, we had current liabilities of $124,556 consisting primarilyof our accounts payable.  Our notepayable to the Kansas Department of Commerce and Housing was paid off onSeptember 30, 2004.  Since our inceptionthrough September 30, 2004, we have an accumulated deficit of $1,345,563.  We have reduced members’ equity by $264,129,the amount of the prepaid offering costs related to the initial registeredoffering.  Total members’ equity as ofSeptember 30, 2004, was $13,361,437. Since our inception, we have generated no revenue from operations.  For the quarter ended September 30, 2004, wehave a net loss of $30,713 primarily due to start-up costs.

 

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We had originally received a written debt financing commitmentconsisting of a term loan of $20,000,000 and a $1,000,000 line of credit fromHome Federal Savings Bank.  We had alsoreceived a written commitment from Fagen, Inc. to provide subordinated debtfinancing of up to $2,000,000.  Due to theincrease of our project cost, we needed to increase our debt financing and havereceived a new debt financing commitment from Home Federal Savings Bank fordebt financing in the amount of $26,000,000 consisting of a $21,000,000conventional term loan and a $5,000,000 USDA 80% guaranteed loan.  Even though a commitment for debt financinghas been signed, it is not a binding loan agreement and, therefore, the lendermay not be required to provide us the debt financing as set forth in thecommitment.  A commitment is an agreementto lend, subject to certain terms and conditions, and to the negotiation,execution and delivery of loan and loan-related documentation satisfactory tothe lender.  The agreement is conditional,and a lender could later decline the loan if terms and conditions set forth inthe agreement are not satisfied.

 

During the construction phase, we will make monthly payments ofinterest only at a variable interest rate equal to prime plus 1.75% with afloor of 6%.  We anticipate that the constructionphase will end no later than September 1, 2005. Following construction completion, the loan will be segmented into twoloans (1) a $5,000,000 USDA 80% guaranteed loan, and (2) a $21,000,000conventional term loan.  The $5,000,000USDA guaranteed loan will have an amortization period and maturity date of 10years.  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 ratewill be adjusted quarterly.  The $21,000,000conventional loan will have an amortization period of ten years but will matureat the end of five years.  We will makemonthly payments of principal and interest on the $21,000,000 loan at avariable rate equal to prime plus 1.75% with a floor of 6%.

 

During the term of the loan, we anticipate that we will pay HomeFederal Savings Bank an annual amount equal to the greater of (1) 75% of anyCommodity Credit Corporation Bio Energy income payments we receive during theyear or (2) 25% of our free cash flow for each year.  We further anticipate that Home FederalSavings Bank will require that we remit 75% of such payments received as partof the USDA Commodity Credit Corporation Bio Energy income program to it within15 days of our receipt any Commodity Credit Corporation Bio Energy incomepayments.  We expect the Home FederalSavings Bank to require our remittance of these payments until it has receivedan aggregate sum of $7,500,000.

 

####   To supplement our expected debt financing, weintend to raise additional equity by issuing units to ICM, Inc. and Fagen, Inc.pursuant to the Unit Purchase and Redemption Agreement with ICM, Inc. andFagen, Inc. entered into on October 11, 2004. The Unit Purchase and Redemption Agreement provides for theissuance of up to 6,250 of the Company’s units to ICM, Inc. and Fagen, Inc. ata purchase price of $1,000 per unit in exchange for their combined capitalcontribution of up to $6,250,000. The closing of the purchase of theseunits by ICM, Inc. and Fagen, Inc. is conditioned upon us depleting theproceeds that we raised from our initial registered offering to $1,000,000 orless.

 

In exchange for the contributions made forthese units, ICM, Inc. and Fagen, Inc. are also entitled to appoint a total ofthree (3) directors to our Board of Directors, subject to our ability toterminate one of their director positions for every 2,000 units redeemed fromeither ICM, Inc. or Fagen, Inc.  Beforewe could offer these units to ICM, Inc. and Fagen, Inc. under the terms andconditions provided for in the Unit Purchase and Redemption Agreement, it wasnecessary for us to amend our operating agreement.  On September 16, 2004 our members voted toamend our operating agreement to authorize the issuance of 20,000 additionalunits and to add provisions regarding ICM, Inc.’s and Fagen, Inc.’s rights toappoint directors.

