**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 

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

 

**For thefiscal year ended December 31, 2004**

 

**OR**

 

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

 

**Commission file number 333-96703**

** **

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

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

 

| **Kansas**                                                           | ** ** | **48-1251578**                            |
|----------------------------------------------------------------------|------------|-------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)**  | ** ** | **(I.R.S. Employer Identification  No.)** |
| ** **                                                           | ** ** | ** **                                |
| **P.O. Box  225,  210 1/2 East 4th Ave. Garnett, Kansas 66032** |
| (Address of principal executive offices)                             |
|                                                                 |       |                                      |
| **(785) 448-2888**                                                   |
| (Issuer’s telephone number)                                     |

 

Securities registered under Section 12(b) of the Exchange Act:  **None**

 

Securities registered under Section 12(g) of the Exchange Act:  **None**

 

Check whether the issuer:  (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                 ý  Yes                   o  No

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. ý

 

State issuer’s revenues for its most recent fiscal year.  None

 

As of March 23, 2005, the aggregate market value of the membershipunits held by non-affiliates (computed by reference to the most recent offeringprice of such membership units) was $20,957,000.

 

As of March 23, 2005, there were 20,957 membership units outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE    None.

 

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

 

 

----

 

**INDEX**

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

 

2

----

 

**PART I.**

 

**ITEM 1.  DESCRIPTIONOF BUSINESS.**

 

East KansasAgri-Energy, L.L.C. was formed as a Kansas limited liability company on October16, 2001.  References to “we”, “us”, “our”and the “Company” refer to East Kansas Agri-Energy, L.L.C.  We are a start-up company in the developmentstage.  We are building a 35 milliongallon per year ethanol plant near Garnett, Kansas.  Our principal business office is currentlylocated at 2101⁄2 East 4th Avenue, Garnett, Kansas 66032.  We are managed by an 11 member Board ofDirectors.

 

**Principal Products and Markets**

 

We have begun construction of a corn and milo-basedethanol plant that will produce ethanol, distillers grains and carbondioxide.  We originally expected to builda 20 million gallon per year ethanol plant. We subsequently revised our business plan to expand the plant capacityto produce 25 million gallons of denatured fuel-grade ethanol.  After further review, we determined thatincreasing our production capacity to 35 million gallons of denaturedfuel-grade ethanol would likely result in more efficient operations for ourethanol plant.

 

The principal products we expect toproduce at the ethanol plant are ethanol and distiller grains.  Ethanol is ethyl alcohol, a fuel componentmade primarily from corn and various other grains, and can be used as: (i) anoctane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducingozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-basedgasoline substitute.  Approximately 95%of all ethanol is used in its primary form for blending with unleaded gasolineand other fuel products.  Theimplementation of the Federal Clean Air act has made ethanol fuels an importantdomestic renewable fuel additive.  Usedas a fuel oxygenate, ethanol provides a means to control carbon monoxideemissions in large metropolitan areas. The principal purchasers of ethanol are generally the wholesale gasolinemarketer or blender.  We expect theprincipal markets for our ethanol to be petroleum terminals in Kansas and theupper Midwest area.

 

A principal by-product of the ethanolproduction process is distiller grains, a high protein, high-energy animal feedsupplement primarily marketed to the dairy and beef industry.  Distiller grains contain by-pass protein thatis superior to other protein supplements such as cottonseed meal and soybeanmeal.  By-pass proteins are moredigestible to the animal, thus generating greater lactation in milk cows andgreater weight gain in beef cattle.  Drymill ethanol processing creates three forms of distiller grains: Distillers WetGrains (“DWS”), Distillers Modified Wet Grains (“DMWS”) and Distillers DriedGrains with Solubles (“DDGS”).  DWS isprocessed corn mash that contains approximately 70% moisture.  DWS has a shelf life of approximately threedays and can be sold only to farms within the immediate vicinity of an ethanolplant.  DMWS is DWS that has been driedto approximately 50% moisture.  DMWS havea slightly longer shelf life of approximately ten days and are often sold tonearby markets.  DDGS is DWS that hasbeen dried to 10% to 12% moisture.  DDGShave an almost indefinite shelf life and may be sold and shipped to any marketregardless of its vicinity to an ethanol plant. We intend to market all distillers dried and wet grains produced at ourplant.

 

We also plan to market and distribute thecarbon dioxide that will be produced at the plant as a by-product of ourethanol production.  We have entered into a letter of intent with BOC Group, Inc. of Murray Hill, New Jersey thatexpires on March 31, 2005. We expect that this letter of intent will beextended by agreement of the parties.  The terms of the letter of intent provide thatwe will make available to BOC Group, Inc. for purchase all of the carbondioxide produced at the plant.  Theletter of intent contemplates that BOC Group, Inc. will purchase a substantialquantity of our raw carbon dioxide gas annually and will construct a carbondioxide liquefaction plant.  We expect tolease a parcel of our land adjacent to our ethanol plant to BOC, Group, Inc.for construction of the liquefaction plant. We have not yet entered into a legally binding contract with BOC Group,Inc. and there is no assurance that we will do so or that if we do that it willbe on terms as favorable as those discussed. If we do execute a final contract with BOC Group, Inc., we expect thatit will take approximately one year for the liquefaction plant to beconstructed and for BOC, Group, Inc. to begin purchasing our carbon dioxide.

 

*Regional Ethanol Markets*

 

Typically a regional market is one that isoutside of the local market, yet within the neighboring states.  This market will likely be serviced by rail,and is within a 450-mile radius of the ethanol plant.  The regional markets for our

 

3

----

 

plant inGarnett, Kansas would include Omaha, Kansas City, Denver, Fort Collins,Colorado Springs, and perhaps St. Louis. Generally, the regional market is good business to develop.  The freight is reasonable, the competition,while aggressive, is not too severe, and the turn-around time on rail cars isfavorable.  In addition, it is ofteneasier to obtain letters of intent to purchase product from regional buyersthan from national buyers.  Theseletters, while not binding, tend to raise the comfort level of the financiallending institutions.  In a regional market, letters of intent to purchaseare taken quite seriously by the buyer. Regional pricing tends to follow national pricing less the freightdifference.  As with national markets,the use of a group-marketing program or a broker is advantageous, especially inthe first one to three years of operation.

 

We purchased approximately 19 acres of realestate in Anderson County, Kansas to allow the placement of a railroad spurfrom the site of the ethanol plant to the existing Union Pacific Railroad trackin Garnett, Kansas so that we may reach regional and national markets with ourproducts.  We have not yet received thenecessary approval from Union Pacific Railroad of our track plans and crossings.  There is no assurance that the necessaryapproval will be granted.  We also need toobtain an easement from Kansas Department of Wildlife and Parks for our railspur to cross the Prairie Spirit bike trail. We are negotiating with Kansas Department of Wildlife and Parks toobtain that easement.  There is noassurance that we will be successful in obtaining the easement.  If we do not receive the necessary approvaland the easement we will not be able to use rail transportation to reachregional and national markets.  Even ifwe are successful, it is unlikely our rail service will be operational when ourplant begins production.  We will bereliant upon trucks to transport grain and ethanol until such time that ourrail service becomes operational.  Thismay negatively affect our ability to make a profit as trucking is typicallymore expensive than rail service.  Occasionallythere are opportunities to obtain backhaul rates from local truckingcompanies.  These are rates that are reduced since the truck is loadedboth ways.  Normally the trucks drive tothe refined fuels terminals empty and load gasoline product for delivery. A backhaul is the opportunity to load the truck with ethanol to drive to theterminal.

 

*National Ethanol Market*

 

After implementing a methyl tertiary butylether (“MTBE”) ban to curtail further water contamination, the states ofCalifornia, New York and Connecticut now account for more than 1.5 billiongallons of annual ethanol demand.  MTBEis a commonly used oxygenate used in fuels for compliance with Federal CleanAir Act mandates, and is a major competitor of ethanol.  Ethanol is the most readily availablesubstitute for MTBE in this market. Twenty other state legislatures have phased out MTBE.  We expect ethanol to replace MTBE as theoxygenate in the federal reformulated gasoline program, however, other MTBEreplacements may capture a portion of all of these potential markets.

 

In June 2001, California requested a waiverfrom the reformulated gasoline (“RFG”) oxygenate requirement under the CleanAir Act.  This means that rather thanusing ethanol as an alternative oxygenate to MTBE, California is seeking to bereleased from federal requirements to use any oxygenates at all.  The Environmental Protection Agency (“EPA”)initially denied the request.  However,the U.S. Court of Appeals for the Ninth Circuit’s July 2003 decision overturnedthat denial and remanded the decision back to the EPA for further review.  Since the Court’s decision, California hasreissued its appeal to the EPA.  The EPAhas yet to deliver a decision on the California waiver request.

 

The states of New York and Georgia have alsofiled requests for waiver of the oxygenate requirement.  New York’s request is still pending.  The EPA denied Georgia’s request for awaiver.  Georgia has appealed thedecision in both the district court and the 11th Circuit Court ofAppeals.  In November 2004, the districtcourt affirmed the EPA’s decision to impose a RFG requirement in Atlanta butstayed the program until the 11th Circuit Court could hear the state’sappeal.  The cases have been consolidatedand a ruling is anticipated by the end of 2005. Until a ruling is issued, the RFG program in Atlanta will bedelayed.  Atlanta’s ethanol market iscurrent estimated to be approximately 250 million gallons per year.

 

**Distribution Methods**

 

*Distillers Grains*

 

On November 12, 2004, we entered into aDistillers Grains Marketing Agreement with United Bio Energy Ingredients, LLCpursuant to which United Bio Energy Ingredients, LLC will purchase all driedand wet distillers grains produced at the plant for a term of 5 years at aprice of 98% of the price United Bio Energy Ingredients, LLC

 

4

----

 

charges itsbuyers of dried distillers grains, and 95% of the price United Bio EnergyIngredients, LLC charges its buyers of wet distillers grains.  United Bio Energy Ingredients, LLC has theduty to use its best efforts to obtain the highest prices for our distillersgrains that are available under prevailing market conditions.  We are responsible for supplying all laborand equipment to load or unload trucks or rail cars without charge to UnitedBio Energy Ingredients, LLC.  We are alsorequired to provide storage for at least 10 days production of wet and drydistillers grains.  In addition, ourdistillers grains must meet quality requirements so that they will meet currentindustry standards for primary animal feed ingredients.  If we fail to supply distillers grains thatcomply with industry standards, United Bio Energy Ingredients, LLC may rejectthem.  United BioEnergyIngredients, LLC has also hired a distillers grains merchandiser who will belocated at our plant and is expected to sell a portion of our distillers grainsto local markets.

 

*Ethanol*

 

On November 12, 2004, we entered into an EthanolAgreement with United Bio Energy Fuels, LLC for the purposes of marketing anddistributing our ethanol.  The terms ofthe agreement provide that United Bio Energy Fuels, LLC will market allfuel-grade ethanol produced at our plant. United BioEnergy Fuels, LLC will pay us a price equal to the priceUnited BioEnergy Fuels, LLC charges its buyers for ethanol less reasonableexpenses incurred in connection with the sale and delivery of the ethanol.  In exchange, we agreed to pay United BioEnergy Fuels, LLC $.01 for each gallon of ethanol produced at our plant duringthe term of the agreement.  The term ofthe agreement is for 5 years.  United BioEnergy Fuels, LLC also agreed to use its best efforts to obtain the highestprice for ethanol available under prevailing market conditions.

