**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

 
| ý                                          | ** ** | **Quarterly report under Section 13 or 15(d)  of the Securities Exchange Act of 1934.** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                         |
| **For the quarterly period ended  June 30, 2004.** |
|                                                    |       |                                                                                         |
| **OR**                                                  |
|                                                    |       |                                                                                         |
| o                                                       |       | **Transition report under Section 13 or 15(d)  of the Exchange Act.**                   |

 

**Commissionfile****number 333-96703**

 

**EAST KANSAS 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 theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                                                                    ý  Yes          o  No

 

State the number of shares outstanding for each of the issuer’s classesof common equity as of the latest practicable date:  As of June 30, 2004, there were 14,707 membership unitsoutstanding.

 

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

 

 

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**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** | ** **                                               | ** ** |
|-----------------------------------------|----------------------------------------------------------|------------|
| ** **                              | ** **                                               | ** ** |
| **Item 1.**                             | **Financial Statements**                                 | ** ** |
| **Item 2.**                             | **Management’s Discussion and Analysis**            | ** ** |
| **Item 3.**                             | **Controls and Procedures**                              | ** ** |
| ** **                              | ** **                                               | ** ** |
| **PART II.  OTHER INFORMATION**    | ** **                                               |
| ** **                              | ** **                                               | ** ** |
| **Item 1.**                             | **Legal Proceedings**                                    | ** ** |
| **Item 2.**                             | **Changes in Securities**                                | ** ** |
| **Item 3.**                             | **Defaults Upon Senior Securities**                      | ** ** |
| **Item 4.**                             | **Submission of Matters to a Vote of  Security Holders** | ** ** |
| **Item 5.**                             | **Other Information**                                    | ** ** |
| **Item 6.**                             | **Exhibits and Reports  on Form 8-K**                    | ** ** |
| ** **                              | ** **                                               | ** ** |
| **SIGNATURES**                          | ** **                                               | ** ** |
|                                         |                                                          |            |  |

 

----

 

**PART I****.****    FINANCIALINFORMATION**

 

**Item 1.****           Fin****ancial Statements**

 

**EAST KANSAS AGRI-ENERGY, LLC**

 

***UNAUDITED FINANCIALSTATEMENTS***

***JUNE 30, 2004***

 

----

 

**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 SH****EET (UNAUDITED)**

**JUNE 30, 2004**

 
| **ASSETS**                                                                                                                      | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                                            |       |       |       |
| CURRENT ASSETS                                                                                                                  |       |       |       |
| Cash and cash equivalents                                                                                                       |       | $          | 11,628,058 |   |
| Grant receivable                                                                                                                |       | 55,573     |       |
| Interest receivable                                                                                                             |       | 17,765     |       |
| Prepaid expense                                                                                                                 |       | 7,436      |       |
| Total current assets                                                                                                            |       | 11,708,832 |       |
|                                                                                                                            |       |       |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                   |       |       |       |
| Office equipment                                                                                                                |       | 16,490     |       |
| Construction in progress                                                                                                        |       | 163,098    |       |
|                                                                                                                            |       | 179,588    |       |
| Less accumulated depreciation                                                                                                   |       | 5,134      |       |
|                                                                                                                            |       | 174,454    |       |
| OTHER ASSETS                                                                                                                    |       |       |       |
| Financing costs                                                                                                                 |       | 31,750     |       |
| Land option                                                                                                                     |       | 20,001     |       |
|                                                                                                                            |       | 51,751     |       |
|                                                                                                                            |       |       |       |
| Total assets                                                                                                                    |       | $          | 11,935,037 |   |
|                                                                                                                            |       |       |       |
| **LIABILITIES AND  MEMBERS’ EQUITY**                                                                                       |       |       |       |
|                                                                                                                            |       |       |       |
| CURRENT LIABILITIES                                                                                                             |       |       |       |
| Current portion of long-term debt                                                                                               |       | $          | 75,000     |   |
| Accounts payable                                                                                                                |       |       |       |
| Trade                                                                                                                           |       | 111,657    |       |
| Related party                                                                                                                   |       | 94,883     |       |
| Accrued payroll, taxes and withholdings                                                                                         |       | 5,864      |       |
| Accrued expenses                                                                                                                |       | 2,200      |       |
| Accrued interest                                                                                                                |       | 3,283      |       |
| Total current liabilities                                                                                                       |       | 292,887    |       |
|                                                                                                                            |       |       |       |
| MEMBERS’ EQUITY                                                                                                            |       |       |       |
| Capital contributions, 20,000 units  authorized, 14,707 units subscribed and 12,707 units outstanding as of  June 30, 2004 |       | 14,707,000 |       |
| Deficit accumulated during the development  stage                                                                               |       | (1,314,850 | )          |
| Less subscriptions receivable - related  party                                                                                  |       | (1,750,000 | )          |
| Total members’ equity                                                                                                      |       | 11,642,150 |       |
|                                                                                                                            |       |       |       |
| Total liabilities and members’ equity                                                                                      |       | $          | 11,935,037 |   |

 

See Notes toUnaudited Financial Statements

 

