**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 March 31, 2003**                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                |
| **OR**                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                |
| **o**                                                                                                                                                                                                                                                                                                               |   | **Transition report under Section 13 or 15(d) of  the Exchange Act.**                   |
|                                                                                                                                                                                                                                                                                                                |   |                                                                                    |
| **For the transition period from                          to                        .** |
|                                                                                                                                                                                                                                                                                                                |
| **Commission file number 333-96703**                                                                                                                                                                                                                                                                                |

** **
| **EAST  KANSAS AGRI-ENERGY, L.L.C.**                                 |
|----------------------------------------------------------------------|
| (Exact name of small business issuer as specified 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 filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. o Yes           ý  No

 

State the number of sharesoutstanding for each of the issuer’s classes of common equity as if the latestpracticable date:  As of May 1, 2003,there were 1,220 units outstanding.

 

Transitional Small BusinessDisclosure 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 or Plan of Operation |
| 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                                                                     |
|                                                                           |
| CERTIFICATIONS                                                                 |

 

2

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

 

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

 

**EAST KANSAS AGRI-ENERGY, LLC**

 

***UNAUDITED FINANCIAL STATEMENTS***

***MARCH 31, 2003 AND 2002***

 

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**EASTKANSAS 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 |

 

4

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

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

**MARCH 31,2003**

 
| **ASSETS**                                                                          |   |          | ** **  |
|-------------------------------------------------------------------------------------|--------|---------------|-------------|
|                                                                                |   |          | ** **  |
| CURRENT ASSETS                                                                      |   |          |        |
| Cash and cash equivalents                                                           |   | **$**         | **141,704** | ** ** |
| Accounts receivable - grant                                                         |   | **59,447**    | ** **  |
| Prepaid offering costs                                                              |   | **259,411**   | ** **  |
| Prepaid expense                                                                     |   | **11,098**    | ** **  |
| Total current assets                                                                |   | **471,660**   | ** **  |
|                                                                                |   |          | ** **  |
| PROPERTY, PLANT AND EQUIPMENT                                                       |   |          | ** **  |
| Office equipment                                                                    |   | **16,140**    | ** **  |
| Construction in progress                                                            |   | **68,563**    | ** **  |
|                                                                                |   | **84,703**    |        |
| Less accumulated depreciation                                                       |   | **1,015**     | ** **  |
|                                                                                |   | **83,688**    |        |
| OTHER ASSETS                                                                        |   |          | ** **  |
| Land option                                                                         |   | **10,000**    | ** **  |
|                                                                                |   |          | ** **  |
| Total assets                                                                        |   | **$**         | **565,348** | ** ** |
|                                                                                |   |          | ** **  |
| **LIABILITIES AND MEMBERS' EQUITY**                                                 |   |          | ** **  |
|                                                                                |   |          | ** **  |
| CURRENT LIABILITIES                                                                 |   |          | ** **  |
| Current portion of long-term debt                                                   |   | **$**         | **75,000**  | ** ** |
| Accounts payable                                                                    |   |          | ** **  |
| Trade                                                                               |   | **99,414**    | ** **  |
| Related party                                                                       |   | **25,160**    | ** **  |
| Accrued payroll, taxes, and withholdings                                            |   | **6,834**     | ** **  |
| Total current liabilities                                                           |   | **206,408**   | ** **  |
|                                                                                |   |          | ** **  |
| COMMITMENTS AND CONTINGENCIES                                                       |   |          | ** **  |
|                                                                                |   |          | ** **  |
| MEMBERS' EQUITY                                                                     |   |          | ** **  |
| Capital contributions, 20,000 units authorized, 1,220 units issued  and outstanding |   | **1,220,000** | ** **  |
| Deficit accumulated during the development stage                                    |   | **(861,060**  | **)**       |
| Total members' equity                                                               |   | **358,940**   | ** **  |
|                                                                                |   |          | ** **  |
| Total liabilities and members' equity                                               |   | **$**         | **565,348** | ** ** |

** **

See Notes to UnauditedFinancial Statements

 

5

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTS OF OPERATIONS****(UNAUDITED)**