 

*Carbon Dioxide*

 

We also plan to market and distribute the carbondioxide that will be produced at the plant as a by-product of our ethanolproduction.  On January 28, 2004, weentered into a letter of intent with BOC Group, Inc. of Murray Hill, NewJersey.  The terms of the letter ofintent provide that we will make available to BOC Group, Inc. for purchase allof the carbon dioxide produced at the plant. The letter of intent contemplates that BOC Group, Inc. will purchase asubstantial quantity of our raw carbon dioxide gas annually and will constructa carbon dioxide liquefaction plant.  Weexpect to lease a parcel of our land adjacent to our ethanol plant to BOCGroup, Inc. for construction of the liquefaction plant.  The letter of intent was scheduled to expireby its terms on March 31, 2004, but was extended to March 31, 2005.  We expect that the letter of intent will beextended by agreement of the parties.  Weare currently negotiating a legally binding contract with BOC Group, Inc.  However, there is no guarantee that a finalcontract will be executed or that it will be executed upon terms as favorableas those currently anticipated.  If afinal contract is executed, it will take approximately one year to constructthe liquefaction plant.  Therefore, it isunlikely that we could begin selling the carbon dioxide until at least Spring2006.

 

**Competition**

 

We will be in direct competition with numerous other ethanolproducers, many of whom have greater resources than we do.  We also expect that additional ethanol producerswill enter the market if the demand for ethanol continues to increase.  Our plant will compete with other ethanolproducers on the basis of price, and to a lesser extent, delivery service.  We believe that we can compete favorably withother ethanol producers due to our proximity to ample grain supplies atfavorable prices.

 

Currently, Kansas has six operating ethanol plants.  A plant near Russell, Kansas, located approximately249 miles from our plant site, produces approximately 40 million gallons peryear while a plant near Campus, Kansas, located approximately 350 miles fromour plant site, produces approximately 30 million gallons per year.  Another plant near Colwich, Kansas, locatedapproximately 176 miles from our plant site, produces approximately 25 milliongallons per year.  Plants near GardenCity, Kansas, Atchison, Kansas and Leoti, Kansas, each produce approximately12, 9 and 1.5 million gallons, respectively, and range from approximately 97miles to 413 miles from our plant site. There is planned for construction a 50 million gallons per year ethanolplant near Pratt, Kansas, located approximately 239 miles from our plant site,and a 40 million gallons per year plant near Phillipsburg, Kansas, located approximately335 miles from our plant site.  Missourihas three operating ethanol plants including a 40 million gallons per yearplant near Macon, Missouri, located approximately 225 miles from our plantsite, a 20 million gallons per year plant near Craig, Missouri, locatedapproximately 170 miles away, and a 45 million gallons per year plant nearMalta Bend,

 

5

----

 

Missouri, located approximately 156 miles from our plant site.  There are also numerous other producer andprivately owned ethanol plants planned and operating throughout the Midwest andelsewhere in the United States.

 

According to the Renewable Fuels Association, during the last 20years, ethanol production capacity in the United States has grown from almostnothing to an estimated 3.7 billion gallons per year.  Plans to construct new plants or to expandexisting plants have been announced which would increase capacity byapproximately 689 million gallons per year. This increase in capacity may continue in the future.  We cannot determine the effect of this typeof an increase upon the demand or price of ethanol.

 

The ethanol industry has grown to over 90 production facilities inthe United States.  The largest ethanolproducers include Abengoa Bioenergy Corp., Archer Daniels Midland, AventineRenewable Energy, Inc. Cargill, Inc., New Energy Corp., and VeraSun EnergyCorporation, all of which are capable of producing more ethanol than we expectto produce.  In addition, there areseveral regional entities recently formed, or in the process of formation, ofsimilar size and with similar resources to ours.

 

The following tableidentifies most of the producers in the United States along with theirproduction capacities according to the Renewable Fuels Association, U.S. FuelEthanol Production Capacity February 2005 Report.

 

**U.S. FUELETHANOL PRODUCTION CAPACITY**

milliongallons per year (mmgy)

** **

| **COMPANY**                          | ** ** | **LOCATION**         | ** ** | **FEEDSTOCK** | ** ** | **Current  Capacity****(mmgy)** | ** ** | **Under  Construction/  Expansions****(mmgy)** | ** ** |
|--------------------------------------|------------|----------------------|------------|---------------|------------|---------------------------------|------------|------------------------------------------------|------------|
| Abengoa Bioenergy Corp.              |       | York, NE             |       | Corn/milo     |       | 55                              |       |                                           |       |
|                                 |       | Colwich, KS          |       |          |       | 25                              |       |                                           |       |
|                                 |       | Portales, NM         |       |          |       | 15                              |       | 15                                             |       |
| ACE Ethanol, LLC                     |       | Stanley, WI          |       | Corn          |       | 30                              |       |                                           |       |
| Adkins Energy, LLC*                  |       | Lena, IL             |       | Corn          |       | 40                              |       |                                           |       |
| AGP*                                 |       | Hastings, NE         |       | Corn          |       | 52                              |       |                                           |       |
| Agra Resources Coop. d.b.a EXOL*     |       | Albert Lea,  MN      |       | Corn          |       | 40                              |       |                                           |       |
| Agri-Energy, LLC*                    |       | Luverne, MN          |       | Corn          |       | 21                              |       |                                           |       |
| Alchem Ltd. LLLP                     |       | Grafton, ND          |       | Corn          |       | 10.5                            |       |                                           |       |
| Al-Corn Clean Fuel*                  |       | Claremont,  MN       |       | Corn          |       | 30                              |       |                                           |       |
| Amaizing Energy, LLC*^               |       | Denison, IA          |       | Corn          |       |                            |       | 40                                             |       |
| Archer Daniels Midland               |       | Decatur, IL          |       | Corn          |       | 1070                            |       |                                           |       |
|                                 |       | Cedar  Rapids, IA    |       | Corn          |       |                            |       |                                           |       |
|                                 |       | Clinton, IA          |       | Corn          |       |                            |       |                                           |       |
|                                 |       | Columbus, NE         |       | Corn          |       |                            |       |                                           |       |
|                                 |       | Marshall, MN         |       | Corn          |       |                            |       |                                           |       |
|                                 |       | Peoria, IL           |       | Corn          |       |                            |       |                                           |       |
|                                 |       | Wallhalla,  ND       |       | Corn/barley   |       |                            |       |                                           |       |
| Aventine Renewable Energy, Inc.      |       | Pekin, IL            |       | Corn          |       | 100                             |       |                                           |       |
|                                 |       | Aurora, NE           |       | Corn          |       | 40                              |       |                                           |       |
| Badger State Ethanol, LLC*           |       | Monroe, WI           |       | Corn          |       | 48                              |       |                                           |       |
| Big River Resources, LLC *           |       | West  Burlington, IA |       | Corn          |       |                            |       | 40                                             |       |
| Broin Enterprises, Inc.              |       | Scotland, SD         |       | Corn          |       | 9                               |       |                                           |       |
| Bushmills Ethanol*^                  |       | Atwater, MN          |       | Corn          |       | 40                              |       |                                           |       |
| Cargill, Inc.                        |       | Blair, NE            |       | Corn          |       | 85                              |       |                                           |       |
|                                 |       | Eddyville,  IA       |       | Corn          |       | 35                              |       |                                           |       |
| Central Iowa Renewable Energy, LLC*^ |       | Goldfield,  IA       |       | Corn          |       |                            |       | 50                                             |       |
| Central MN Ethanol Coop*             |       | Little  Falls, MN    |       | Corn          |       | 20.5                            |       |                                           |       |

 

6

----

 

| Central Wisconsin Alcohol            |   | Plover, WI          |   | Seed corn          |   | 4      |   |   |   |
|--------------------------------------|--------|---------------------|--------|--------------------|--------|--------|--------|--------|--------|
| Chief Ethanol                        |   | Hastings, NE        |   | Corn               |   | 62     |   |   |   |
| Chippewa Valley Ethanol Co.*         |   | Benson, MN          |   | Corn               |   | 45     |   |   |   |
| Commonwealth Agri-Energy, LLC*       |   | Hopkinsville,  KY   |   | Corn               |   | 23     |   |   |   |
| Corn Plus, LLP*                      |   | Winnebago,  MN      |   | Corn               |   | 44     |   |   |   |
| Dakota Ethanol, LLC*                 |   | Wentworth,  SD      |   | Corn               |   | 50     |   |   |   |
| DENCO, LLC*                          |   | Morris, MN          |   | Corn               |   | 21.5   |   |   |   |
| East Kansas Agri-Energy, LLC*^       |   | Garnett, KS         |   | Corn               |   |   |   | 35     |   |
| ESE Alcohol Inc.                     |   | Leoti, KS           |   | Seed corn          |   | 1.5    |   |   |   |
| Ethanol2000, LLP*                    |   | Bingham  Lake, MN   |   | Corn               |   | 30     |   |   |   |
| Glacial Lakes Energy, LLC*           |   | Watertown,  SD      |   | Corn               |   | 50     |   |   |   |
| Golden Cheese Company of California* |   | Corona, CA          |   | Cheese whey        |   | 5      |   |   |   |
| Golden Grain Energy L.L.C.*^         |   | Mason City,  IA     |   | Corn               |   | 40     |   |   |   |
| Golden Triangle Energy, LLC*         |   | Craig, MO           |   | Corn               |   | 20     |   |   |   |
| Grain Processing Corp.               |   | Muscatine,  IA      |   | Corn               |   | 20     |   |   |   |
| Granite Falls Energy, LLC^           |   | Granite  Falls, MN  |   | Corn               |   |   |   | 45     |   |
| Great Plains Ethanol, LLC*           |   | Chancellor,  SD     |   | Corn               |   | 50     |   |   |   |
| Hawkeye Renewables, LLC              |   | Iowa Falls,  IA     |   | Corn               |   | 45     |   |   |   |
| Heartland Corn Products*             |   | Winthrop, MN        |   | Corn               |   | 36     |   |   |   |
| Heartland Grain Fuels, LP*           |   | Aberdeen, SD        |   | Corn               |   | 8      |   |   |   |
|                                 |   | Huron, SD           |   | Corn               |   | 14     |   |   |   |
| Husker Ag, LLC*                      |   | Plainview,  NE      |   | Corn               |   | 24     |   |   |   |
| Iowa Ethanol, LLC*                   |   | Hanlontown,  IA     |   | Corn               |   | 55     |   |   |   |
| Illinois River Energy, LLC^          |   | Rochelle, IL        |   | Corn               |   |   |   | 50     |   |
| James Valley Ethanol, LLC            |   | Groton, SD          |   | Corn               |   | 50     |   |   |   |
| KAAPA Ethanol, LLC*                  |   | Minden, NE          |   | Corn               |   | 40     |   |   |   |
| Land O’ Lakes*                  |   | Melrose, MN         |   | Cheese whey        |   | 2.6    |   |   |   |
| Lincolnland Agri-Energy, LLC*        |   | Palestine,  IL      |   | Corn               |   | 40     |   |   |   |
| Lincolnway Energy, LLC*^             |   | Nevada, IA          |   | Corn               |   |   |   | 50     |   |
| Liquid Resources of Ohio^            |   | Medina, OH          |   | Waste beverage     |   |   |   | 4      |   |
| Little Sioux Corn Processors, LP*    |   | Marcus, IA          |   | Corn               |   | 49     |   |   |   |
| Merrick/Coors                        |   | Golden, CO          |   | Waste beer         |   | 1.5    |   |   |   |
| Michigan Ethanol, LLC                |   | Caro, MI            |   | Corn               |   | 50     |   |   |   |
| MGP Ingredients, Inc.                |   | Pekin, IL           |   | Corn/wheat starch  |   | 78     |   |   |   |
|                                 |   | Atchison, KS        |   |               |   |   |   |   |   |
| Mid-Missouri Energy, Inc.*           |   | Malta Bend,  MO     |   | Corn               |   | 45     |   |   |   |
| Midwest Grain Processors*            |   | Lakota, IA          |   | Corn               |   | 50     |   | 45     |   |
| Midwest Renewable Energy, LLC        |   | Sutherland,  NE     |   | Corn               |   | 15     |   |   |   |
| Miller Brewing Co.                   |   | Olympia, WA         |   | Brewery waste      |   | 0.7    |   |   |   |
| Minnesota Energy*                    |   | Buffalo  Lake, MN   |   | Corn               |   | 18     |   |   |   |
| New Energy Corp.                     |   | South Bend,  IN     |   | Corn               |   | 102    |   |   |   |
| Northeast Missouri Grain, LLC*       |   | Macon, MO           |   | Corn               |   | 40     |   |   |   |
| Northern Lights Ethanol, LLC*        |   | Big Stone  City, SD |   | Corn               |   | 50     |   |   |   |
| Northstar Ethanol, LLC^              |   | Lake  Crystal, MN   |   | Corn               |   |   |   | 50     |   |
| Otter Creek Ethanol, LLC*            |   | Ashton, IA          |   | Corn               |   | 55     |   |   |   |
| Panhandle Energies of Dumas, LP^     |   | Dumas, TX           |   | Corn/Grain Sorghum |   |   |   | 30     |   |
| Parallel Products                    |   | Louisville,  KY     |   | Beverage Waste     |   | 5.4    |   |   |   |
|                                 |   | R.  Cucamonga, CA   |   |               |   |   |   |   |   |