 

We expect our initial equity proceeds to fall below $1,000,000 sometimewithin the next quarter at which time we intend to issue units to ICM, Inc. andFagen, Inc. in exchange for their combined capital contribution of$6,250,000.  To raise the proceedsnecessary to redeem the units in accordance with the terms of Unit Purchase andRedemption Agreement, we intend to register an additional offering with the SECfor a minimum of 2,000 units and a maximum of 10,000 units at a purchase priceof $1,100 per unit.  The first $6,875,000raised in this offering will be used to redeem the units owned by Fagen, Inc.and ICM, Inc. at a redemption price of $1,100 per unit.

 

To the extent that we obtain proceeds of less than $6,875,000 in thisoffering, 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 

 

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units as of the date of theredemption.  The amount of yearly netcash flow available for redemption will be subject to a reduction due todistributions to our members (including ICM, Inc. and Fagen, Inc.) in an aggregateamount equal to forty percent (40%) of our net income for the purpose of payingincome taxes related to the ownership of our units.  The amount of yearly net cash flow availablefor redemption will be subject to a further reduction equal to the greater ofseventy-five percent (75%) of any CCC Bio-Energy income payments we receiveduring such year or twenty-five percent (25%) of our free cash flow.  Any redemption of our units by us is furthersubject to the terms and conditions of any and all debt financing agreementsexecuted between our lenders and us.

 

We received a Value-Added Agricultural Product Market Development Grantof $450,000 from the USDA, which is a matching grant to be used for start-upcosts.   We have applied with the City ofGarnett, Kansas under the Neighborhood Revitalization Program for a rebate ofany additional property taxes attributable to our site improvements.   The City of Garnett, Kansas was awarded anEconomic 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 Cityhas also applied for highway improvements with the Kansas Department ofTransportation and for grant funds that would assist with railimprovements.  These grants are stillpending.

 

We have applied for a grant from the USDA’s Commodity CreditCorporation. Under the grant program, the Commodity Credit Corporation willreimburse eligible ethanol producers of less than 65 million gallons ofbioenergy one bushel of corn for every two and one-half bushels of corn usedfor the increased production of ethanol. Under the program, no eligibleproducer may receive more than $7.5 million in any fiscal year.  However, some ethanol producers have receivedmore than this amount when the start-up period has extended over more than onefiscal year of the U.S. government. Because we expect to be an eligible producer and to annually utilizeapproximately 12.5 million bushels of corn annually in the increased productionof ethanol, we expect to potentially receive a maximum award of approximately$7.5 million.  However, theCommodity Credit Corporation may award only $150 million annually fiscalyears 2003 through 2006, and any award we receive may be reduced based upon thevolume of applications from other eligible producers.  In addition, payments under the program inany one fiscal year may be less if Congress does not fully fund the program forthat fiscal year (funding for the program is subject to an annualappropriation).  We expect to be eligibleto receive an award under the program only once during the life of ourproject.  The Commodity CreditCorporation Bioenergy Program is scheduled to expire on September 30, 2006.  The grants available under the CCC programmay not continue beyond their scheduled expiration date or if they do continue,the grants may not be at the same level. If our ethanol plant is not operational by the expiration of the CCCprogram or has not had substantial operations, we may not be eligible for thegrants or may receive a reduced amount.

 

The following schedule sets forth our estimated sources of funds.  This schedule could change in the futuredepending on whether we receive additional grants.  The schedule may also change depending on thelevel of additional equity raised.

** **
| **Source of Funds**        | ** ** | ** ** | ** **     | **Percent of Total** | ** ** |
|----------------------------|------------|------------|----------------|----------------------|------------|
| Member Equity              |       | $          | 20,317,000     |                 | 43.42      | % |
| Term Debt                  |       | $          | 26,000,000     |                 | 55.56      |   |
| Grants                     |       | $          | 476,000        |                 | 1.02       |   |
|                       |       |       |           |                 |       |   |
| **Total Sources of Funds** | ** ** | **$**      | **46,793,000** | ** **           | **100.00** | **%** |

 

**Off-Balance Sheet Arrangements**

 

We do not haveany off-balance sheet arrangements.