 
|                                                  |   | **Three Months  Ended  March 31,  2003** |        | **Three Months  Ended  March 31,  2002** |   | **From January 3,  2001 (Date of  Inception) to  March 31,  2003** |   |
|-------------------------------------------------------|--------|------------------------------------------|-------------|------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                                  |   |                                     |        |                                     |   |                                                               |   |
| REVENUE                                               |   | **$**                                    | **—**  |                                     | $      | **—**                                                         |   | $ | **—** |   |
|                                                  |   |                                     |        |                                     |   |                                                               |   |
| OPERATING EXPENSES                                    |   |                                     |        |                                     |   |                                                               |   |
| Organizational expenses                               |   | **—**                               |        | **—**                               |   | 3,643                                                              |   |
| Start-up expenses                                     |   | **80,213**                               |        | 24,059                                   |   | 241,032                                                            |   |
|                                                  |   | **80,213**                               |        | 24,059                                   |   | 244,675                                                            |   |
| OTHER INCOME (Expense)                                |   |                                     |        |                                     |   |                                                               |   |
| Interest income                                       |   | **1,158**                                |        | 288                                      |   | 6,013                                                              |   |
| Other income                                          |   | **—**                               |        | 2,000                                    |   | 2,000                                                              |   |
|                                                  |   | **1,158**                                |        | 2,288                                    |   | 8,013                                                              |   |
|                                                  |   |                                     |        |                                     |   |                                                               |   |
| NET LOSS                                              |   | **$**                                    | **(79,055** | **)**                                    | $      | (21,771                                                            | )      | $ | (236,662 | ) |
|                                                  |   |                                     | ** **  |                                     |   |                                                               |   |
| BASIC AND DILUTED LOSS PER UNIT                       |   | **$**                                    | **(65**     | **)**                                    | $      | (26                                                                | )      |   |   |
|                                                  |   |                                     |        |                                     |   |                                                               |   |
| WEIGHTED AVERAGE UNITS OUTSTANDING, BASIC AND DILUTED |   | **1,220**                                |        | 850                                      |   |                                                               |   |

 

See Notes to UnauditedFinancial Statements

 

6

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

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

 
|                                                 |   | **Units** |       | **Contributed  Capital** |          | **Deficit  Accumulated  During the  Development  Stage** |   | **Total**    |   |
|------------------------------------------------------|--------|-----------|------------|--------------------------|---------------|----------------------------------------------------------|--------|--------------|--------|
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Balance, January 3, 2001                             |   | —    |       | $                        | —        |                                                     | $      | —       |   | $ | — |   |
| (Date of Inception)                                  |   |      |       |                     |          |                                                     |   |         |   |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Net loss for the period ended December 31, 2001      |   | —    |       | —                   |          | (30,484                                                  | )      | (30,484      | )      |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Balance as of December 31, 2001                      |   | —    |       | —                   |          | (30,484                                                  | )      | (30,484      | )      |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Units issued                                         |   | 1,220     |       | 610,000                  |          | —                                                   |   | 610,000      |   |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Impact of units issued at a discount                 |   | —    |       | 610,000                  |          | (610,000                                                 | )      | —       |   |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Cost of raising capital                              |   | —    |       | —                   |          | (14,398                                                  | )      | (14,398      | )      |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Net loss for the three months ended March 31, 2002   |   | —    |       | —                   |          | (21,771                                                  | )      | (21,771      | )      |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Balance as of March 31, 2002                         |   | 1,220     |       | 1,220,000                |          | (676,653                                                 | )      | 543,347      |   |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Net loss for the nine months ended December 31, 2002 |   | —    |       | —                   |          | (105,352                                                 | )      | (105,352     | )      |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Balance as of December 31, 2002                      |   | 1,220     |       | 1,220,000                |          | (782,005                                                 | )      | 437,995      |   |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Net loss for the three months ended March 31, 2003   |   | —    |       | —                   |          | (79,055                                                  | )      | (79,055      | )      |
|                                                 |   |      |       |                     |          |                                                     |   |         |   |
| Balance as of March 31, 2003                         |   | **1,220** | ** ** | **$**                    | **1,220,000** | ** **                                               | **$**  | **(861,060** | **)**  | **$** | **358,940** | ** ** |

 

See Notes to UnauditedFinancial Statements

 