 

7

----

 

| Permeate Refining                         |       | Hopkinton,  IA      |       | Sugars & starches |       | 1.5         |       |       |       |
|-------------------------------------------|------------|---------------------|------------|-----------------------|------------|-------------|------------|------------|------------|
| Phoenix Biofuels^                         |       | Goshen, CA          |       | Corn                  |       |        |       | 25         |       |
| Pine Lake Corn Processors, LLC*^          |       | Steamboat  Rock, IA |       | Corn                  |       |        |       | 20         |       |
| Platte Valley Fuel Ethanol, L.L.C.        |       | Central  City, NE   |       | Corn                  |       | 40          |       |       |       |
| Pro-Corn, LLC*                            |       | Preston, MN         |       | Corn                  |       | 40          |       |       |       |
| Quad-County Corn Processors*              |       | Galva, IA           |       | Corn                  |       | 23          |       |       |       |
| Reeve Agri-Energy                         |       | Garden City,  KS    |       | Corn/milo             |       | 12          |       |       |       |
| Siouxland Energy & Livestock Coop*    |       | Sioux  Center, IA   |       | Corn                  |       | 22          |       |       |       |
| Sioux River Ethanol, LLC*                 |       | Hudson, SD          |       | Corn                  |       | 55          |       |       |       |
| Tall Corn Ethanol, LLC*                   |       | Coon Rapids,  IA    |       | Corn                  |       | 49          |       |       |       |
| Tate & Lyle                           |       | Loudon, TN          |       | Corn                  |       | 67          |       |       |       |
| Trenton Agri Products, LLC                |       | Trenton, NE         |       | Corn                  |       | 30          |       |       |       |
| Tri-State Ethanol Co., LLC*               |       | Rosholt, SD         |       | Corn                  |       | 18          |       |       |       |
| United WI Grain Producers, LLC*^          |       | Friesland,  WI      |       | Corn                  |       |        |       | 40         |       |
| U.S. Energy Partners, LLC                 |       | Russell, KS         |       | Milo/wheat starch     |       | 40          |       |       |       |
| Utica Energy, LLC                         |       | Oshkosh, WI         |       | Corn                  |       | 48          |       |       |       |
| VeraSun Energy Corporation                |       | Aurora, SD          |       | Corn                  |       | 102         |       |       |       |
| VeraSun Fort Dodge, LLC^                  |       | Ft. Dodge,  IA      |       | Corn                  |       |        |       | 110        |       |
| Voyager Ethanol, LLC*                     |       | Emmetsburg,  IA     |       | Corn                  |       | 50          |       |       |       |
| Western Plains Energy, LLC*               |       | Campus, KS          |       | Corn                  |       | 30          |       |       |       |
| Western Wisconsin Renewable Energy, LLC*^ |       | Boyceville,  WI     |       | Corn                  |       |        |       | 40         |       |
| Wyoming Ethanol                           |       | Torrington,  WY     |       | Corn                  |       | 5           |       |       |       |
| **Total Existing Capacity**               | ** ** | ** **          | ** ** | ** **            | ** ** | **3,738.7** | ** ** | ** ** | ** ** |
| **Total Under Construction/ Expansions**  | ** ** | ** **          | ** ** | ** **            | ** ** | ** **  | ** ** | **689.0**  | ** ** |
| **Total Capacity**                        | ** ** | ** **          | ** ** | ** **            | ** ** | **4427.7**  | ** ** | ** ** | ** ** |

 

----

| * farmer-owned       |   |   |   |   |   | Renewable Fuels Association |   |
|----------------------|--------|--------|--------|--------|--------|-----------------------------|--------|
| ^ under construction |   |   |   |   |   | Last Updated: February 2005 |   |

 

The ethanol industry is very competitive.  While the ethanol industry has been growing,there is significant competition among ethanol producers.  Nationally, ethanol production isconcentrated in a few large companies. Our ethanol plant will face a competitive challenge from larger factories,from plants that can produce a wider range of products than our plant, and fromother plants similar to our planned ethanol plant.

 

Our ethanol plant will also compete with producers of othergasoline additives having similar octane and oxygenate values as ethanol, suchas producers of MTBE, a petrochemical derived from methanol that costs less toproduce than ethanol.  Although currentlythe subject of a federal ban, many major oil companies can produce MTBE andbecause it is petroleum-based, its use is strongly supported by major oilcompanies.  Alternative fuels, gasolineoxygenates and alternative ethanol production methods are also continuallyunder development.  The major oilcompanies have significantly greater resources than we have to market MTBE andother additives, to develop alternative products, and to influence legislationand public perception of MTBE and ethanol. These companies also have sufficient resources to begin production ofethanol should they choose to do so.

 

Ethanol production is also expanding internationally.  Ethanol produced or processed in certaincountries in Central America and the Caribbean region is eligible for tariffreduction or elimination upon importation to the United States under a programknown as the Caribbean Basin Initiative. Large ethanol producers, such as Cargill, have expressed interest inbuilding dehydration plants in participating Caribbean Basin countries, such asEl Salvador, which would convert ethanol into fuel-grade ethanol for shipmentto the United States.  Ethanol importedfrom Caribbean Basin countries may be a less expensive alternative todomestically produced ethanol and may affect our ability to sell our ethanolprofitably.  The International TradeCommission recently announced the 2005 CBI import quota of 240.4

 

8

----

 

million gallons of ethanol. Last year, legislation was introduced in the Senate that would limit thetransshipment of ethanol through the CBI. It is possible that similar legislation will be introduced this year,however, there is no assurance or guarantee that such legislation will beintroduced or that it will be successfully passed.

 

A number of automotive, industrial and power generationmanufacturers are developing alternative clean power systems using fuel cellsor clean burning gaseous fuels.  Likeethanol, the emerging fuel cell industry offers a technological option toaddress increasing worldwide energy costs, the long-term availability ofpetroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existingpower sources because of their higher efficiency, reduced noise and loweremissions.  Fuel cell industryparticipants are currently targeting the transportation, stationary power andportable power markets in order to decrease fuel costs, lessen dependence oncrude oil and reduce harmful emissions. If the fuel cell and hydrogen industries continue to expand and gainbroad acceptance and hydrogen becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively.  This additional competition could reduce thedemand for ethanol, which would negatively impact our profitability.

 

**Sources of Raw Materials - Corn FeedstockSupply**

 

We anticipate that ourplant will need approximately 13 million bushels of grain per year as thefeedstock for its dry milling process.

 

On November 18, 2004, ProExporter Network ofOlathe, Kansas, revised our original corn origination study which included acorn origination analysis, flat price history, small area supply demand, and abasis impact analysis.

 

In the year 2003, in the 11 county area surrounding the site for ourethanol plant, corn production was over 14 million bushels and sorghumproduction was approximately 3.5 million bushels.  The following tables summarize theapproximate number of bushels of corn and sorghum produced by suppliers locatedwithin the 11 counties surrounding our plant site and the three closestcounties in Missouri during the year 2003:

 
| **County**        | ** ** | **Sorghum  (bushels)** | ** ** | **Corn  (bushels)** | ** ** | **Sorghum + Corn  (bushels)** | ** ** |
|-------------------|------------|------------------------|------------|---------------------|------------|-------------------------------|------------|
| Allen             |       | 357,300                |       | 1,728,000           |       | 2,085,300                     |       |
| Anderson          |       | 629,600                |       | 2,154,000           |       | 2,783,600                     |       |
| Bourbon           |       | 134,000                |       | 572,000             |       | 706,000                       |       |
| Coffey            |       | 422,300                |       | 1,502,000           |       | 1,924,300                     |       |
| Douglas           |       | 112,100                |       | 2,060,000           |       | 2,172,100                     |       |
| Franklin          |       | 415,700                |       | 1,438,000           |       | 1,853,700                     |       |
| Johnson           |       | 117,000                |       | 620,000             |       | 737,000                       |       |
| Linn              |       | 116,000                |       | 737,000             |       | 853,000                       |       |
| Miami             |       | 231,600                |       | 1,004,000           |       | 1,235,600                     |       |
| Osage             |       | 664,400                |       | 1,661,000           |       | 2,325,400                     |       |
| Woodson           |       | 361,600                |       | 1,171,000           |       | 1,532,600                     |       |
| **Kansas Totals** | ** ** | **3,561,600**          | ** ** | **14,647,000**      | ** ** | **18,208,600**                | ** ** |
| Cass, MO          |       | 175,000                |       | 3,203,000           |       | 3,378,000                     |       |
| Bates, MO         |       | 85,000                 |       | 1,988,000           |       | 2,073,000                     |       |
| Vernon, MO        |       | 545,000                |       | 3,205,000           |       | 3,750,000                     |       |
| **KS + MO Total** | ** ** | **4,366,600**          | ** ** | **23,043,000**      | ** ** | **27,409,600**                | ** ** |

 

Source: U.S. Department of AgricultureStatistics 2003

 

Although the area surrounding the plantproduces a significant amount of corn and we do not anticipate problemssourcing grain, there is no assurance that a shortage will not develop,particularly if there were an extended drought or other production problems. In addition, our financial projections assume that we can purchase grain forprices near the ten-year average for corn in the area of the plant. However, there is no assurance that we will be able to purchase grain for theseprices.  Grain prices are primarily dependent on world feedstuffs supplyand demand and on U.S. and global corn crop production, which can be volatileas a result of a number of factors, the most important of which are weather,current and anticipated stocks and prices, export prices and supports and thegovernment’s current and anticipated agricultural policy.   The price ofgrain has fluctuated significantly in the past and may fluctuate

 

9

----

 

significantlyin the future.  Because the market priceof ethanol is not related to corn prices, ethanol producers are generally notable to compensate for increases in the cost of corn feedstock throughadjustments in prices charged for their ethanol.  We therefore anticipatethat our plant’s profitability will be negatively impacted during periods ofhigh corn prices.  We have determined that the average price for corn forthe fourteen Kansas counties surrounding our plant site over the last ten yearshas been approximately $2.37 per bushel. We have also determined that the average price for sorghum for thefourteen Kansas counties surrounding our plant site over the last ten years hasbeen approximately $2.17 per bushel.