1

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**STATEMENTSOF OPERA****TIONS(UNAUDITED)**

 
| ** **                                             | ** ** | **Three Months  Ended  June 30,  2004** | ** **  | **Six Months  Ended  June 30,  2004** | ** ** | **Three Months  Ended  June 30,  2003** | ** ** | **Six Months  Ended  June 30,  2003** | ** ** | **From January 3,  2001 (Date of   Inception) to June  30, 2004** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------|-------------|--------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------|------------|
|                                                   |       |                                         |        |                                       |       |                                         |       |                                       |       |                                                                   |       |
| REVENUE                                                |       | **$**                                        | **—**  | ** **                                 | **$**      | **—**                                   | ** ** | $                                          | —     |                                                                   | $          | — |   | $ | — |   |
|                                                   |       | ** **                                   | ** **  | ** **                                 | ** ** |                                         |       |                                       |       |                                                                   |       |
| OPERATING EXPENSES                                     |       | ** **                                   | ** **  | ** **                                 | ** ** |                                         |       |                                       |       |                                                                   |       |
| Organizational expenses                                |       | **—**                                   | ** **  | **—**                                 | ** ** | —                                       |       | —                                     |       | 3,643                                                                  |       |
| Start-up expenses                                      |       | **53,117**                                   | ** **  | **134,001**                                | ** ** | 6,078                                        |       | 86,291                                     |       | 454,082                                                                |       |
|                                                   |       | **53,117**                                   | ** **  | **134,001**                                | ** ** | 6,078                                        |       | 86,291                                     |       | 457,725                                                                |       |
| OTHER INCOME (EXPENSE)                                 |       | ** **                                   | ** **  | ** **                                 | ** ** |                                         |       |                                       |       |                                                                   |       |
| Interest income                                        |       | **16,051**                                   | ** **  | **26,375**                                 | ** ** | 258                                          |       | 1,416                                      |       | 33,003                                                                 |       |
| Interest expense                                       |       | **(1,251**                                   | **)**       | **(2,470**                                 | **)**      | —                                       |       | —                                     |       | (3,601                                                                 | )          |
| Other income                                           |       | **—**                                   | ** **  | **—**                                 | ** ** | —                                       |       | —                                     |       | 2,000                                                                  |       |
|                                                   |       | **14,800**                                   | ** **  | **23,905**                                 | ** ** | 258                                          |       | 1,416                                      |       | 31,402                                                                 |       |
|                                                   |       | ** **                                   | ** **  | ** **                                 | ** ** |                                         |       |                                       |       |                                                                   |       |
| NET LOSS                                               |       | **$**                                        | **(38,317** | **)**                                      | **$**      | **(110,096**                                 | **)**      | $                                          | (5,820     | )                                                                      | $          | (84,875 | ) | $ | (426,323 | ) |
|                                                   |       | ** **                                   | ** **  | ** **                                 | ** ** |                                         |       |                                       |       |                                                                   |       |
| BASIC AND DILUTED LOSS PER UNIT                        |       | **$**                                        | **(3**      | **)**                                      | **$**      | **(15**                                      | **)**      | $                                          | (5         | )                                                                      | $          | (70 | ) |   |   |
|                                                   |       | ** **                                   | ** **  | ** **                                 | ** ** |                                         |       |                                       |       |                                                                   |       |
| WEIGHTED AVERAGE UNITS OUTSTANDING, BASIC  AND DILUTED |       | **12,707**                                   | ** **  | **7,531**                                  | ** ** | 1,220                                        |       | 1,220                                      |       |                                                                   |       |

 

See Notes toUnaudited Financial Statements

 

2

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**STATEMENTSOF CHANGES IN MEMBERS****’ EQUITY (UNAUDITED)**

 
| ** **                                                | ** ** | **Units**  | ** ** | **Contributed  Capital** | ** **     | **Subscriptions  Receivable** | ** ** | **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 six months ended  June 30, 2002     |       | —     |       | —                   |           | —                        |       | (67,976                                                  | )          | (67,976     | )              |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Balance as of June 30, 2002                          |       | 1,220      |       | 1,220,000                |           | —                        |       | (722,858                                                 | )          | 497,142     |           |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Net loss for the six months ended  December 31, 2002 |       | —     |       | —                   |           | —                        |       | (59,147                                                  | )          | (59,147     | )              |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Balance as of December 31, 2002                      |       | 1,220      |       | 1,220,000                |           | —                        |       | (782,005                                                 | )          | 437,995     |           |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Net loss for the six months ended  June 30, 2003     |       | —     |       | —                   |           | —                        |       | (84,875                                                  | )          | (84,875     | )              |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Balance as of June 30, 2003                          |       | 1,220      |       | 1,220,000                |           | —                        |       | (866,880                                                 | )          | 353,120     |           |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Net loss for the six months ended  December 31, 2003 |       | —     |       | —                   |           | —                        |       | (73,745                                                  | )          | (73,745.00  | )              |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| 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  |           |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Subscriptions receivable                                  |       | —     |       | —                   |           | (13,457,000                   | )          | —                                                   |       | (13,457,000 | )              |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Collection of unit subscriptions                          |       | —     |       | —                   |           | 11,707,000                    |       | —                                                   |       | 11,707,000  |           |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Units issued for compensation                             |       | 30         |       | 30,000                   |           | —                        |       | —                                                   |       | 30,000      |           |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Cost of raising capital                                   |       | —     |       | —                   |           | —                        |       | (264,129                                                 | )          | (264,129    | )              |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| Net loss for the six months ended  June 30, 2004     |       | —     |       | —                   |           | —                        |       | (110,096                                                 | )          | (110,096    | )              |
|                                                      |       |       |       |                     |           |                          |       |                                                     |       |        |           |
| **Balance as of  June 30, 2004**                     | ** ** | **14,707** | ** ** | **$**                    | **14,707,000** | ** **                    | **$**      | **(1,750,000**                                           | **)**      | **$**       | **(1,314,850** | **)** | **$** | **11,642,150** | ** ** |