7

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

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

 
|                                                                         |   | **Three Months********Ended********March 31,****2003** |        | **Three Months********Ended********March 31,********2002** |   | **From January 3,********2001 (Date of********Inception) to********March 31,********2003** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------------------------|-------------|------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|
| CASH FLOWS FROM OPERATING  ACTIVITIES                                        |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| Net loss                                                                     |   | **$**                                                  | **(79,055** | **)**                                                      | $      | (21,771                                                                                    | )      | $ | (236,662 | ) |
| Adjustments to reconcile net  loss to net cash used  in operating activities |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
|                                                                         |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| Depreciation                                                                 |   | **617**                                                | ** **  | —                                                     |   | 1,015                                                                                      |   |
|                                                                         |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| Increase in current assets                                                   |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| Accounts receivable                                                          |   | **(59,447**                                            | **)**       | —                                                     |   | (59,447                                                                                    | )      |
| Prepaid expense                                                              |   | **(11,098**                                            | **)**       | —                                                     |   | (11,098                                                                                    | )      |
| Increase (decrease) in current  liabilities:                                 |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| Accounts payable                                                             |   | **48,928**                                             | ** **  | 14,646                                                     |   | 111,462                                                                                    |   |
| Accrued payroll, taxes, and  withholdings                                    |   | **5,426**                                              | ** **  | —                                                     |   | 6,834                                                                                      |   |
| Net cash (used in) operating  activities                                     |   | **(94,629**                                            | **)**       | (7,125                                                     | )      | (187,896                                                                                   | )      |
|                                                                         |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                        |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| Purchase of equipment                                                        |   | **(7,274**                                             | **)**       | —                                                     |   | (13,874                                                                                    | )      |
| Purchase of land option                                                      |   | **(5,000**                                             | **)**       | (5,000                                                     | )      | (10,000                                                                                    | )      |
| Construction in process                                                      |   | **(6,320**                                             | **)**       | (9,973                                                     | )      | (57,717                                                                                    | )      |
| Net cash (used in) investing  activities                                     |   | **(18,594**                                            | **)**       | (14,973                                                    | )      | (81,591                                                                                    | )      |
|                                                                         |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                        |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| Cost of raising capital                                                      |   | **(119,263**                                           | **)**       | —                                                     |   | (273,809                                                                                   | )      |
| Proceeds from notes payable                                                  |   | —                                                 | ** **  | —                                                     |   | 137,000                                                                                    |   |
| Repayment of notes payable                                                   |   | **—**                                             | ** **  | (126,000                                                   | )      | (137,000                                                                                   | )      |
| Proceeds from long-term debt                                                 |   | **—**                                             | ** **  | —                                                     |   | 75,000                                                                                     |   |
| Capital contributions                                                        |   | **—**                                             | ** **  | 555,000                                                    |   | 610,000                                                                                    |   |
| Net cash provided by financing  activities                                   |   | **(119,263**                                           | **)**       | 429,000                                                    |   | 411,191                                                                                    |   |
|                                                                         |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                    |   | **(232,486**                                           | **)**       | 406,902                                                    |   | 141,704                                                                                    |   |
|                                                                         |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                               |   | **374,190**                                            | ** **  | 186,809                                                    |   | —                                                                                     |   |
|                                                                         |   |                                                   | ** **  |                                                       |   |                                                                                       |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                     |   | **$**                                                  | **141,704** | ** **                                                 | $      | 593,711                                                                                    |   | $ | 141,704 |   |

 

(continued on next page)

 

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**STATEMENTSOF CASH FLOWS (UNAUDITED)**

 
|                                                    |   | **Three Months********Ended********March 31,****2003** |      | **Three Months********Ended********March 31,********2002** |   | **From January 3,********2001 (Date of********Inception) to********March 31,********2003** |   |
|---------------------------------------------------------|--------|--------------------------------------------------------|-----------|------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|
|                                                    |   |                                                   |      |                                                       |   |                                                                                       |   |
| NON CASH INVESTING AND  FINANCING ACTIVITIES            |   |                                                   |      |                                                       |   |                                                                                       |   |
|                                                    |   |                                                   |      |                                                       |   |                                                                                       |   |
| Property, Plant, and Equipment  costs incurred          |   | **$**                                                  | **2,266** |                                                       | $      | —                                                                                     |   | $ | 13,112 |   |
|                                                    |   |                                                   |      |                                                       |   |                                                                                       |   |
| Cost of raising capital  reclassified to members'equity |   | **$**                                                  | —    |                                                       | $      | —                                                                                     |   | $ | 14,398 |   |
|                                                    |   |                                                   |      |                                                       |   |                                                                                       |   |
| Capital contributions issued  at discount               |   | **$**                                                  | —    |                                                       | $      | —                                                                                     |   | $ | 610,000 |   |

 

See Notes to Unaudited FinancialStatements

 

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**EASTKANSAS ARGI-ENERGY, LLC**

**(ADEVELOPMENT STATE COMPANY)**

**NOTES TOUNAUDITED FINANCIAL STATE****MENTS**

 

**NOTE 1 -**                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

*Nature of Business*

 

East Kansas Agri-Energy, LLC, (a development stage Kansas limitedliability company) to be located in Garnett, Kansas, was organized to poolinvestors to build a 20 million gallon ethanol plant with distribution withinthe United States.  Construction isprojected to begin in the year 2003.  Asof March 31, 2003, the Company is in the development stage with its effortsbeing principally devoted to organizational and financing activities.

 

The Company was formallyorganized as a limited liability company as of October 16, 2001.  Prior to that date the Company operated as ageneral partnership with no formal partnership agreement.

 

*Basis of Accounting*

 

The Company uses the accrualbasis of accounting in accordance with accounting principles generally acceptedin the United States of America.  Thismethod recognizes revenues as earned and expenses as incurred.

 

The unaudited financial statements containedherein have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States of America.

 

In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included in the accompanyingfinancial statements.

 

These financial statementsshould be read in conjunction with the financial statements and notes includedin the Company’s financial statements for the year ended December 31, 2002.