 

*RawGrains Agreement*

 

OnNovember 12, 2004 we entered into a Raw Grains Agreement with United Bio EnergyIngredients, LLC.  The Raw GrainsAgreement provides for our purchase of all raw grains necessary for ethanolproduction from United Bio Energy Ingredients, LLC for a period of at least 5years.  Pursuant to the agreement, UnitedBio Energy Ingredients, LLC will use its best efforts to arrange for thepurchase of grain at the lowest price available under prevailing marketconditions.  For its service, we will payUnited Bio Energy Ingredients, LLC the actual cash procurement price and allreasonable and necessary expenses to get the grain to the plant plus a perbushel fee.  We will supply all labor andequipment necessary to load or unload trucks or rail cars.  The title, risk of loss, and responsibilityfor the quality of grain will transfer to us when we unload the grain at theplant.  Prior to that time, United BioEnergy Ingredients, LLC will bear the risk of loss.  All grain delivered to the plant shall meetcertain quality standards and we will have the options to reduce the price wepay or fully reject any delivery that fails to conform to these standards,depending upon the severity of the noncompliance.

 

*TradingAgreement*

 

OnNovember 12, 2004, we entered into a Trading Agreement with United Bio EnergyTrading, LLC in which United Bio Energy Trading, LLC will provide marketinformation and hedging consulting services for us.  We anticipate that the term of the agreementwill be for at least 5 years.  For theseservices, we will pay United Bio Energy Trading, LLC a monthly fee of$6,000.00.

 

Due to fluctuations in the price of corn, we anticipate that UnitedBioEnergy Trading, LLC will utilize forward contracting and hedging strategiesto manage our commodity risk exposure and optimize finished productpricing.  We anticipate that most of our grain will be acquired in thismanner.  We intend to do this to help guard against price movements thatoften occur in corn markets.  Hedging means protecting the price at whichwe buy corn and the price at which we will sell our products in thefuture.  It is a way to attempt to reduce the risk caused by pricefluctuation.  The effectiveness of such hedging activities is dependentupon, among other things, the cost of corn and our ability to sell sufficientamounts of ethanol and distillers dried grains.  Although we will attemptto link hedging activities to sales plans and pricing activities, such hedgingactivities can themselves result in costs because price movements in corncontracts are highly volatile and are influenced by many factors that arebeyond our control.  We may incur such costs and they may be significant.

 

**Utilities**

 

The production of ethanol is a very energyintensive process that uses significant amounts of electricity and naturalgas.  Water supply and quality are alsoimportant considerations.  We haveentered into some, but not all, of the agreements we need with utilities toprovide us with energy and water.  Therecan be no assurance that those utilities will be able to reliably supply thegas, electricity, and water that we need.

 

If there is an interruption in the supply ofenergy or water for any reason, such as supply, delivery, or mechanicalproblems, we may be required to halt production.  If production is halted for an extendedperiod of time, it may have a material adverse effect on our operations, cashflows, and financial performance.

 

*Natural Gas*

 

The plant will produce process steam from its own boiler system and drythe distillers dried grains by-product via a direct gas-fired dryer.  According to engineering specificationsproduced by the plant designer, ICM, Inc., we anticipate that our plant willrequire a natural gas supply of approximately 4,000 MMBtu per day whendrying.   If the direct gas-fired dryer operates 100% ofthe time for an entire year, the plant could consume 1,440,000 MMBtu per year.

 

10

----

 

To accesssufficient supplies of natural gas to operate the plant, an interconnectionwill be completed with Southern Star Central Gas Pipeline’s facilities, aninterstate natural gas pipeline located on plant property.  We have entered into an agreement withSouthern Star Central Gas Pipeline to design and build a measurement stationcapable of flowing natural gas in sufficient hourly quantities to meet thetotal daily requirements indicated above and to construct, install, operate andmaintain the side valve, orifice meter, regulation, flow computer, flowcontrol, SCADA equipment, valves and other appurtenances necessary to tap themain line.  We have agreed to pay actualcosts of construction estimated at $312,471.

 

The plant will need natural gas odorization equipment, regulationequipment, and 1,000 feet or less of natural gas fuel line immediatelydownstream of Southern Star Central Gas Pipeline’s measurement station.  We have engaged an engineering firm, Shafer,Kline & Warren, Inc., to design and construct these facilities.

 

Much of Southern Star Central Gas Pipeline’s pipeline capacity is fullysubscribed, which means that the space within their pipeline is under contractwith other parties.  U.S. Energy Servicesis working closely with Southern Star Central Gas Pipeline’s businessdevelopment staff to ensure that if an existing capacity contract should comeup for renewal, we will have an opportunity to bid on the contract.  Despite the current fully subscribedsituation, there are alternative means in which to deliver natural gas to theplant using Southern Star Central Gas Pipeline. We intend to utilize one or a combination of those means until capacitybecomes available to us.  However, therecan be no assurance that we will be able to obtain a sufficient supply ofnatural gas or that we will be able to procure alternative sources of naturalgas on acceptable terms.

 

*Electricity*

 

Based on engineering specifications produced by ICM, Inc., the plantwill require approximately 20,000,000 kilowatt hours per year.  We have entered into an agreement with KansasCity Power and Light Company to provide for our electricity needs.  Kansas City Power and Light Company hasagreed to provide electric utility service for a term of 15 years and toinstall facilities capable of providing such electrical service on or beforeMay 1, 2005.  In exchange, we have agreedto pay $515,720, payable in five equal installments due on February 28, March31, April 30, and May 31, 2005, respectively. In addition, we have agreed to reimburse their costs, not to exceed$298,117, to the extent reasonably incurred as a result of discovery ofrock.  We expect to receive an economicdevelopment incentive which is expected to result in a discount on our purchaseof electric service for the first five years.  Based on an estimate of the amount of the load rate and usage we willrequire, we expect to pay per kWh on average approximately $0.0276 in year 1,$0.0295 in year 2, $0.0314 in year 3, $0.0335 in year 4 and $0.0335 in year 5.  Thereafter, the incentive is expected toexpire and we expect to pay approximately $0.0394 per kWh.  The actual amounts we pay for electricservice could vary if we do not qualify for the incentive, if our load rate or usageis different from our estimates, or if the applicable tariff rates areincreased.

 

We also intend to execute an agreement with ICM, Inc. for the purchaseof a steam turbine generator which we anticipate will result in energy savingsfor our plant.  We expect to sign apromissory note payable to ICM, Inc. in the amount of $1,760,274 payable in tenannual installments at an interest rate of the prime rate plus 1% with thebalance due on July 1, 2008.  We alsointend to grant ICM, Inc. a security interest in the generator.  We expect that the generator will generate upto approximately 68% of the plant’s electricity needs.  We have not yet executed a final agreementwith ICM Inc. for the purchase of the generator and there is no assurance wewill do so or that if we do that the agreement will be on terms as favorable asthose outlined here.

 

*Water*

 

We will require a significant supply of water.  Based upon the results from water qualitytests performed by U.S. Water Services/Utility Chemicals, Inc., our plant waterrequirements are approximately 243 gallons per minute.  That is approximately 349,298 gallons perday.

 

Much of the water used in an ethanol plant is recycled back into theprocess.  There are, however, certainareas of production where fresh water is needed.  Those areas include boiler makeup water andcooling tower water.  Boiler makeup wateris treated on-site to minimize all elements that will harm the boiler andrecycled water cannot be used for this process. Cooling tower water is deemed non-contact water because it does not comein contact with the mash, and therefore, can be regenerated back into the coolingtower process.  The makeup waterrequirements for the cooling

 

11

----

 

tower are primarily a result of evaporation.  Depending on the type of technology utilizedin the plant design, much of the water can be recycled back into the process,which will minimize the discharge water. This will have long-term effect of lowering wastewater treatmentcosts.  Many new plants today are zero ornear zero effluent facilities.  At most,there should be no more than 56 gallons per minute (80,471 gallons per day) ofnon-contact cooling water effluent.  Weanticipate that the City of Garnett will supply our water requirements at acost of $0.50 per thousand gallons.  Wehave not executed as agreement with the city for water.

 

**Dependence on One or a Few Major Customers**

 

As discussed above, we have entered into marketingagreements with United BioEnergy Fuels, LLC and United BioEnergy Ingredients,LLC for the purposes of marketing and distributing our ethanol and distillersgrains.  We will rely on United BioEnergyFuels, LLC and United BioEnergy Ingredients, LLC for the sale and distributionof all of our ethanol and distillers grains. Therefore, we will be highly dependent on United BioEnergy Fuels, LLCand United BioEnergy Ingredients, LLC for the successful marketing of ourproducts.

 

**Insurance Requirements**

 

We have obtained and must maintain liability,property and casualty and other policies of insurance during the period ofconstruction of the plant and once plant operations commence.  Any failure by us to maintain adequateinsurance, with adequate policy limits and/or self-retention limits, may have amaterial adverse effect on our operations, cash flows and financialperformance.

 

**Design/Build Agreement**

 

OnAugust 9, 2004, we executed a design/build agreement with ICM, Inc. for variousdesign and construction services.

 

*GeneralTerms and Conditions*

 

Weexpect to pay ICM, Inc. up to an anticipated maximum of $35,900,000 to designand construct the plant.  All drawings,specifications, and other construction-related documents will belong to ICM,Inc.  We will be granted a limitedlicense to use such drawings, specifications, and related documents inconnection with our occupancy of the plant.

 

IfICM, Inc. encounters “differing site conditions,” it will expect to be entitledto an adjustment in the contract price and time of performance, if suchconditions adversely affect its costs and performance time.  By “differing site conditions,” we mean anyconcealed physical conditions at the site that:

 

•                  Materially differ from theconditions indicated in our geotechnical report; or

 

•                  Any unusual conditions which differmaterially from the conditions ordinarily encountered in similar work.

 

OnSeptember 28, 2004, we instructed ICM, Inc. to commence construction and made aprogress payment in the amount of $4,000,000. Pursuant to the agreement, ICM, Inc. warrants that the plant will besubstantially complete no later than 345 calendar days after this date.  By “substantial completion,” we mean when theplant is ready for us to occupy and use the plant to produce ethanol.