 

See Notes to Unaudited Financial Statements

 

3

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**STATEMENTOF CA****SH FLOWS(UNAUDITED)**

 
| ** **                                                                  | ** ** | **Six Months  Ended  June 30,  2004** | ** **     | **Six Months  Ended  June 30,  2003** | ** ** | **From January 3,     2001 (Date of  Inception) to  June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|----------------|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                        |       |                                       |           |                                       |       |                                                                                    |       |
| Net loss                                                                    |       | **$**                                      | **(110,096**   | **)**                                      | $          | (84,875                                                                                 | )          | $ | (426,323 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Depreciation                                                                |       | **1,640**                                  | ** **     | 1,434                                      |       | 5,134                                                                                   |       |
| Non-cash compensation for capital units                                     |       | **30,000**                                 | ** **     | —                                     |       | 30,000                                                                                  |       |
| Increase in current assets                                                  |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Accounts receivable                                                         |       | **(28,514**                                | **)**          | (39,811                                    | )          | (55,573                                                                                 | )          |
| Interest receivable                                                         |       | **(17,765**                                | **)**          | —                                     |       | (17,765                                                                                 | )          |
| Prepaid expense                                                             |       | **(6,017**                                 | **)**          | (7,893                                     | )          | (7,436                                                                                  | )          |
| Increase (decrease) in current liabilities                                  |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Accounts payable                                                            |       | **59,279**                                 | ** **     | (16,000                                    | )          | 129,788                                                                                 |       |
| Accrued expenses                                                            |       | **4,606**                                  | ** **     | 4,934                                      |       | 11,347                                                                                  |       |
| Net cash (used in) operating activities                                     |       | **(66,867**                                | **)**          | (142,211                                   | )          | (330,828                                                                                | )          |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Purchase of equipment                                                       |       | **—**                                 | ** **     | (9,890                                     | )          | (16,490                                                                                 | )          |
| Purchase of land option                                                     |       | **(10,001**                                | **)**          | (5,000                                     | )          | (20,001                                                                                 | )          |
| Construction in process                                                     |       | **(11,651**                                | **)**          | (6,847                                     | )          | (86,346                                                                                 | )          |
| Net cash (used in) investing activities                                     |       | **(21,652**                                | **)**          | (21,737                                    | )          | (122,837                                                                                | )          |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Cost of raising capital                                                     |       | **(1,260**                                 | **)**          | (112,263                                   | )          | (278,527                                                                                | )          |
| Payment of financing fees                                                   |       | **(31,750**                                | **)**          | —                                     |       | (31,750                                                                                 | )          |
| Proceeds from notes payable                                                 |       | **—**                                 | ** **     | —                                     |       | 137,000                                                                                 |       |
| Repayment of notes payable                                                  |       | **—**                                 | ** **     | —                                     |       | (137,000                                                                                | )          |
| Proceeds from long-term debt                                                |       | **—**                                 | ** **     | —                                     |       | 75,000                                                                                  |       |
| Capital contributions                                                       |       | **11,707,000**                             | ** **     | —                                     |       | 12,317,000                                                                              |       |
| Net cash provided by (used in) financing  activities                        |       | **11,673,990**                             | ** **     | (112,263                                   | )          | 12,081,723                                                                              |       |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                       |       | **11,585,471**                             | ** **     | (276,211                                   | )          | 11,628,058                                                                              |       |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                             |       | **42,587**                                 | ** **     | 374,190                                    |       | —                                                                                  |       |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                    |       | **$**                                      | **11,628,058** | ** **                                 | $          | 97,979                                                                                  |       | $ | 11,628,058 |   |
|                                                                        |       |                                       |           |                                       |       |                                                                                    |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                           |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Cash paid for interest                                                      |       | **$**                                      | **—**     | ** **                                 | $          | —                                                                                  |       | $ | 318 |   |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| NON CASH INVESTING AND FINANCING ACTIVITIES                                 |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Prepaid expenses reclassified to deferred  offering costs                   |       | **$**                                      | **—**     | ** **                                 | $          | —                                                                                  |       | $ | 35,754 |   |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Deferred offering costs incurred                                            |       | **$**                                      | **—**     | ** **                                 | $          | —                                                                                  |       | $ | 9,649 |   |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Property, plant and equipment costs  incurred                               |       | **$**                                      | **76,752**     | ** **                                 | $          | —                                                                                  |       | $ | 76,752 |   |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Cost of raising capital reclassified to  members’ equity               |       | **$**                                      | **264,129**    | ** **                                 | $          | —                                                                                  |       | $ | 278,527 |   |
|                                                                        |       | ** **                                 | ** **     |                                       |       |                                                                                    |       |
| Capital contributions issued at discount                                    |       | **$**                                      | **—**     | ** **                                 | $          | —                                                                                  |       | $ | 610,000 |   |

 

See Notes to Unaudited Financial Statements

 

4

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTESTO UNAUDIT****ED FINANCIALSTATEMENTS**

** **

**JUNE 30, 2004**

 

**NOTE1 -**                     SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

** **

*Nature of Business*

 

East Kansas Agri-Energy, LLC, (a developmentstage Kansas limited liability company) to be located in Garnett, Kansas, wasorganized to pool investors to build a 20 million gallon ethanol plant withdistribution within the United States. East Kansas Agri-Energy, LLC (theCompany) anticipates completing construction by the summer of 2005. As ofJune 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 six month periods ended     June 30, 2004 and2003 are not necessarily 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 the saleof units are recorded as prepaid offering costs until the related units areissued. 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.