 

*Estimates*

 

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

 

*Earnings Per Unit*

 

Earnings per unit arecalculated based on the period of time units have been issued andoutstanding.  For purposes ofcalculating diluted earnings per capital unit, units subscribed for but notissued are included in the computation of outstanding capital units.  As of March 31, 2003, there were no unitsincludable in diluted earnings per unit related to subscribed units as thecalculation would have been antidilutive.

 

*Recently Issued Accounting Pronouncements*

 

The Financial AccountingStandards Board (FASB) has  issuedStatement No. 149, Amendment of Statement 133 on Derivative Instruments andHedging Activities*.* The Statementamends and clarifies accounting for derivative instruments, including certainderivative instruments embedded in other contracts, and for hedging activitiesunder Statement 133.  Management doesnot expect the implementation of this pronouncement to have a significanteffect on the Company’s financial statements.

 

(Continued on next page)

 

10

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**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

** **

**NOTE 2 -**                  COMMITMENTS AND CONTINGENCIES

 

The Companyhas entered into an option agreement to purchase approximately 10 acres ofland.  The option was originallypurchased for $5,000 and provides for a purchase price of $9,000 per acre, plusthe cost to replace boundary fencing and relocate an existing structure alongwith water and electric utilities.  Theoption was extended to March 13, 2004 and the Company paid an additional $5,000for the extension.  The purchase priceof the land will be reduced by amounts previously paid for the option andextension.

 

The Companyhas an agreement with its former project coordinator to defer a portion of feesearned until stock sales are authorized. The former project coordinator provides limited service on an ongoingbasis.  The deferred amount included inaccounts payable – related party as of March 31, 2003 was $25,160.

 

On May 14,2002, the Company entered into an option to purchase real property for theplant site with a fair value of approximately $172,500. The option is for thepurchase of approximately 23 acres within the Golden Prairie Industrial Park ofthe City of Garnett, Kansas for $1.  Theoption was extended and expires on May 1, 2003.

 

The Companyentered into an agreement for preliminary engineering for the proposed ethanolplant with Fagan Engineering LLC.  Theagreement obligates the Company for no more than $30,000, of whichapproximately $11,000 had been incurred as of March 31, 2003.

 

During thethree months ended March 31, 2003, the Company terminated its agreement withValue Added Ventures, LLC (VAV).  TheCompany has been notified by VAV requesting payment for services from theinception of the contract through the date of termination totaling$33,380.  The Company and VAV arenegotiating settlement of this contract. The Company has recorded a liability related to this agreement of $5,847as of March 31, 2003.

 

The Board of Directorsapproved a registration statement filed with the Securities and ExchangeCommission for the sale of units in an initial public offering. A minimum of9,000 units and a maximum of 18,000 units (exclusive of units issued prior tothe initial public offering) will be offered for sale in the public offering ata price of $1,000 per unit.  Eachinvestor is required to purchase a minimum of 10 units. The minimum amount ofthe offering is $9,000,000, with a maximum potential amount raised of$18,000,000.  In the event subscriptionsfor the minimum are not received and accepted or events occur that prevent theescrow from being broken (such as non-execution of debt financing agreements),amounts received from subscriptions will be returned to the purchaser withinterest based on interest earned on the escrow account, less applicablefees.  Subscriptions require submissionof 10% of the offering price, with the remaining amount subject to call of theBoard of Directors.  In the event asubscriber does not pay for their units in full, all amounts previouslycollected are forfeited to the Company. As of March 31, 2003 the amount held inescrow totaled $76,900 representing subscriptions of $769,000 for 769 units.  Amounts held in escrow are not included inthe accompanying financial statements as the Company does not have title to theproceeds of the subscriptions until the terms of the escrow agreement have beenmet and the subscriptions are released to the Company.

 

**NOTE 3 -**                     CONCENTRATION OF CREDIT RISK

 

The Company maintains cashbalances at a financial institution in its trade area.  The account is secured by the FederalDeposit Insurance Corporation up to $100,000. At times, the Company’s bank balance may exceed $100,000.

 

During 2003, the Companyentered into an agreement with Garnett State Savings Bank to provide securityfor balances held in escrow related to subscriptions received as part of theCompany’s initial public offering.

 

(Continued on next page)

 

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**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

** **

**NOTE 4 -**                     VALUE ADDED GRANT

 

During the three months ended March 31, 2003, the Company receivednotification of award of a United States Department of Agriculture Value-AddedAgricultural Product Market Development Grant (the Grant) for approximately$450,000.  The Grant can be used to payfor certain organizational, offering and start-up costs related to theformation and capitalization of the Company. For the three months ended March 31, 2003, the Company qualified forreimbursement of $59,447 of costs, of which $24,781 related to cost of raisingcapital and $34,666 was recorded as a reduction of start-up costs.