 

Inaddition to providing the general contracting services, pursuant to thedesign/build agreement, ICM, Inc. is also responsible for the following:

 

•                  Providing all necessary engineeringand design services, consistent with applicable law and provided by licenseddesign professionals;

 

•                  Performing all work in accordancewith legal requirements;

 

12

----

 

•                  Performing its responsibilities in asafe manner so as to prevent damage, injury, or loss;

 

•                  Providing us a warranty that thework performed for us is of good quality, conforms to all contract andconstruction documents, and is free of defect in materials and workmanship;

 

•                  Providing assistance in connectionwith the start-up, testing, refining, and adjusting of any equipment andtraining staff to operate and maintain the equipment and facility;

 

•                  Correcting any defects in materialsand equipment and commencing construction of defects within seven days ofreceipt of notice from us that the work performed was defective for a period ofone year after substantial completion;

 

•                  Obtaining and providing us with acertificate of insurance covering claims arising from worker’s compensation ordisability; claims for bodily injury, sickness, death, or disease, regardlessor whether the person injured was an employee of ICM, Inc.; claims for damageor destruction of tangible personal property; claims for damages arising frompersonal injury, death or property damage resulting from ownership, use, andmaintenance of any motor vehicles; claims for professional errors or omissions;or claims pursuant to any duty to indemnify. Such insurance must be maintained through the development andconstruction of the plant; and

 

•                  Indemnifying, defending, holding us,our officers, directors, agents, and employees harmless against any claims,losses, damages, liabilities, including attorney’s fees and expenses, if sucharises from the fault of ICM, Inc., its consultants, agents, or employees.

 

We expect to beresponsible for the following:

 

•                  Obtaining andmaintaining liability insurance to protect us from any claim that may arisefrom performance of our responsibilities;

 

•                  Obtaining andmaintaining property insurance for the full insurable value of the plant,including physical loss and damage to the facility, temporary buildings,falsework, all materials and equipment in transit, professional fees and allother expenses incurred to replace or repair the ethanol plant;

 

•                  Indemnifying,defending, and holding ICM, Inc., its officers, directors, agents, andemployees harmless against any claims, losses, damages, liabilities, includingattorney’s fees and expenses, caused by us, our agents, or employees;

 

•                  Rough gradingthe construction site to the specifications of ICM, Inc.;

 

•                  Providing atleast one access road of sufficient quality to withstand semi-truck traffic;

 

•                  Obtaining allpermits and licenses related to the construction and operation of the plant,except that ICM, Inc. will be responsible for obtaining building permits,paying all governmental charges and inspection fees necessary for theconstruction of the plant, and paying for utility connection fees;

 

•                  Procuring an AirPollution Construction and Operation permit;

 

•                  Obtaining thenecessary Kansas air and water discharge permits;

 

•                  Maintaining$250,000 in the budget to cover unforeseen government regulation changes untilwe have satisfactorily complied with atmospheric emissions regulations;

 

•                  Providing acontinuous supply of natural gas of at least 1.3 billion cubic feet per yearand supply meter and regulators to provide burner tip pressures as specified byICM, Inc.;

 

13

----

 

•                  Providing a continuoussupply of electricity of 12,000 kVA, 12,400 volt electrical energy, a highvoltage switch, a substation, if required, and meter as specified by theelectric company; and

 

•                  Providing railtracks, ties, and ballast to the plant at grades specified by ICM, Inc.

 

ICM, Inc. will have the right to stop or postpone the work and toreasonably adjust the time for completion of the plant if any of the followingoccurs:

 

•                  Wedo not provide reasonable evidence indicating that we have adequate funds tofulfill all our contractual obligations or do not pay amounts properly dueaccording to the progress payments, and we do not cure within seven days afterwe receive notice from ICM, Inc. and work on the plant has stopped;

 

•                  Anyacts, omissions, conditions, events, or circumstances beyond its control, ifthe act or omission was not caused by ICM, Inc. or anyone for whom they areresponsible.  If ICM, Inc.’s delay inperformance is caused by us or those under our control, then the contract pricemay be appropriately adjusted;

 

•                  Thepresence of any hazardous conditions at the construction site.  Upon receiving notice of a hazardouscondition, we must immediately proceed to correct the condition.  After the condition is corrected and allnecessary governmental approvals have been obtained, ICM, Inc. should resumework in the effected area.  ICM, Inc. maybe entitled to an adjustment in price and time for completion of the plant ifits price and time for performance has been adversely affected by the hazardouscondition;

 

•                  Workon the plant has stopped for 90 days, because of any order from us or a courtor governmental authority, if such stoppage is not because of any act oromission of ICM, Inc. or because we failed to provide ICM, Inc. withinformation, permits, or approvals for which we will be responsible; or

 

•                  Wefail to act on application for payment within 30 days after it is submitted orwe fail to pay ICM, Inc. within 30 days after any sum is determined to be due.

 

We have the right to terminate the design/build agreement without causeprior to the date on which the concrete is first poured upon providing ICM,Inc. with 20 days prior written notice. In addition, we expect to be required to pay ICM, Inc. for the following:

 

•                  Completedand acceptable work including fair and reasonable amounts for overhead andprofit;

 

•                  Expensesincurred prior to the date of termination in performing services and furnishinglabor and materials; and

 

•                  Reasonablecosts and expenses attributable to the termination, including amounts due tosettle terminated contracts with subcontractors and consultants.

 

We have the right to terminate the design/build agreement for cause atany time.  The following events justifyour termination of ICM, Inc. for cause:

 

•                  Failingto perform work in accordance with the agreement;

 

•                  Intentionallydisregarding laws or regulations;

 

•                  Materiallybreaching any provision of the agreement;

 

•                  Failingto pay its consultants or subcontractors undisputed amounts; and

 

•                  Becomingfinancially insolvent or filing for bankruptcy.

 

14

----

 

Thereis no assurance that defects in materials and/or workmanship in the plant willnot occur.  Under the terms of thedesign/build agreement, ICM, Inc. would warrant that the material and equipmentfurnished to build the plant would be new, of good quality, and free frommaterial defects in the material and workmanship at the time of delivery.  Though the agreement requires ICM, Inc. tocorrect all defects in material or workmanship for a period of one year aftersubstantial completion of the plant, material defects in the material orworkmanship may still occur.  Suchdefects could cause us to delay the commencement of operations of the plant,or, if such defects are discovered after operations have commenced, to halt ordiscontinue the plant’s operation.  Anysuch event may have a material adverse effect on our operations, cash flows,and financial performance.

 

*Dispute Resolution*

 

The design/build agreement provides that disputes would first beresolved through submitting the matter to non-binding mediation.  In the event that the dispute is not settledthrough mediation, the matter must be resolved by arbitration in accordancewith the Construction Industry Arbitration Rules of the American ArbitrationAssociation, unless the parties agree otherwise.  The determination of the arbitrator isexpected to be final and may not be appealed to any court.  The prevailing party in any arbitrationproceeding is entitled to recover reasonable attorneys’ fees and expensesincurred.

 

*Limitation of Consequential Damages*

 

The design/build agreement provides that the maximum amount of damageswe may recover from ICM, Inc. for defective construction is $2,500,000.

 

**Management Agreement**

 

OnNovember 12, 2004, we entered into a Management Agreement with United BioEnergy Management, LLC in which United Bio Energy Management, LLC willsupervise and direct the general operations of the plant for an anticipatedperiod of at least 5 years.  United BioEnergy Management, LLC will provide the services of a full-time general managerto the plant.  United Bio EnergyManagement, LLC is owned by UBE, LLC which is in turn owned by affiliates ofICM, Inc. and Fagen, Inc.  Accordingly,we may not be able to negotiate any further transactions at arms’ length, as wewould be able to do with an independent party.

 

UnitedBio Energy Management, LLC will be responsible for the following duties, amongothers:

 

•                  Hiring, paying, supervising, anddischarging all plant employees;

 

•                  Contracting for the purchase of allservices, grains, supplies, and other materials necessary for the production ofethanol;

 

•                  Contracting for the purchase of allfixtures, furnishings, equipment, supplies, tools, vermin extermination, andother services as the manager deems necessary or advisable (excludingelectricity, natural gas, water, and waste water);

 

•                  Preparing or overseeing thepreparation of an annual operating budget;

 

•                  Setting up and maintaining accurateand adequate accounting and financial records for the plant;

 

•                  Handling our accounts payable andaccounts receivable;

 

•                  Maintaining insurance policies onthe plant; and

 

•                  Cooperating with our attorneys andaccountants in the preparation of disclosures required by the Securities Act of1933, the Securities Exchange Act of 1934, and any other securities laws orregulations.

 

15

----

 

Wehave agreed to compensate United Bio Energy Management, LLC an annual fee of $250,000.00payable in monthly payments for these services, plus an incentive bonus basedon the attainment of certain financial benchmarks.

 

UnitedBio Energy Management, LLC will appoint a general manager to be based on siteat our plant, and to work exclusively for us. It is anticipated that the general manager will be responsible for thefollowing duties, among others:

 

•                  Managing all business operations,plant operations, purchasing operations, marketing operations, personneloperations, safety, and any and all other items relating to the plantoperations and profitability;

 

•                  Administering our wage and benefitpackage per our approval;

 

•                  Arranging repairs and replacement ofchemicals, enzymes, supplies, and other items necessary for plant operations;

 

•                  Reviewing invoices for repairs andreplacement of items;

 

•                  Minimizing operational costs;

 

•                  Administering the purchase of grainsand the marketing of ethanol and by-products to ensure the best pricingscenarios; and

 

•                  Performing any and all other dutiesassigned by United Bio Energy Management, LLC or us.

 

The ManagementAgreement provides that we will first attempt to amicably settle any dispute ordifference privately between United Bio Energy Management, LLC and us.  If we cannot resolve the dispute as a resultof the discussions, then we must submit the matter to non-bindingmediation.  In the event that the disputeis not settled through mediation, the matter must be resolved by non-appealablearbitration in accordance with the rules of the American ArbitrationAssociation as applicable in the state of Kansas.  The determination of the arbitrator isexpected to be final and may not be appealed to any court.  The prevailing party in any arbitration proceedingis entitled to recover reasonable attorneys’ fees and expenses incurred.

 

**Effect of Governmental Regulation**

 

Ethanol has important applications,primarily as a high quality octane enhancer and an oxygenate capable ofreducing air pollution and improving automobile performance.  Ethanol contains 35% oxygen by weight.  When combined with gasoline, ethanol acts asan oxygenate.  As a result, the gasolineburns cleaner and releases less carbon monoxide and other exhaust emissions inthe atmosphere.  The federal governmentencourages the use of oxygenated gasoline as a measure to protect theenvironment.  Oxygenated gasoline iscommonly referred to as reformulated gasoline.

 

The ethanol industry is heavily dependenton several economic incentives to produce ethanol, including federal ethanolsupports.  Ethanol sales have been favorablyaffected by the Clean Air Act amendments of 1990, particularly the FederalOxygen Program which became effective November 1, 1992.  The Federal Oxygen Program requires the saleof oxygenated motor fuels during the winter months in certain major metropolitanareas to reduce carbon monoxide pollution. Ethanol use has increased due to a second Clean Air Act program, theReformulated Gasoline Program.  Thisprogram became effective January 1, 1995, and requires the sale of reformulatedgasoline in nine major urban areas to reduce pollutants, including those thatcontribute to ground level ozone, better known as smog.  Increasingly stricter EPA regulations areexpected to increase the number of metropolitan areas deemed in non-compliancewith Clean Air Standards, which could increase the demand for ethanol.