 

5

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

** **

**JUNE 30, 2004**

 

*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 June 30, 2004, there were no units includable in dilutedearnings per unit related to subscribed units as thecalculation would have been antidilutive.

 

*Stock Based Compensation*

 

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

 

**NOTE 2 -**                     COMMITMENTS ANDCONTINGENCIES

** **

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 $5,000for the extension. The purchase price of the land will be reduced by amountspreviously paid for the option and extension.

 

On May 14, 2002, the Companyentered into an option to purchase real property for the plant site with a fairvalue of approximately $172,500. The option is for the purchase ofapproximately 23 acres within the Golden Prairie Industrial Park of the City ofGarnett, Kansas for $1. On May 27, 2004, the Company gave notice of exercise ofthe option, but had not secured title to the land as of June 30, 2004.

 

The Company entered into an agreement for preliminary engineering forthe proposed ethanol plant with Fagan Engineering LLC. As of June 30, 2004approximately $77,000 had been incurred.

 

During the year ended December 31, 2003, the Company terminatedits agreement with Value Added Ventures, LLC (VAV). The Company has beennotified by VAV requesting payment for services from the inception of thecontract through the date of termination totaling $33,380. The Company and VAVare negotiating settlement of this contract. The Company has recorded aliability related to this agreement of $5,847 as of June 30, 2004.

 

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

 

The Company completed its initial public offering and escrow was brokenin March 2004. A total of 13,457 units were subscribed, with subscriptionsreceivable of $1,750,000 related to 2,000 units remaining unpaid as ofJune 30, 2004. For accounting purposes, these 2,000 units are notincluded in units outstanding as of June 30, 2004.

 

The Company entered into a repurchase agreement with Garnett StateSavings Bank to provide security for cash balances held in anticipation ofconstruction. The Company has approximately $11,565,000, included in cash andcash equivalents, under the repurchase agreement.

 

6

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

** **

**JUNE 30, 2004**

 

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

 

The Company had originally received a written debt financing commitmentfor approximately $20,000,000 of construction debt converting to term debt, a$1,000,000 line of credit from a bank and subordinated debt financing of up to$2,000,000 from Fagen, Inc.

 

Due to the increase of project cost and overall capitalization, theCompany will need to increase debt financing and is currently negotiating withlenders, including Home Federal Savings Bank, to receive the best financingarrangement. The Company expects that the new debt financing commitment, whenit is received, will consist of term debt and/or a line of credit totalingapproximately $26,000,000 and that the senior debt facility will be secured bysubstantially all of the assets. However, no definitive agreement has beensigned and there is no assurance that such an agreement will be signed.

 

To supplement this debt financing, the Company anticipates that it mayraise additional equity instead of utilizing the $2,000,000 subordinated debtfinancing previously offered by Fagen, Inc. In that event, the Company intendsto raise additional equity by authorizing and issuing Class B membershipinterests. It expects that these Class B membership interests will be issued toICM, Inc. of Colwich, Kansas, who is expected to serve as the design-builder,and Fagen, Inc., is expected to serve as the principalsubcontractor. The holders of Class B membership interests are expected to havecertain rights that will likely differ from the holders of currentlyoutstanding membership interests. The Company also intends to register anoffering for additional Class A membership interests and use the salesproceeds of those membership interests to redeem the Class B membershipinterests and for other operating expenses.

 

The Company plans to negotiate and executefinalized contracts needed in connection with the construction of the ethanolplant. The Company had previously executed a non-binding letter of intent withFagen, Inc. in connection with the design construction and operation of theethanol plant. The Company expects that ICM, Inc. will serve as the design-builderwith Fagen, Inc. serving as the principal subcontractor. The Company iscurrently in the process of negotiating a legally binding design-build contractand estimates that it will enter into an agreement with ICM, Inc. for a fixedprice of approximately $35,900,000 pursuant to that agreement.

 

**NOTE 3 -**                     MEMBERS’ EQUITY

 

In addition to transactions discussed in Note2, the Company issued a total of 30 units for compensation. The former projectcoordinator received 15 units in exchange for amounts previously owed forservices.

 

The current project coordinator and treasurer(who are full time employees of the Company) received a total of 15 units as abonus for their services related to the development and financing of theCompany. Compensation expense related to this bonus totaled $15,000 for the sixmonths ended June 30, 2004.