 

12

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**Item 2****.****                     ****Management’s Discussionand Analysis or Plan of Operation**

 

This reportcontains forward-looking statements that involve future events, our futureperformance and our expected future operations and actions.  In some cases you can identifyforward-looking statements by the use of words such as “may,” “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 risks described inour Registration Statement on Form SB-2, as amended (SEC Registration No.333-96703) and appearing elsewhere in this report.  We are not under any duty to update the forward-lookingstatements contained in this report.  Wecannot guarantee future results, levels of activity, performance orachievements.  We caution you not to putundue reliance on any forward-looking statements, which speak only as of thedate of this report.  You should readthis report and the documents that we reference in this report and have filedas exhibits, completely and with the understanding that our actual futureresults may be materially different from what we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

 

**Overview**

 

We are astart-up company in the development stage. We plan to build a corn-based ethanol plant that will produce ethanol,distillers grains and carbon dioxide. The ethanol plant is expected to process approximately 7.5 millionbushels of corn and sorghum per year into 20 million gallons of denatured fuelgrade ethanol.  We also intend toproduce approximately 64 thousand tons of dried distillers grains with solubles and 63thousand tons of raw carbon dioxide gas.

 

We filed aRegistration Statement on Form SB-2 (SEC Registration No. 333-96703), asamended, with the Securities and Exchange Commission, which became effective onJanuary 24, 2003 (the “Registration Statement”) for an initial public offeringof our units (the “Offering”). Depending on the results of the Offering, we expect that the projectwill cost approximately $35.9 million.  Wehave raised approximately $610,000 in seed capital in the form of cash andpromissory notes, and plan to raise a minimum of $9,000,000 and a maximum of$18,000,000 in the Offering and secure the balance through federal, state andlocal grants and debt financing.  Wewill require a significant amount of debt financing to complete ourproject.  The amount of debt financingthat we need depends on the amount of equity we raise in the Offering and whetherwe receive all of our grant proceeds. We have contacted and have had limited discussions with prospectivelenders, but have no agreement with any lender for the debt financing that weneed.  If we do not secure the debtfinancing that we need, we will not be able to construct our proposed ethanolplant and may have to abandon our business.

 

We expect thatit will take approximately 14 to 16 months from the date we close the Offeringto construct the ethanol plant and commence start-up operations.  We do not intend to hire a sales staff tomarket our products.  We plan to engagethird party distributors to market or purchase our ethanol and distillersgrains.  We have entered intodiscussions with third party distributors to market our ethanol, but have notexecuted any agreement with any distributor for our ethanol or distillersgrains.  We plan to pay commissions orfees to distributors to market our products. We have no plans at this time to sell our carbon dioxide to a thirdparty processor.  We intend to hirestaff only to operate our ethanol plant and manage our business.

 

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We are in the process of acquiring 23 acresof land in the Golden Prairie Industrial Park on the edge ofGarnett, Kansas for theproject.  We have received an option topurchase the real estate from the City of Garnett, Kansas.  That option was set to expire on December 1,2002, but was extended for six months to June 1, 2003.  On May 13, 2003, the Garnett City Commissionextended the option for another year, to June 1, 2004.  The extension to the option was grantedwithout additional costs to us.

 

**Plan ofOperation to Start-up of the Ethanol Plant**

 

We expect to spend the next 24 months infinancing, design-development and construction of the Plant.  During the time precedingcompletion of this Offering, we will identify and interview senior bank lendersto obtain needed debt financing. We intend to begin this process by identifyingregional lenders that are able to fund projects of the size of our Plant andinviting those lenders to inform us of their level of interest in offering usdebt financing.  We will then determinewhich of those lenders have the least restrictive requirements of us and theterms that are most favorable to us.  Weexpect to have the senior bank loan commitment from a major financinginstitution or institutions in place at approximately the closing of thisOffering.

 

We arecurrently in the process of negotiating a design-build contract with Fagen,Inc.  We expect that the construction ofthe Plant and rail spur will take 14 months from the time constructioncommences.  We expect that initialstart-up and operations of the plant will be under the general direction and guidanceof Fagen, Inc. employees and our own personnel, who will have experience inethanol production or will have received on-site training provided by Fagen,Inc.  We further anticipate thatadditional on-site support will be provided by Fagen, Inc. for the first 30days of plant operation.

 

**Sourcesand Uses of Funds**

 

The grossproceeds from this Offering will be $9,000,000 if the minimum amount of equityoffered is sold, and $18,000,000, before deducting expenses, if the maximumnumber of Units offered is sold. We estimate the Offering expenses to beapproximately $350,000, and the net proceeds of the Offering to be $8,650,000if the minimum amount of equity is raised, and $17,650,000 if the maximumnumber of Units offered is sold.