 

A bill (S. 791, 108th Cong.)including provisions known as the Renewable Fuels Standard was introduced inthe United States Senate during the 108th Session, which ended in2004.  If passed, it would have served asa catalyst for investment in renewable fuel processing fuels and newtechnologies.  The former proposedlegislation would have

 

16

----

 

determined the specific baseline volume of ethanol to be used ingasoline on a nationwide basis.  The billanticipated that volumes would begin in the year 2003 at 2.3 billion gallonsand grow at a rate of approximately 300 million gallons per year to a volume of5 billion gallons in 2012.  The RFS wouldhave banned the use of MTBE effective 4 years after enactment.  However, individual states would still havebeen permitted to continue to allow the use of MTBE by notifying theadministrator of the EPA of this intent.

 

On March 17, 2005, a bipartisan billcontaining a proposed Renewable Fuels Standard was introduced in the U.S.Senate by Senators Dick Lugar of Indiana and Tom Harkin of Iowa.  The Lugar/Harkin bill creates a RenewableFuels Standard that would require the use of 4 billion gallons of renewablefuels in 2006 increasing to 8 billion gallons by 2012.  The bill is a national flexible program thatdoes not require that any renewable fuels be used in any particular area orstate, allowing refiners to use renewable fuel blends in those areas where itis most cost-effective.  In addition, thebill eliminates the reformulated gasoline (“RFG”) oxygenate standard, enhancesRFG air quality requirements and improves the credit and waiver provisions ofthe RFS package.  There is no assuranceor guarantee that Congress will pass RFS legislation or that any RFSlegislation approved by Congress will contain provisions sufficiently favorableto the ethanol industry to increase demand.

 

The government’s regulation of theenvironment changes constantly.  It ispossible that more stringent federal or state environmental rules orregulations could be adopted, which could increase our operating costs andexpenses.  It also is possible thatfederal or state environmental rules or regulations could be adopted that couldhave an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding therequired oxygen content of automobile emissions could have an adverse effect onthe ethanol industry.  Furthermore, plantoperations likely will be governed by the Occupational safety and HealthAdministration (“OSHA”).  OSHAregulations may change such that the costs of the operation of the plant mayincrease.  Any of these regulatory factsmay result in higher costs or other materially adverse conditions effecting ouroperations, cash flows and financial performance.

 

The use of ethanol as an oxygenate toblend with fuel to comply with federal mandates also has been aided by federaltax policy.  The Energy Tax Act of 1978exempted ethanol blended gasoline from the federal gas tax as a means forstimulating the development of a domestic ethanol industry and mitigating thecountry’s dependence on foreign oil.  Asamended, the federal tax exemption currently allows the market price of ethanolto compete with the price of domestic gasoline. The exemption for a 10% ethanol blend is the equivalent of providing aper gallon “equalization” payment that allows lenders to pay more for ethanolthan the wholesale price of gasoline and still retain profit margins equal tothose received upon the sale of gasoline that is not blended with ethanol.  The federal gasoline tax exemption for a 10%blend was 5.2 cents per gallon.  Thisexemption was scheduled to gradually drop to 5.1 cents per gallon in 2005,however, as of January 1, 2005, this federal tax incentive has been replaced bya new volumetric ethanol excise tax credit discussed below.

 

On October 22, 2004, President Bush signedH.R. 4520, which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”)and amended the federal excise tax structure effective as of January 1,2005.  Prior to VEETC, ethanol-blendedfuel was taxed at a lower rate than regular gasoline (13.2 cents on a 10%blend).  Under VEETC, the existingethanol excise tax exemption is eliminated, thereby allowing the full federalexcise tax of 18.4 cents per gallon of gasoline to be collected on all gasolineand allocated to the highway trust fund. This would add approximately $1.4 billion to the highway trust fundrevenue annually.  In place of the currentexemption, the bill creates a VEETC of 5.1 cents per gallon of ethanol blendedat 10%.  Refiners and gasoline blenderswould apply for this credit on the same tax form as before only it would be acredit from general revenue, not the highway trust fund.  Based on volume, the VEETC is expected toallow much greater refinery flexibility in blending ethanol since it makes thetax credit available on all ethanol blended with all gasoline, diesel and ethyltertiary butyl ether (“ETBE”), including ethanol in E-85 and the proposed E-20in Minnesota.  The VEETC is scheduled toexpire on December 31, 2010.

 

The ethanol industry and our business willdepend upon continuation of the federal ethanol supports discussed above.  These incentives have supported a market forethanol that might disappear without the incentives.  Alternatively, the incentives may becontinued at lower levels than at which they currently exist.  The elimination or reduction of such federalethanol supports would make it more costly for us to produce and sell ourethanol and would likely reduce our net income.

 

17

----

 

**Costs and Effects of Compliance withEnvironmental Laws**

 

We will be subject to extensive air, waterand other environmental regulations and we will be required to obtain a numberof environmental permits to construct and operate the plant.  We have engaged Natural Resource Group ofMinneapolis, Minnesota, to provide environmental consulting, engineering andanalytical services in connection with the construction and operation of ourplant.  We are subject to oversight activities by the EPA.  There is always a risk that the EPA mayenforce certain rules and regulations differently than Kansas’ environmentaladministrators.  Kansas and EPA rules aresubject to change, and any such changes could result in greater regulatoryburdens on plant operations.  We couldalso be subject to environmental or nuisance claims from adjacent propertyowners or residents in the area arising from possible foul smells or other airor water discharges from the plant.  Suchclaims may result in an adverse result in court if we are deemed to engage in anuisance that substantially impairs the fair use and enjoyment of real estate.

 

*Air Emission Source ConstructionPermit*

 

Wemodified our application for the permit based on plans for a 35 milliongallon ethanol plant on July 22, 2004 with the KDHE, and received approvalon August 5, 2004.  The permit willbe valid until the plant is modified or until there is a process change thatchanges air emissions.

 

*National Pollutant DischargeElimination System Permit (Individual NPDES Permit)*

 

Weexpect that we will use water to cool our closed circuit systems in the plant.  Although the water in the cooling system willbe re-circulated to decrease facility water demands, a certain amount of waterwill be continuously replaced to make-up for evaporation and to maintain a highquality of water in the cooling tower.  In addition, there will be occasional blowdownwater that will have to be discharged.  It is anticipated that the facility will alsorequire a reverse osmosis system and water softeners to provide makeup waterfor the boiler.  Reject water from thereverse osmosis system and water softener regeneration water will also bedischarged.  Depending on the waterquality and atmospheric conditions, approximately 164,000 gallons of water perday could potentially be discharged.  This figure represents peak water dischargefor the facility.  An application for anindividual NPDES permit was submitted to the KDHE on April 28, 2004 andapproved is still pending.

 

*Storm Water Discharge Permit andStorm Water Pollution Prevention Program (General NPDES Permits)*

 

OnApril 30, 2004, we submitted a notice of intent to obtain coverage underthe KDHE’s construction storm water permit (“General Permit No. 2”).  To comply with permit conditions, NaturalResource Group developed a Construction Storm Water Pollution Prevention Planfor the facility.  The plan outlinesvarious measures that will be developed for the facility, which outlinesvarious measures that will be implemented during construction to mitigateerosion and minimize storm water pollution.  A separate application will be required forstorm water discharges from the facility during operations.  It is anticipated that the facility will gaincoverage under KDHE General Permit No. 1 for industrial storm waterdischarges; however, an individual industrial storm water permit could berequired by the KDHE, stipulating additional permit requirements not identifiedin the general permit.  The applicationfor the General Permit No. 1 must be filed 24 hours prior to thestart of operations.  We anticipate thatwe will be able to obtain a General Permit No. 1 storm water dischargepermit, but there can be no assurances of this.  In either case, an Industrial Storm WaterPollution Prevention Plan will be required for plant operation.

 

*New Source Performance Standards*

 

Theplant will be subject to New Source Performance Standards for both the ethanolplant’s distillation processes, and the storage of volatile organic compoundsused in the denaturing process.  Theseduties include initial notification, emissions limits, compliance, andmonitoring requirements, and record keeping requirements.

 

*Spill Prevention, Control, andCountermeasures Plan*

 

Beforewe can begin operations, we must prepare and implement a Spill PreventionControl and Countermeasure (“SPCC”) plan in accordance with the guidelinescontained in 40 CFR § 112.  This planwill address oil pollution prevention regulations and must be reviewed andcertified by a professional engineer.  The SPCC must be reviewed and updated everythree years.

 

18

----

 

*Bureau of Alcohol, Tobacco, andFirearms Requirements*

 

Beforewe can begin operations, we must comply with applicable Bureau of Alcohol,Tobacco, and Firearms regulations.  Theseregulations require that we first make application for and obtain an alcoholfuel producer’s permit pursuant to 27 CFR § 19.915.  The application must include informationidentifying the principal persons involved in our venture and a statement as towhether any of them have ever been convicted of a felony or misdemeanor underfederal or state law.  The term of thepermit is indefinite until terminated, revoked, or suspended.  The permit also requires that we maintaincertain security measures.  We must alsosecure an operations bond pursuant to 27 CFR § 19.957.  There are other taxation requirements relatedto special occupational tax and a special stamp tax.  We are in the process of completing ourapplication for an alcohol fuel producer’s permit.

 

**Employees**

 

We currently have 2 full-time employees.  Weintend to employ approximately 31 additional full-time employees, most of whichwill be hired prior to our start-up.  Inaddition, pursuant to our Management Agreement, United BioEnergy Management,LLC has hired a general manager for our plant whom we expect will be employedby United BioEnergy Management, LLC. and United BioEnergy Ingredients, LLC hashired a distillers grains merchandiser who is expected to work full time at ourplant and be employed by United BioEnergy Ingredients, LLC.  Finally, pursuant to an Management Agreement,United BioEnergy Management, LLC has recently hired our plant manager who willbe a full-time employee employed by our company.

 

**ITEM 2.  DESCRIPTION OF PROPERTY.**

 

We are building our plant in Garnett, Kansas, inEast Central, Kansas.  The actual site islocated in the Golden Prairie Industrial Park on the edge ofGarnett.  Our mailing address is P.O. Box225, 2101⁄2 E. 4th Avenue, Garnett, Kansas 66032.  Construction of the facility is progressingas discussed below.  Startup is plannedfor Summer, 2005.

 

On September 2,2004, we finalized our purchase of 23 acres of land in the Golden PrairieIndustrial Park on the edge of Garnett, Kansas, where we are constructing ourethanol plant.  We paid a purchase priceof $1.00.  The property for the plantsite is believed to have a fair value of approximately $172,500.00.  On November 18, 2004, we purchasedapproximately 19 acres of real estate in Anderson County, Kansas, to allow theplacement of a railroad spur from the plant site to existing Union PacificRailroad track in Garnett, Kansas.  Wepurchased the real estate pursuant to an option that granted us the right topurchase it for $9,000.00 per acre.  Wepaid $170,010.00 which excluded the cost to replace boundary fencing andrelocate an existing structure along with water and electric utilities.  Previously paid deposits totaling $20,000.00were applied to the purchase price and the sum of $150,010.00 was paid at closing.  On February 16, 2005, we entered into a realestate contract for the purchase of an additional 17 acres adjacent to the sitewhere we are constructing our plant.  Weintend to use this land for our natural gas metering station and for a portionof our railroad spur.  We expect to pay apurchase price of $90,083.  We have notyet closed on this purchase.