 

**NOTE 4 -**                     CONCENTRATION OFCREDIT RISK

 

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

 

7

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**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

** **

**JUNE 30, 2004**

 

**NOTE 5 -**                     VALUE ADDED GRANT

 

During the year ended December 31, 2003,the Company received notification of award of a United States Department ofAgriculture Value-Added Agricultural Product Market Development Grant (theGrant) for approximately $450,000. The Grant can be used to pay for certainorganizational, offering and start-up costs related to the formation andcapitalization of the Company. For the six months ended June 30, 2004 and2003, the Company qualified for reimbursement of $132,149 and $94,134,respectively, of which $1,409 and $34,240, respectively, related to cost ofraising capital. For the period from inception though June 30, 2004, theCompany qualified for reimbursement of $341,370 of costs, of which $61,602related to cost of raising capital and $279,768 was recorded as a reduction ofstart-up costs.

 

8

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**Item 2.****           Manageme****nt’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 ofthese terms or other similar expressions. These forward-looking statements are only our predictions and involvenumerous assumptions, 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 a Kansas limited liabilitycompany on October 16, 2001, for the purpose of constructing and operatingan ethanol plant near Garnett, Kansas. We plan to build a corn-based ethanol plant that will produce ethanol,distiller’s grains and carbon dioxide. The ethanol plant was originally expected to process approximately 7.5million bushels of corn and sorghum per year into 20 million gallons ofdenatured fuel grade ethanol, 64,000 tons of dried distiller’s grainswith solubles and 63,000 tons of raw carbon dioxide gas.  Subsequently, we revised these figures withthe expectation that we would produce 25 million gallons of denatured fuelgrade ethanol, approximately 80,000tons of dried distiller’s grains with solubles and approximately 79,000 tons ofraw carbon dioxide gas.  Afterfurther review, our board of directors has determined that increasing ourproduction capacity to 35 million gallons of denatured fuel grade ethanol,approximately 68,000 tons ofdried distiller’s grains with solubles and approximately 92,000 tons of rawcarbon dioxide gas will likely result in more efficient operations forour ethanol plant.  This change is notexpected to delay our anticipated date of operation.

 

Based on the increased capacity of our ethanol plant, we now expectthat the project will cost approximately $47,526,000 instead of the $37,000,000previously planned.  We are still in thedevelopment phase, and until the proposed ethanol plant is operational, willgenerate no revenue.  We anticipate thataccumulated losses will continue to increase until the ethanol plant isoperating.  We expect that it will takeapproximately 14 to 16 months from the date we released funds from escrow toconstruct the ethanol plant and commence start-up operations.  Our anticipated date of substantialcompletion is currently summer of 2005.

 

We raised $13,457,000 of equity by a publicoffering registered with the Securities and Exchange Commission on Form SB-2(SEC Registration No. 333-96703) as amended, which was declared effective onJanuary 24, 2003, and terminated January 24, 2004.  In addition to the units sold in thepublic offering, we issued a total of 30 membership units to certainindividuals as compensation in exchange for performance of developmentservices.

 

9

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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 of Rochester, Minnesota.  We had also received a written commitmentfrom Fagen, Inc. of Granite Falls, Minnesota to provide subordinated debtfinancing of up to $2,000,000.  Due tothe increase of our project cost and overall capitalization, we will now needto increase our debt financing and are currently negotiating with lenders,including Home Federal Savings Bank, to receive the best financing arrangementthat we can.  We expect that our new debtfinancing commitment when it is received will consist of term debt and/or aline of credit totaling approximately $26,000,000.  However, no definitive agreement has beensigned and there is no assurance that such an agreement will be signed.

 

To supplement this debt financing, we anticipate that we may raiseadditional equity instead of utilizing the $2,000,000 subordinated debtfinancing previously offered by Fagen, Inc. In that event, we intend to raise additional equity by authorizing andissuing Class B membership interests.  Weexpect that these Class B membership interests will be issued to ICM, Inc. ofColwich, Kansas, who is now expected to serve as our design-builder, and Fagen,Inc., who is now expected to serve as our principal subcontractor.  The holders of Class B membership interestsare expected to have certain rights that will likely differ from the holders ofcurrently outstanding membership interests. We also intend to register an offering for additional Class A membershipinterests and use the sales proceeds of those membership interests to redeemthe Class B membership interests and for other operating expenses.

 

In return for either the subordinated debt financing or the purchase byICM, Inc. and Fagen, Inc. of the Class B membership interests, we intend toengage UnitedBio Energy Management, LLC, United Bio Energy Fuels, LLC, United Bio EnergyIngredients, LLC, and United Bio Energy Trading, LLC, to provide us servicesincluding ethanol plant general management, ethanol and distillers grainsmarketing, grain origination services and overall risk management.  These companies are owned by United BioEnergy, LLC, of Wichita, Kansas.  Themajority owners of United Bio Energy, LLC are Fagen, Inc., and ICM, Inc.  As such, we expect to be very dependent onUnited Bio Energy, LLC, and its subsidiaries.

 

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

 

We expect to spend the next 12 months in design development andconstruction of the ethanol plant.  We received an option to purchase23 acres of land in the Golden Prairie Industrial Park on the edge of Garnett,Kansas to construct our ethanol plant from the City of Garnett, Kansas for acost of $1.00.  This option was extendedwithout additional cost to us.  We gavenotice of the exercise of that option to the City on May 27, 2004, but have notyet finalized our purchase of the real estate. We expect to do so prior to beginning construction of the ethanol plant.  We have received a commitment for titleinsurance from First American Title Insurance Company of Kansas.  We are also currently negotiating anagreement with the City of Garnett, Kansas, which we expect will provide forimprovements to the real estate, grants, tax abatement and bonds.