 

Assuming the successful completion of thisOffering and the related debt financing, we expect to have sufficient cash onhand to cover all costs associated with construction of the project, includingbut not limited to, site acquisition, utilities, construction, equipmentacquisition and site development. In addition, we expect to have enough cash tocover our costs through this period, including staffing, office costs, audit,legal, compliance and staff training. We estimate that we will need approximately $35.6 million to completethe project.

 

We must obtaindebt financing in order to complete construction on the ethanol Plant. Theamount and nature of the debt financing that we are seeking is subject to theinterest rates and the credit environment as well as other economic factorsover which we have no control. We have no binding contracts or commitments withany bank, lender or financial institution for our debt financing, but we willnot close on this Offering until we execute binding financing arrangements.

 

The followingschedule is an estimate of our sources of funds.  This schedule is based on numerous assumptions, including, amongother things, that we sell 14,360 units and receive grant proceeds of$450,000.  The amounts set forth beloware estimates only and our actual source of funds could vary significantly dueto a variety of factors, including those described in the RegistrationStatement and this report.

** **
| **Source of Funds**            |   | **If 14,360 Units  Sold** |       | **Percent of  Total** |   |
|--------------------------------|--------|---------------------------|------------|-----------------------|--------|
| Unit Proceeds                  |   | $                         | 14,200,000 |                  | 39.9   | % |
| Seed Capital Proceeds          |   | $                         | 610,000    |                  | 1.7    | % |
| Government and Grant Financing |   | $                         | 450,000    |                  | 1.3    | % |
| Term Debt Financing            |   | $                         | 20,346,000 |                  | 57.1   | % |
|                           |   |                      |       |                  |   |
| **Total Sources of Funds**     |   | $                         | 35,606,000 |                  | 100.0  | % |

 

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We intend touse the net proceeds of the Offering to build an ethanol plant and to startoperating the ethanol Plant as a going concern. We must supplement the proceedsof this Offering with debt financing to meet our stated goals. We estimatetotal capital expenditures for the construction of the Plant, including realestate costs, will be approximately $33 million. The following table describesour proposed use of proceeds based on a maximum offering amount of $18,000,000,and a minimum offering amount of $9,000,000. The following figures are intendedto be estimates only, and the actual use of funds may vary significantly fromthe descriptions given below.

 
| **Use of Funds**                                                 |   | **Expenses** |       |   |       | **Percent of Total** |   |   |       |
|------------------------------------------------------------------|--------|--------------|------------|--------|------------|----------------------|--------|--------|------------|
|                                                             |   |         | ** ** |   |       |                 |   |   | ** ** |
| Plant Construction and  Equipment                                |   |         |       |   |       |                 |   |   |       |
| Grain receiving, storage  and milling equipment                  |   | $            | 1,655,500  |   |       |                 | 4.65   | %      |       |   |
| Conversion and  liquefication system                             |   | $            | 1,204,000  |   |       |                 | 3.38   | %      |       |   |
| Fermentation System                                              |   | $            | 3,612,000  |   |       |                 | 10.14  | %      |       |   |
| Distillation and  molecular sieve                                |   | $            | 2,709,000  |   |       |                 | 7.61   | %      |       |   |
| Liquid/Solid separation  system                                  |   | $            | 1,354,500  |   |       |                 | 3.80   | %      |       |   |
| Evaporation system                                               |   | $            | 2,408,000  |   |       |                 | 6.76   | %      |       |   |
| Product storage area                                             |   | $            | 2,107,000  |   |       |                 | 5.92   | %      |       |   |
| Utilities: costs to  install gas, electric, water infrastructure |   | $            | 1,200,000  |   |       |                 | 3.37   | %      |       |   |
| General plant  infrastructure, including roads                   |   | $            | 8,650,000  |   |       |                 | 24.30  | %      |       |   |
| Engineering and  architectural fees                              |   | $            | 2,500,000  |   |       |                 | 7.02   | %      |       |   |
| Total Plant Construction and Equipment                           |   |         |       | $      | 27,400,000 |                 |   |   | 76.95      | % |
| Non-Plant Construction                                           |   |         |       | $      | 200,000    |                 |   |   | 0.56       | % |
| Organizational Costs                                             |   |         |       | $      | 865,000    |                 |   |   | 2.43       | % |
| Start Up Costs                                                   |   |         |       | $      | 1,960,000  |                 |   |   | 5.51       | % |
| Fire Protection / Water Supply                                   |   |         |       | $      | 420,000    |                 |   |   | 1.18       | % |
| Rolling Stock                                                    |   |         |       | $      | 190,000    |                 |   |   | 0.53       | % |
| Site Costs                                                       |   |         |       | $      | 851,000    |                 |   |   | 2.39       | % |
| Railroad                                                         |   |         |       | $      | 1,430,000  |                 |   |   | 4.02       | % |
| Financing Costs                                                  |   |         |       | $      | 1,290,000  |                 |   |   | 3.62       | % |
| Thermal Oxidizer                                                 |   |         |       | $      | 1,000,000  |                 |   |   | 2.81       | % |
|                                                             |   |         |       |   |       |                 |   |   |       |
| **Total Uses of Funds**                                          |   |         |       | $      | 35,606,000 |                 |   |   | 100.00     | % |