 

On November 23, 2004, the company enteredinto a Credit Agreement with Home Federal Savings Bank establishing aconstruction loan facility for the construction of a 35 million gallon per yearethanol plant.  The constructionfinancing is in the amount of $26,000,000 consisting of a $21 million dollarconventional term loan and a $5 million dollar USDA 80% guaranteed loan and issecured by substantially all our assets including a mortgage on our realestate.  Following constructioncompletion, the loan will be segmented into two loans including a $5 milliondollar USDA 80% guaranteed loan and a $21 million conventional term loan.

 

**ITEM3.  LEGAL PROCEEDINGS.**

 

None.

 

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

 

None.

 

19

----

 

**PART II.**

 

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

 

There is no public trading market for our membership units.  On March 23, 2005, there are approximately 641holders of our units.  We have notdeclared or paid any distributions on our units.  Distributions are payable at the discretionof our board of directors subject to the provisions of the Kansas LimitedLiability Company Act and our Operating Agreement.  Our Operating Agreement requires the board ofdirectors to endeavor to make cash distributions at such time and in suchamounts as will permit our unit holders to satisfy their income tax liabilityin a timely fashion.  Distributions arerestricted by certain loan covenants and our construction loan and revolvingcredit financing agreements.

 

Duringthe time period beginning on Company’s formation on October 16, 2001 andending on February 1, 2002, we issued and sold 1,220 membership units toour seed capital investors at a purchase price of $500 per unit, withoutregistering the units with the Securities and Exchange Commission.  All sales were made pursuant to Rule 504of Regulation D.  Each of thesesales was deemed to be exempt from registration under the Securities Act inreliance on Section 4(2) and Rule 504 of the Securities Act of 1933as transactions by an issuer not involving a public offering.  No underwriting discounts or commissions werepaid in these transactions and the Company conducted no general solicitation inconnection with the offer or sale of the securities.  The purchasers of the securities in eachtransaction made representations to us regarding their intention to acquire thesecurities for investment only and not with a view to or for sale in connectionwith any distribution thereof. Appropriate legends were affixed to unitcertificates and instruments issued in such transactions.  All purchasers (other than the original 10directors) were provided a private placement memorandum containing all materialinformation concerning the Company and the offering.  All purchases were made with cash and thetotal amount of cash consideration for those securities was $610,000.

 

The Securities and Exchange Commission declared ourregistration statement on Form SB-2 (SEC Registration No. 333-96703) effectiveon January 24, 2003.  We commenced our public offering shortly thereafter.

 

The following is a breakdown of membership unitsregistered 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** | ** ** |
|                        |            |                                               |                |                 |            |                                                 |            |  |  |

 

20

----

 

On January 24, 2004, we closed the offering andstopped selling units registered under our registration statement.  Duringthe offering we sold 13,457 units for an aggregate price of $13,457,000. We sold the units without the assistance of an underwriter.

 

In addition to the units sold, we issued a total ofthirty membership units for compensation.  Jill Zimmerman, a full timeemployee who is also our Treasurer, principal financial officer and a member,was awarded five membership units as part of her bonus for services related toour development and financing.  We awarded ten units to our employee andproject coordinator, Diane Allen, as part of her bonus.  Finally, weissued fifteen units to a our former project coordinator, Bill Barnes, inexchange for amounts previously owed for services.

 

We released funds from escrow and issued 13,487units in the Company, including 13,457 units sold in our offering and anadditional thirty units issued for compensation.  As of December 31, 2004,we had used net offering proceeds of approximately $6,469,793 for constructionof plant, building and facilities, $75,000 for repayment of indebtedness,$567,183 for financing costs and $322,900 for operating expenses.  All ofthese payments were direct or indirect payments to others.

 

On October 11, 2004, we executed a Unit Purchase and RedemptionAgreement with ICM, Inc. and Fagen, Inc. in which we agreed to issue a total of6,250 units to them in exchange for their combined capital contribution of$6,250,000.  We also agreed to redeem all6,250 units from ICM, Inc. and Fagen, Inc. using the proceeds from the sale ofunits in a future registered offering or, to the extent the future offering isunsuccessful, from cash flow generated by operations subject to certain loancovenants, restrictions and tax distributions. The redemption price will be $1,100 per unit if we are able to raise atleast $6,875,000 in the future offering. Otherwise, the redemption price will be based on a current fair marketvalue of the units.  In connection withthis capital contribution, we amended our Operating Agreement to allow ICM,Inc. and Fagen, Inc. to appoint a total of three directors to our board ofdirectors, subject to our ability to terminate one of their director positionsfor every $2,000,000 dollars in redemption payments made to either or both ofICM, Inc. and Fagen, Inc.  On January 19,2005, we closed on the purchase of these units by ICM, Inc. and Fagen, Inc. andissued 3,125 units to Fagen, Inc. and 3,125 units to ICM, Inc. at a purchaseprice of $1,000 per unit.  Thepurchases were made with cash and the total amount of cash consideration forthose securities was $6,250,000.  Thissale of unregistered securities is claimed exempt under Section 4(2) and Rule506 of Regulation D of the Securities Act of 1933 as ICM, Inc. and Fagen, Inc.qualify as accredited investors.  No underwriting discounts or commissions werepaid in these transactions.  On December16, 2004, we filed a registration statement on Form SB-2 (Commission File333-121323).  We filed a pre-effectiveamendment to our registration statement on February 1, 2005.  We intend to offer units at an aggregateminimum price of $2,000,000 and an aggregate maximum price of $10,000,100.  We intend to use the proceeds of theregistered offering to redeem units from ICM, Inc. and Fagen, Inc. inaccordance with our agreement and retain the balance of any proceeds forworking capital.  Our registered offeringis not yet effective.

 

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

 

**Forward Looking Statements**

 

This report contains forward-looking statements thatinvolve future events, our future performance and our expected futureoperations and actions.  In some cases you can identify forward-lookingstatements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,”“expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,”“continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerousassumptions, risks and uncertainties.  Our actual results or actions maydiffer materially from these forward-looking statements for many reasons,including the reasons described in this report.  We are not under any dutyto update the forward-looking statements contained in this report.  Wecannot guarantee future results, levels of activity, performance orachievements.  We caution you not to put undue reliance on anyforward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we referencein this report and have filed as exhibits, completely and with theunderstanding that our actual future results may be materially different fromwhat we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

 

**Overview**

 

East KansasAgri-Energy, LLC was formed as a Kansas limited liability company on October16, 2001, for the purpose of constructing and operating an ethanol plant nearGarnett, Kansas.  We have begunconstruction of a corn- and milo-based ethanol plant that will produce ethanol,distillers grains and carbon dioxide. The corn we will use is field corn, which is a tall growing cereal graincontaining both hard and soft starches. Milo or grain sorghum is a coarse annual cereal grass with large whiteor yellow grains.  One bushel of miloproduces approximately as much ethanol as one bushel of corn and the distillersgrains produced from corn and milo has equivalent uses.

 

We originallyexpected to build a 20 million gallon per year ethanol plant.  We subsequently revised our business plan toexpand the plant capacity to produce 25 million gallons of denatured fuel-gradeethanol.  After further review, wedetermined that increasing our production capacity to 35 million gallons ofdenatured fuel-grade ethanol would likely result in more efficient operationsfor our ethanol plant.  We do not expectthis change to delay our anticipated date of start-up operation, which iscurrently summer 2005.

 

Based on the increased capacity of our ethanolplant, we expect that the project will cost approximately $46,793,000 insteadof the $37,000,000 as previously planned. This includes approximately $36,340,000 to build the plant.  We are still in the development phase, anduntil the ethanol plant is operational, we will generate no revenue.  We anticipate that accumulated losses willcontinue to increase until the ethanol plant is operational.

 

Due to the increase in our anticipated total projectcost, we received an increase in our written debt financing commitment from$20,000,000 to $26,000,000.  To supplementthis debt financing, we entered into an agreement to secure additional equityproceeds of $6,250,000 from ICM, Inc., our design/builder and Fagen, Inc, ourprincipal subcontractor.  As incentivefor ICM, Inc. and Fagen, Inc. to contribute equity capital to purchase ourunits, we

 

21

----

 

engaged United Bio EnergyManagement, LLC; United Bio Energy Fuels, LLC; United Bio Energy Ingredients,LLC; and United Bio Energy Trading, LLC to provide us services includingethanol plant general management, ethanol and distillers grains marketing,grain origination services and overall risk management.  As such, we expect to be very dependent onUnited Bio Energy, LLC and its subsidiaries. These companies are owned by United Bio Energy, LLC of Wichita,Kansas.  United Bio Energy, LLC is ownedby an affiliate of ICM, Inc and an affiliate of Fagen, Inc.

 

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

 

In the next 12 months, we plan to focus on threeprimary activities: (1) completing construction of the plant, site developmentand permitting; (2) implementing our financing plan including the redemption of6,250 units from ICM, Inc. and Fagen, Inc.; and (3) preparing for andcommencing start-up operations.

 

*Plant Construction and Site Development*

 

OnSeptember 28, 2004, we instructed ICM, Inc. to commence construction of theethanol plant on our 23-acre site located in the Golden Prairie Industrial Parkon the outskirts of Garnett, Kansas. ICM, Inc. is serving as the design/builder and Fagen, Inc. is serving asthe principal subcontractor.  Weanticipate that we will need to purchase significant amounts of equipment inthe next 12 months, all of which will be necessary for successful plant operations.  We expect the plant to be substantiallycomplete, which means ready for occupancy and ethanol production in the summerof 2005, assuming a constant availability of supplies and labor.

 

Wewill be required to make progress payments to ICM, Inc. based upon applicationsof payment made by ICM, Inc. for all work performed as of the date of theapplication.  Initially we will retain10% of the amount submitted in each application for payment.  When at least 50% of the work has beencompleted, we will no longer withhold a retainage amount.  Once ICM, Inc. has substantially completed theproject, we will make a payment to ICM, Inc. equal to 100% of the contract,less $500,000.  We will also withholdamounts for any defective work.  We willpay $250,000 of the $500,000 to ICM, Inc. once we are satisfied that ICM, Inc.has satisfied its obligations under the contract.  We will pay the remaining $250,000 to ICM,Inc. after we receive a written emissions compliance report documentingcompliance with the applicable atmospheric emission criteria.