 

We also plan to purchaseten acres of real estate in Anderson County, Kansas to allow the placement of arailroad spur from the proposed plant site to existing Union Pacific Railroadtrack in Garnett, Kansas.  We havereceived an option to purchase the real estate from Clarence L. White andBerniece F. White.  That option grantedus the right to purchase approximately ten acres for $9,000 per acre and wasobtained at a cost of $5,000.  The optionwas scheduled to expire on March 31, 2003, but was extended untilMarch 14, 2004, in exchange for an additional payment of $5,000.  The option was extended a second time toJuly 1, 2004, for an additional $5,000 payment.  The option was extended a third time to September 1,2004, for an additional $5,000 payment. The purchase price of the land will be reduced by the amounts paid forthe option and extensions.  The realestate was used as a surface dumpsite many years ago resulting in the need tomove and bury waste.  The clean-uprequired has now been completed and paid for by grant funds applied for andreceived by the City of Garnett, Kansas. The commitment for title insurance from First American Title InsuranceCompany of Kansas also applies to this real estate.

 

We plan to negotiate andexecute finalized contracts needed in connection with the construction of theethanol plant.  We had previouslyexecuted a non-binding letter of intent with Fagen, Inc. in connection with thedesign construction and operation of the ethanol plant.  We now expect that ICM, Inc. will serve asthe design-builder with Fagen, Inc. now serving as our principalsubcontractor.   We are currently in theprocess of negotiating a legally binding design-build contract and estimatethat we will pay ICM, Inc. a fixed price of $35,900,000 pursuant to thatagreement.  We expect that thedesign-build contract will obligate ICM, Inc. to provide all

 

10

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engineering services, labor, materials, andequipment to design, construct and startup a dry mill ethanol plant capable ofproducing 35 million gallons per year of denatured fuel-grade ethanol.  We expect that ICM, Inc. will providetraining to our personnel for a period of 1-3 weeks.  We also expect that the design-build contractwill limit our ability to recover damages from ICM, Inc. for defectiveconstruction and/or termination for cause to $2,500,000.  No assurances can be given that a legallybinding design-build contract will be executed with ICM, Inc. or if executed,that it will be on the terms and conditions as favorable as those currentlyanticipated.

 

We previously engaged Fagen Engineering, LLC, to provide preliminarycivil engineering for our ethanol plant. ICM, Inc. is now working on preliminary civil engineering and sitedevelopment.  A Phase 1 EnvironmentalStudy on our proposed site was completed on April 23, 2004.  Natwick & Associates of Fargo, NorthDakota has conducted an appraisal and Taylor Design Group of Ottawa, Kansas hasbeen engaged to survey the property.

 

Environmental Resource Group of Minneapolis,Minnesota, who has been engaged to coordinate and assist us with properpermitting, has submitted the application for the NPDES Wastewater DischargePermit to the Kansas Department of Health and Environment and is currentlyworking with the Kansas Department of Health and Environment to modify theconstruction air permit previously issued for the ethanol plant.  This modification is necessary to accommodatethe anticipated increased production capacity of our ethanol plant.

 

We also expect to negotiate and execute contracts for the provision ofelectricity, natural gas, water and other utilities.  We have not yet entered into any suchcontracts, but have engaged U.S. Energy Services, Inc. of Wayzata, Minnesota,to provide consulting and energy management services for supplies ofelectricity and natural gas.  We arecurrently negotiating with U.S. Water Services for the provision of watertreatment chemicals and services.

 

We are also currently negotiating contracts for the operation of theethanol plant with United Bio Energy Management, LLC, United Bio Energy Fuels, LLC,United Bio Energy Ingredients, LLC, and United Bio Energy Trading, LLC.  We expect that United Bio Energy Management,LLC, will manage the ethanol plant and United Bio Energy Fuels, LLC, willprovide us ethanol marketing services. In addition, we expect that United Bio Energy Ingredients, LLC, willprovide us distiller’s grains marketing and grain origination services.  United Bio Energy Trading, LLC, is expectedto provide us with overall risk management. We expect to be very dependent on these companies after we beginoperations.  As a result, anyagreements negotiated will not be arms-length transactions and may not be asfavorable as those negotiated with an independent third party.

 

We also plan to market anddistribute the carbon dioxide that will be produced at the plant as aby-product of our ethanol production.  OnJanuary 28, 2004, we entered in to a letter of intent with BOC Group, Inc.of Murray Hill, New Jersey.  The terms ofthe letter of intent provide that we will make available to BOC Group, Inc. forpurchase all of the carbon dioxide produced at the plant.  The letter of intent contemplates that BOCGroup, Inc. will purchase a substantial quantity of our raw carbon dioxide gasannually and will construct a carbon dioxide liquefaction plant.  We expect to lease a parcel of our landadjacent to our ethanol plant to BOC Group, Inc. for construction of theliquefaction plant.  The letter of intentwas scheduled to expire by its terms on March 31, 2004, but was extendedto July 31, 2004.  The letter ofintent has now been extended to September 30, 2004.  We are currently negotiating a legallybinding contract with BOC Group, Inc. However, there is no guarantee that a final contract will be executed orthat it will be executed upon terms as favorable as those currentlyanticipated.

 

**Sourcesand Uses of Funds**

 

We expect to have sufficient cash available to cover our costs over thenext 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., Fagen, Inc.,and our financial advisor’s experience with other businesses.  It is only an estimate and our actualexpenses could be much higher due to a variety of factors described in our FormSB-2 registration statement under the section entitled “Risk Factors.”