 

**Item3.  ControlsAnd Procedures**

 

Ourmanagement, including our President (the principal executive officer), WilliamPracht, and our Treasurer (the principal financial officer), Jill Zimmerman,have reviewed and evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based upon this review and evaluation, theseofficers believe that our disclosure controls and procedures are effective inensuring that material information related to us is recorded, processed,summarized and reported within the time periods required by the forms and rulesof the Securities and Exchange Commission.

 

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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.****                        OTHER INFORMATION**

 

**Item 1.  LegalProceedings**

 

None.

 

**Item 2.  Unregistered Sales of Equity Securitiesand Use of Proceeds**

 

*Unregistered Sales of Equity Securities*

 

We previously disclosed on Form 8-K filed October 15, 2004 theunregistered sale of our units to ICM, Inc. and Fagen, Inc. pursuant to theUnit Purchase and Redemption Agreement entered into on October 11, 2004.

 

*Use of Proceeds*

 

The Securities and Exchange Commission declared our registrationstatement on Form SB-2 (SEC Registration No. 333-96703) effective on January24, 2003.  We commenced our publicoffering shortly thereafter.

 

The following is a breakdown of membership units registered and themembership units sold in the 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 January24, 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 fulltime employee who is also our Treasurer, principal financial officer and amember, was awarded five membership units as part of her bonus for servicesrelated to our development and financing. We awarded ten units to our employee and project coordinator, DianeAllen, as part of her bonus.  Finally, weissued fifteen units to a our former project coordinator, Bill Barnes, inexchange for amounts previously owed for services.

 

On March 22,2004, we released funds 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 September 30, 2004, we had used netoffering proceeds of approximately $4,100,000 for construction of plant,building and facilities, $75,000 for repayment of indebtedness, and $229,000for operating expenses.  All of thesepayments were direct or indirect payments to others.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

 

On September16, 2004, we held a special meeting of the members to vote on whether toapprove an amendment to our Amended and Restated Operating Agreement datedMarch 13, 2002.  The amendment modifiedthe rights of members owning our membership units by authorizing the issuanceof up to 20,000 additional 

 

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membership units and allowingFagen, Inc., and ICM, Inc. to appoint a total of 3 directors to the our boardof directors in exchange for their combined additional capital contribution ofapproximately $6.25 million.  The memberscast 10,976 votes for the amendment, 10 votes against the amendment and therewere 30 abstentions.

 

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

 

None.

 

**Item 6.  Exhibits.**

 

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

 

 
| **Exhibit  No.** | ** ** | **Exhibit**                                                                                                                                                                                                                        |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                               |
| 3.2              |       | Amended and Restated Operating Agreement of  East Kansas Agri-Energy, L.L.C. Filed as Exhibit 3.2 to the registrant’s  registration statement on Form SB-2 (Commission File 333-96703) and  incorporated by reference herein. |
| 3.2.1            |       | First Amendment to Amended and Restated  Operating Agreement of East Kansas Agri-Energy, L.L.C. adopted September 16,  2004.                                                                                                       |
| 10.11            |       | Agreement Between Owner and Design/Builder  on the Basis of a Stipulated Price dated August 9, 2004                                                                                                                                |
| 10.12            |       | Unit Purchase and Redemption Agreement  dated October 11, 2004                                                                                                                                                                     |
| 31.1             |       | Certificate Pursuant to 17 CFR  240.15d-14(a)                                                                                                                                                                                      |
| 31.2             |       | Certificate Pursuant to 17 CFR  240.15d-14(a)                                                                                                                                                                                      |
| 32.1             |       | Certificate Pursuant to 18 U.S.C. Section  1350                                                                                                                                                                                    |
| 32.2             |       | Certificate Pursuant to 18 U.S.C. Section  1350                                                                                                                                                                                    |

** **

** **

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|   | EAST KANSAS AGRI-ENERGY, LLC                            |
|--------|---------------------------------------------------------|
|   |                                                    |
|   |                                                    |
| Date:  | November 15, 2004                                       |   | /s/ William Pracht |
|   | William Pracht                                          |
|   | President  (Principal Executive Officer)                |
|   |                                                    |
|   |                                                    |
| Date:  | November 15, 2004                                       |   | /s/ Jill Zimmerman |
|   | Jill Zimmerman                                          |
|   | Treasurer  (Principal Financial and Accounting Officer) |

 

 

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