 

Because wemust secure a significant amount of debt, we will first pay financing costs ofapproximately $1,290,000. This is an estimate and our actual debt financingexpenses could be substantially higher. We will have significant operating costs prior to the receipt of revenuefrom the sale of ethanol and distillers grains.  Among these costs is the cost of insurance.  The Board of Directors is currentlyresearching various insurance structures for directors and officers’ insurance,general liability insurance and property insurance. We are reservingapproximately $865,000 to cover costs associated with securing appropriateinsurance coverage and other organizational expenses. This reserve amount isbased on an estimate only and our actual insurance costs may exceed the reserveamount.  We are also reserving funds forstart up costs, such as $300,000 to pay general and administrative costs formanagerial fees, out-of-pocket reimbursements and general office expenses.  Our actual general and administrativeexpenses may exceed this amount. We will also have preproduction costs forinventory and other expenses.  It is possible that lenders mayrequire a performance bond for the construction of the Plant.  Payment for such a bond

 

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will be our responsibility.  Weanticipate that such a bond will cost approximately $300,000.  The remainder of the fundswill be used to pay construction costs, such as digging, laying foundations,purchasing and installing equipment, and constructing buildings.

 

**Administration**

 

We currently have an office staff comprised of two full-time and twopart-time employees.  One of thefull-time employees, Jill Zimmerman, is also a director of the company.  The staff is dedicated to coordinating ourcampaign to complete our equity drive and to complying with state and federalregulations in the process.  We are alsodependent on our board of directors to maintain our books and records.  These individuals are ultimately responsiblefor complying with the rules and regulations promulgated under the Securitiesand Exchange Act of 1934 concerning the maintenance of accurate books andrecords, and the timely submission of periodic reports and other requirementswith the Securities and Exchange Commission.

 

**OperatingExpenses**

 

When the ethanol plant nears completion, we expect to incur variousoperating expenses, such as supplies, utilities and salaries for administrationand production personnel.  Along withoperating expenses, we anticipate that we will have significant expensesrelating to financing and interest.  Wehave allocated funds in our capital structure for these expenses, but cannotassure you that the funds allocated will be sufficient to cover theseexpenses.  We may need additionalfunding to cover these costs if sufficient funds are not available or if costsare higher than expected.

 

**Employees**

 

Uponcompletion of the ethanol plant, we intend to hire approximately 32 additionalemployees. Approximately ten of our employees will be involved primarily inmanagement and administration and the remainder will be involved primarily inPlant operations.

 

The followingtable represents some of the anticipated positions within the Plant and theminimum number of individuals we intend to employ for each position:

 

| **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**         | ** ** |

 

**Liquidityand Capital Resources**

 

Asof March 31, 2003, we had cash and cash equivalents of $141,704 and totalassets of $565,348.  Our total assetsinclude $259,411 of prepaid offering costs relating to the Offering.  At the time we issue units in the Offering,these costs will be netted against the proceeds received, or if we do notcomplete the sale of any units in the Offering, they will be expensed.  To date, we have raised a total of $610,000in seed capital, which we have used to fund our organization and operation todate.  As of March 31, 2003, we hadcurrent liabilities of $206,408, which consists primarily of our accountspayable.  Since our inception throughMarch 31, 2003, we have an accumulated

 

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deficitof $861,060.  Total members’ equity asof March 31, 2003 was $358,940.  Sinceour inception, we have generated no revenue from operations.

 

We are seeking to raise a minimum of $9,000,000 and a maximum of$18,000,000 in the Offering. Depending on the results of the Offering, webelieve that the project will cost a total of approximately $35,600,000.  We plan to finance the project with seedcapital, proceeds from the Offering, government grants and debt financing.  The amount of debt financing that we needdepends on the results of the Offering and whether we receive all of ouranticipated grant proceeds.  Weanticipate that we will need approximately $26,600,000 in debt financing if weraise the minimum amount offered in the Offering, and approximately $17,600,000if we raise the maximum amount offered. The amount of debt financing we need may decrease if we receiveadditional grants.  We have nocommitments for the debt financing that we need or for any additionalgrants.  Completion of the proposedethanol plant depends on our ability to close on our debt financing and satisfyall conditions for breaking escrow and closing on the Offering.

 

We expect that our debt financing will be in the form of a constructionloan that will convert to a permanent loan when we begin operations.  We also expect that the loan will be securedby all of our real property and substantially all of our other assets,including receivables and inventories. In addition to repaying the principal, we plan to pay interest on theloan at market rate for loans to start-up ethanol projects, plus annual feesfor maintenance and observation of the loan by the lender.  We intend to capitalize all of our interestuntil we commence start-up operation, which means that we will not make anypayment on the loan until we construct the ethanol plant and begin producingethanol.  If the project suffers delays,we may not be able to timely repay the loan. If interest rates increase, we will have higher interest payments, whichcould adversely affect our business. We currently have no commitment for anyfinancing.