 

11

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| **USE  OF FUNDS**                          | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| Plant construction                         |       | $          | 36,335,000 |   |
| Land & site development costs          |       | 900,000    |       |
| Railroad                                   |       | 1,210,000  |       |
| Fire Protection / Water Supply             |       | 420,000    |       |
| Construction insurance costs               |       | 100,000    |       |
| Construction contingency                   |       | 633,000    |       |
| Capitalized interest                       |       | 700,000    |       |
| Rolling stock                              |       | 190,000    |       |
| Start up costs:                            |       |       |       |
| Financing costs                            |       | 563,000    |       |
| Organization costs                         |       | 650,000    |       |
| Pre Production period costs                |       | 600,000    |       |
| Spare parts – process equipment       |       | 250,000    |       |
| Working capital                            |       | 3,125,000  |       |
| Inventory – corn and milo             |       | 850,000    |       |
| Inventory – chemicals and ingredients |       | 250,000    |       |
| Inventory – Ethanol and DDGS          |       | 750,000    |       |
|                                       |       |       |       |
|                                       |       | $          | 47,526,000 |   |

 

We expect the total funding required for the plant to be$47,526,000.  We estimate that we willneed approximately $36,335,000 to construct the plant, which includes the$35,900,000 we expect to pay to ICM, Inc.,  and a total of approximately$11,191,000 to cover all capital expenditures necessary to complete theproject, make the plant operational and produce revenue.  The total project cost has increased by$10,526,000 due to the increase in plant production capacity.  The change includes a$8,635,000 increase in plant construction costs and a $785,000 increase toInventory and Working Capital resulting from our decision to increase ourexpected annual production of fuel grade ethanol from 25 million gallons to 35million gallons.

 

Based upon offering proceeds of $13,457,000, seed capital proceeds of$610,000, additional equity of $7,009,000, a term loan and/or line of credit inthe approximate amount of $26,000,000, and grant financing of $450,000, weexpect that we will have approximately $47,526,000 of debt and equityavailable, which means we expect to have sufficient cash on hand to coverconstruction and related start-up costs necessary to make the plantoperational.

 

**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 has been extended through September 30, 2004.

 

**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 personnelat 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             |       |

 

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# **Liquidity and Capital Resources**

 

As of June30, 2004, we had cash and cash equivalents of $11,628,058 and total currentassets of $11,708,832.  To date, we havesold units in our public offering with a price of $13,457,000 and have raisedan additional $610,000 in seed capital. We released proceeds of our equity offering from escrow on March 22,2004, and issued a total of 13,487 membership units, including 13,457 unitssold in our offering and an additional thirty 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.  We may draw on these funds at any time, butdo not intend to do so prior to the commencement of substantial construction ofthe ethanol plant.

 

As ofJune 30, 2004, we had current liabilities of $292,887 consisting primarilyof our accounts payable and a note payable to the Kansas Department of Commerceand Housing.  Since our inception throughJune 30, 2004, we have an accumulated deficit of $1,314,850 and asubscriptions receivable in the amount of $1,750,000.  We have reduced members’ equity by $264,129,the amount of the prepaid offering costs related to the offering.  Total members’ equity as of June 30,2004, was $11,642,150.  Since ourinception, we have generated no revenue from operations.  For the quarter ended June 30, 2004, wehave a net loss of $38,317 primarily due to start-up costs.

 

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 tothe increase of our project cost, we will now need to increase our debtfinancing and are currently negotiating with lenders, including Home FederalSavings Bank, to receive the best financing arrangement available.  We expect that our 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 our assets.  No definitive agreement has been signed andthere is no assurance that such an agreement will be signed.  Even if signed, a commitment for debtfinancing is not a binding loan agreement and, therefore, the lender may not berequired to provide us the debt financing as set forth in the commitment.  A commitment is an agreement to lend, subjectto certain terms and conditions, and to the negotiation, execution and deliveryof loan and loan-related documentation satisfactory to the lender.  The agreement is conditional, and a lendercould later decline the loan if terms and conditions set forth in the agreementare not satisfied.

 

To supplement our expected debt financing, we anticipate that we mayraise additional equity instead of utilizing the $2,000,000 subordinated debtfinancing previously offered by Fagen, Inc. We intend to raise additional equity by issuing Class B membershipinterests.  We expect that these Class Bmembership interests will be issued to ICM, Inc. and Fagen, Inc.  The Class B membership interests are expectedto have an 8% cumulative fixed rate of return which will entitle ICM, Inc. andFagen, Inc. to preferred rights to income distributions and priority overcurrently outstanding membership interests (which we intend to re-designate asClass A membership interests) in the event of dissolution.  We also intend to register an offering withthe SEC for a minimum of 2,000 Class A membership interests and a maximum of10,000 Class A membership interests at a purchase price of $10,000.  We intend to use the proceeds from the salesof registered Class A membership interests to redeem the Class B membershipinterests at a redemption price of $1,000 per unit and for other operatingexpenses.  If we fail to sell the minimumamount of Class A membership interests, we anticipate that we will redeem theClass B membership interests through distribution of net cash flow, subject toany restrictions on distributions imposed by our debt

 

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financing agreements.  We expect that we will be required to redeemthe Class B membership interests prior to making any distributions to Class Aholders except with respect to tax distributions.  We also expect that in exchange for thecontributions made for Class B membership interests, the Class B holder will beentitled to representation on our board of directors.