 

**Item 3****.****           Controlsand Procedures**

 

(a)                                  Evaluationof Disclosure Controls and Procedures.

 

Our President(the principal executive officer), William R. Pracht, and ourTreasurer (the principal financial officer), Jill A. Zimmerman, have reviewedour disclosure controls and procedures within 90 days prior to the filing of thisreport.  Based upon this review, theseofficers believe that our disclosure controls and procedures are effective inensuring that material information related to us is made known to them byothers within the Company.

 

(b)                                 Changesin Internal Controls.

 

There were nosignificant changes in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.

 

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

 

**Item 1.****           Legal Proceedings**

 

None.

 

**Item 2.****           Changesin Securities**

 

The Securitiesand Exchange Commission declared our Registration Statement on Form SB-2 (SECRegistration No. 333-96703) effective on January 24, 2003.  We commenced our initial public offering ofour units shortly thereafter.  We havenot closed the Offering and are continuing to offer the units. Our officers anddirectors are offering and selling the units on a best efforts basis withoutthe assistance of an underwriter.  We donot pay our officers or directors any compensation for services related to theoffer or sale of the units. One of our directors, Jill Zimmerman, is employedon a full-time basis as our equity manager. Her compensation is a fixed annualsalary.

 

We registereda total of 18,000 units with an aggregate gross offering price of $18,000,000,or $1,000.00 per unit.  We intend toclose the Offering on January 24, 2004. As of May 1, 2003, we have received subscriptions for approximately1,657 units, or an aggregate of $1,657,000 of subscription payments in the formof cash and notes.

 

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We are depositing allsubscription payments from the Offering in an escrow account.  We have not yet met the conditions tobreaking escrow and therefore have not completed the sale of any of the unitssubscribed.  We will not break escrowand complete the sale of any of the units subscribed for until we satisfy thefollowing conditions:

•                                 thesubscription proceeds in the escrow account equals or exceeds $9.0 million(exclusive of interest);

•                                 weobtain a written debt financing commitment sufficient to carry out our businessplan;

•                                 weelect, in writing, to terminate the escrow agreement; and

•                                 releaseis approved by the Kansas Securities Commission.

 

From January 24, 2003  (theeffective date of the registration statement) to March 31, 2003, we incurred noexpenses for our account in connection with the issuance and distribution ofthe units registered for underwriting discounts and commissions, finders’ fees,expenses paid to or for underwriters, or other expenses.  From January 24, 2003 (the effective date ofthe registration statement) to March 31, 2003, we did not receive or use anynet offering proceeds.

 

**Item 3.****           Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

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

 

None.

 

**Item 6****.****           Exhibitsand Reports on Form 8-K**

 

(a)                                  Thefollowing exhibits are included herein:

 

10.1                           SiteOption Extension from the City of Garnett, Kansas

99.1                           CertificatePursuant to 18 U.S.C. § 1350

 

(b)                                 Reportson Form 8-K.

 

None.

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |         | EAST KANSAS AGRI-ENERGY,  L.L.C.                        |
|--------|--------------|---------------------------------------------------------|
|   |         |                                                    |
| Date:  | May 14, 2003 |                                                    | /s/ William  R. Pracht |
|   |         | William R. Pracht                                       |
|   |         | President  (Principle Executive Officer)                |
|   |         |                                                    |
| Date:  | May 14, 2003 |                                                    | /s/ Jill A.  Zimmerman |
|   |         | Jill A.  Zimmerman                                      |
|   |         | Treasurer  (Principal Financial and Accounting Officer) |

 

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**CERTIFICATIONS**

 

I, William R. Pracht, certify that:

 

1.                                       I have reviewed this quarterly report on Form10-QSB of East KansasAgri-Energy, L.L.C.;

 

2.                                     Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                     Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presentedin this quarterly report;

 

4.                                     The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)                                   designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                   presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5                                        The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)                                   all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                                  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                     The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | May  14, 2003 |      | /s/ William R. Pracht |
|--------|---------------|-----------|-----------------------|
|   |          | President |

 

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I, Jill A. Zimmerman, certify that:

 

1.                                        Ihave reviewed this quarterly report on Form 10-QSB of East Kansas Agri-Energy, L.L.C.;

 

2.                                     Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                     Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presentedin this quarterly report;

 

4.                                     The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)                                   designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                   presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                     The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)                                   all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                                  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                     The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  | May  14, 2003 |      | /s/ Jill A. Zimmerman |
|--------|---------------|-----------|-----------------------|
|   |          | Treasurer |

 

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