 

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 will be applying 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 CCCprogram may not continue beyond their scheduled expiration date or if they docontinue, the grants may not be at the same level.  If our ethanol plant is not operational bythe expiration of the CCC program or has not had substantial operations, we maynot be eligible for the grants or may receive a reduced amount.

 

The following schedule sets forth our estimated sources offunds.  This schedule could changein the future depending on whether we receive additional grants.  The schedule may also change dependingon the level of additional equity raised.

 

 
| **Source of Funds**         | ** ** | ** ** | ** **     | **Percent of Total** | ** ** |
|-----------------------------|------------|------------|----------------|----------------------|------------|
| Member  Equity              |       | $          | 21,076,000     |                 | 44.35      |   |
| Term  Debt/Line of Credit   |       | $          | 26,000,000     |                 | 54.71      |   |
| Grants                      |       | $          | 450,000        |                 | .94        |   |
|                        |       |       |           |                 |       |
| **Total Sources of  Funds** | ** ** | **$**      | **47,526,000** | ** **           | **100.00** | **%** |

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balancesheet arrangements.

 

**Item 3.****  Contro****ls And Procedures**

 

Our management, including our President (theprincipal executive officer), William Pracht, and our Treasurer (the principalfinancial officer), Jill Zimmerman, have reviewed and evaluated theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report.  Basedupon this review and evaluation, these officers believe that our disclosurecontrols and procedures are effective in ensuring that material informationrelated to us is recorded, processed, summarized and reported within the timeperiods required by the forms and rules of the Securities and ExchangeCommission.

 

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 materially affectedor is reasonably likely to materially affect our internal control overfinancial reporting.

 

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

 

**Item 1.****           Lega****l Proceedings**

 

None.

 

**Item 2.****           Chan****ges in Securities**

 

The Securities and Exchange Commissiondeclared our registration statement on Form SB-2 (SEC RegistrationNo. 333-96703) effective on January 24, 2003.  We commenced our public offering shortlythereafter.

 

The following is a breakdown of membershipunits registered and the membership 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 January 24, 2004, we closed theoffering and stopped selling units registered under our registrationstatement.  During the offering we sold 13,457units for an aggregate price of $13,457,000 of which a total of $1,750,000 has not yet been received from twosubscribers, Fagen, Inc. and Fagen Energy, Inc. We expect to receive the remaining proceeds before execution ofdefinitive loan documents with our senior lender.  We sold the units without the assistance ofan underwriter.

 

In addition to the units sold, we issued atotal of thirty membership units for compensation.  Jill Zimmerman, a full time employee who isalso our Treasurer, principal financial officer and a member, was awarded fivemembership units as part of her bonus for services related to our developmentand financing.  We awarded ten units toour employee and project coordinator, Diane Allen, as part of her bonus.  Finally, we issued fifteen units to a our former project coordinator, Bill Barnes, in exchangefor amounts previously owed for services.

 

On March 22, 2004, we released funds fromescrow and issued 13,487 units in the Company, including 13,457 units sold inour offering and an additional thirty units issued for compensation.  As of June 30, 2004, we had not used netoffering proceeds in excess of $100,000 for any purpose.

 

**Item 3.****           Defa****ults Upon Senior Securities**

 

None.

 

**Item 4.****           Submiss****ion of Matters to a Vote of Security Holders**

 

None.

 

**Item 5.****           Oth****er Information**

 

There has been no change in our procedures bywhich Members may recommend nominees to the Company’s Board of Directors.  The process continues to be as described inour Operating Agreement.

 

**Item 6.****          ****Exhib****its And Reports On Form 8-K.**

 

(a)                                  Thefollowing exhibits are included herein:

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                    |
|-----------------|------------|------------------------------------------------------------------------------------------------|
|            |       |                                                                                           |
| 10.10           |       | July 1, 2004 Option to Purchase Real  Estate from Clarence L. White and Berniece F. White |
| 31.1            |       | Certificate Pursuant to 17 CFR  240.15d-14(a)                                                  |
| 31.2            |       | Certificate Pursuant to 17 CFR  240.15d-14(a)                                                  |

 

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| 32.1 |   | Certificate Pursuant to 18 U.S.C.  Section 1350 |
|------|--------|------------------------------------------------------|
| 32.2 |   | Certificate Pursuant to 18 U.S.C.  Section 1350 |

 

(b)                                 Reportson Form 8-K.

 

None.

 

**SIGNATU****RES**

 

In accordance with Section 13 or 15(d)of the Exchange Act, the registrant caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|   |                 | EAST KANSAS AGRI-ENERGY, LLC                            |
|--------|----------------------|---------------------------------------------------------|
|   |                 |                                                    |
|   |                 |                                                    |
| Date:  | August 16, 2004 |                                                    | /s/ William Pracht |   |
|   |                 | William Pracht                                          |
|   |                 | President  (Principal Executive Officer)                |
|   |                 |                                                    |
|   |                 |                                                    |
| Date:  | August 16, 2004 |                                                    | /s/ Jill Zimmerman |   |
|   |                 | Jill Zimmerman                                          |
|   |                 | Treasurer  (Principal Financial and Accounting Officer) |

 

16

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