 

Thefollowing chart summarizes the progress on the construction of our plant asreported by ICM, Inc. on March 15, 2005.

 
| **Projects**                                                             | ** ** | **Percentage of Completion  as of March 15, 2005** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------|
| Install Dryer                                                            |       | 80                                                 |
| Install Energy Center Structural Steel,  Electrical, and Instrumentation |       | 60                                                 |
| Install Distillers Dried Grains Equipment                                |       | 60                                                 |
| Install Chiller and Master Control Center                                |       | 50                                                 |
| Install Fermenters                                                       |       | 100                                                |
| Install Distillers                                                       |       | 100                                                |
| Process Building Structural Steel                                        |       | 80                                                 |
| Work on Electrical System                                                |       | 50                                                 |
| Erect office building                                                    |       | 0                                                  |
| Install Cooling Tower                                                    |       | 30                                                 |
| Install Piping for Fermentation                                          |       | 30                                                 |
| Set Distillers and Install Piping for them                               |       | 40                                                 |
| Work on Alcohol Storage                                                  |       | 10                                                 |
| Work on Energy  Center                                                   |       | 30                                                 |
| Install Centrifuges and Process Equipment                                |       | 50                                                 |
| Install Piping, Electric, and Instrumentation  for Piping                |       | 30                                                 |
| Work on Fermenters                                                       |       | 100                                                |
| Work on field-erected tanks                                              |       | 35                                                 |
| Continue work on Alcohol Storage                                         |       | 10                                                 |
| Work on Installation of Cooling Tower                                    |       | 20                                                 |
| Install Evaporators                                                      |       | 100                                                |
| Install Electric  and Instrumentation for Distillers                     |       | 10                                                 |
| Install Rail Spur                                                        |       | 0                                                  |
| Continue work on  Alcohol Storage                                        |       | 40                                                 |
| Install Pumps on  Cooling Towers                                         |       | 40                                                 |
| Install Truck  Scales                                                    |       | 0                                                  |
| Complete Distillers Dried Grains Building                                |       | 100                                                |
| Train Plant Personnel                                                    |       | 10                                                 |
| Complete  Administration Building                                        |       | 20                                                 |
| Test Equipment and  Prepare for Start-up Operations                      |       | 0                                                  |
| Perform Water  Trials and Hydrology Testing                              |       | 0                                                  |
| Commence Operations                                                      |       | 0                                                  |

 

22

----

 

OnNovember 18, 2004, we purchased approximately 19 acres of real estate inAnderson County, Kansas to allow the placement of a railroad spur from theplant site to existing Union Pacific Railroad track in Garnett, Kansas.  We purchased the real estate pursuant to anoption that granted us the right to purchase it for $9,000 per acre.  We purchased the property for $170,010, whichexcluded the cost to replace boundary fencing and relocate an existingstructure along with water and electric utilities.  Previous deposits totaling $20,000 wereapplied to the purchase price.  The real estate was used as a surface dumpsitemany years ago resulting in the need to move and bury waste.  The clean-up required has now been completedand paid for by grant funds applied for and received by the City of Garnett,Kansas.  The commitment for titleinsurance from First American Title Insurance Company of Kansas applies to thisreal estate.

 

OnSeptember 2, 2004, we finalized our purchase of 23 acres of land in the GoldenPrairie Industrial Park on the edge of Garnett, Kansas where we areconstructing our ethanol plant.  OnFebruary 16, 2005, we entered into a real estate contract for the purchase ofan additional 17 acres adjacent to the site where we are constructing ourplant.  We intend to use this land forour natural gas metering station and for a portion of our railroad spur.  We expect to pay a purchase price of $90,083.  We have not yet closed on this purchase.

 

Weengaged Natural Resource Group of Minneapolis, Minnesota to coordinate andassist us with proper permitting.  It hassubmitted the application for the NPDES Wastewater Discharge Permit to theKansas Department of Health and Environment (“KDHE”) and worked with the KDHEto modify the construction air permit previously issued for the ethanol plantto accommodate the anticipated increased production capacity of our ethanolplant.  The approval of the modification wasreceived from the KDHE on August 5, 2004.

 

ICM,Inc. provided the preliminary civil engineering and site development for theethanol plant and continues to provide assistance in this area.  A Phase 1 Environmental Study on our site wascompleted on April 23, 2004.  Natwick& Associates of Fargo, North Dakota conducted an appraisal of the propertyand we engaged Taylor Design Group of Ottawa to conduct a survey of theproperty.  The survey was completed on November22, 2004.

 

**ImplementingOur Financing Plan**

 

Dueto the increase of our project cost and overall capitalization, our financingneeds have changed.  On November 23,2004, we entered into revised debt financing agreements with Home FederalSavings Bank of Rochester, Minnesota consisting of a term loan of $26,000,000.

 

To supplement our debt financing and complete our capitalization planwe entered into a Unit Purchase and Redemption Agreement with ICM, Inc. andFagen, Inc. In the Unit Purchase and Redemption Agreement we agreed to issue upto 6,250 of our units to ICM, Inc. and Fagen, Inc. at a purchase price of$1,000 per unit in exchange for a combined capital contribution from them of upto $6,250,000.  The closing of thepurchase of these units by ICM, Inc. and Fagen, Inc. was conditioned upon usdepleting the proceeds that we raised from our initial registered offering to$1,000,000 or less.  We also agreed toredeem all 6,250 units from ICM, Inc. and Fagen, Inc. using the proceeds fromthe sale of units in a future registered offering or, to the extent the futureoffering is unsuccessful, from cash flow generated by operations subject tocertain loan covenants, restrictions and tax distributions.  The redemption price will be $1,100 per unitif we are able to raise at least $6,875,000 in the future offering.  Otherwise, the redemption price will be basedon a current fair market value of the units.  In connection with this capital contribution,we amended our Operating Agreement to allow ICM, Inc. and Fagen, Inc. toappoint a total of three directors to our board of directors,

 

23

----

 

subject to ourability to terminate one of their director positions for every $2,000,000dollars in redemption payments made to either or both of ICM, Inc. and Fagen,Inc. On January 19, 2005, we closed on the purchase of these units and issued3,125 units to ICM, Inc. and 3,125 units to Fagen, Inc. in exchange for theirpurchase of the units at a price of $1,000 per unit.  Due to our obligation to redeem the units fromICM, Inc. and Fagen, Inc., our financial statements subsequent to our December31, 2004 financial statements will reflect the $6,250,000 as a liability at thetime the units are issued and the liability will be identified as units subjectto mandatory redemption.  For all otherpurposes, the $6,250,000 will be considered equity.

 

On December16, 2004, we filed a registration statement on Form SB-2 (Commission File333-121323).  We filed a pre-effectiveamendment to our registration statement on February 1, 2005.  We intend to offer units at an aggregateminimum price of $2,000,000 and an aggregate maximum price of $10,000,100.  We intend to use the proceeds of theregistered offering to redeem units from ICM, Inc. and Fagen Inc. and retainthe balance as working capital.  Ourregistered offering is not yet effective.

 

*Plan of Operations*

 

We have entered into agreements for theoperation of the ethanol plant with United Bio Energy Management, LLC;United Bio Energy Fuels, LLC; United Bio Energy Ingredients, LLC; and UnitedBio Energy Trading, LLC. United Bio Energy Management, LLC will manage theethanol plant and United Bio Energy Fuels, LLC will provide us ethanolmarketing services. United Bio Energy Ingredients, LLC will provide usdistillers grains marketing and grain origination services. United Bio EnergyTrading, LLC will provide us with overall risk management.  We expect to be very dependent on thesecompanies after we begin operations.  Asa result, any agreements negotiated will not be arms’ length transactions andmay not be as favorable as those negotiated with an independent third party.

 

We have entered into an agreement with Kansas CityPower & Light Company wherein Kansas City Power & Light Company has agreedto provide electric utility service for 15 years.  They will also install electric facilities onor before May 1, 2005. In exchange, we have agreed to pay $515,720 and certainactual costs not to exceed $298,117.  Weexpect to receive an economic development incentive which is expected to resultin a discount on our purchase of electric service for the first five years.  Based on an estimate of the amount of theload rate and usage we will require, we expect to pay per kWh on averageapproximately $0.0276 in year 1, $0.0295 in year 2, $0.0314 in year 3, $0.0335in year 4 and $0.0335 in year 5. Thereafter, we expect to pay approximately $0.0394 per kWh.  The actual amounts we pay for electricservice could vary if we do not qualify for the incentive, if our load rate orusage is different from our estimates, or if the applicable tariff rates areincreased.  We have engaged U.S. EnergyServices, Inc. of Wayzata, Minnesota, to provide consulting and energymanagement services for supplies of electricity and natural gas.  We have also executed an agreement withSouthern Star Central Gas Pipeline for construction, operation and maintenanceof the appropriate equipment and related facilities to deliver natural gas toour ethanol plant in exchange for our agreement to pay actual costs ofconstruction estimated at $312,471.  Weare also working with Southern Star Central Gas Pipeline to determine pricingfor our natural gas.  We have signed anagreement with U.S. Water Services for the provision of water treatmentchemicals and services for a price of $84,633 annually and a one time fee of$10,000.  We also plan to purchase asteam turbine generator from ICM, Inc. which is expected to generate up toapproximately 68% of the plant’s electrical needs.

 

We also plan to market and distribute thecarbon dioxide that will be produced at the plant as a by-product of ourethanol production. On January 28, 2004, we entered in to a letter of intentwith BOC Group, Inc. of Murray Hill, New Jersey.  The terms of the letter of intent providethat we will make available to BOC Group, Inc. for purchase all of the carbondioxide produced at the plant.  Theletter of intent contemplates that BOC Group, Inc. will purchase a substantialquantity of our raw carbon dioxide gas annually and will construct a carbondioxide liquefaction plant.  We expect tolease a parcel of our land adjacent to our ethanol plant to BOC Group, Inc. forconstruction of the liquefaction plant.  Theletter of intent was scheduled to expire by its terms on March 31, 2004, butwas extended to March 31, 2005.  We arecurrently negotiating a legally binding contract with BOC Group, Inc.  However, there is no guarantee

 

24

----

 

that a finalcontract will be executed or that it will be executed upon terms as favorableas those currently anticipated.  If we doexecute a final contract, it is likely that the sale of carbon dioxide will notbegin until at least Spring 2006.

 

*Major Commodity Supplies, MarketTrends and Risks Related to Price Protection*

 

The 2004 corn crop was the largest corn crop onrecord with national production at approximately 11.8 billion bushels. The 2004 corn supply is expected to outpace demand by approximately 1billion bushels.  National corn pricesshould remain low into the 2005 spring planting season.  However, as we get nearer to corn plantingseason, we expect the grain market to begin focusing on prospects for the 2005corn crop.  Variables such as planting dates, rainfall, and temperatureswill likely cause market uncertainty and create corn price volatility as thegrowing season begins.

 

Natural gas is also an important input commodityto our manufacturing process.  We use natural gas to dry our distiller’sgrain products to moisture contents at which they can be stored for longperiods of time, and can be transported greater distances.  Dry distiller’sgrains have a much broader market base, including the western cattle feedlots,and the dairies of California and Florida.  Unseasonably cold temperaturesacross much of the country in the summer of 2004 kept the demand for gas firedpeak plants low, coupled with a favorable injection season which filled thestorage space available for gas.  Prices as a result have trended lower,but still remain considerably higher than the last 10 year average.  Welook for continued volatility in the natural gas market, led mainly by thespeculators who are taking advantage of this market, and any increases in theprice of natural gas will increase our cost of production and impact our profitmargins.  We have secured an energy consultant for our natural gas, andwill work with them to develop ways to protect our business against adverseprice risk.

 

*Trends Impacting the EthanolIndustry*

 

Ethanol demand is expected to continue at a veryaggressive pace.  Today’s demand of morethan 3.57 billion gallons per year is expected to grow to at least 4 billiongallons per year by the year 2012 under current law according to the NationalCorn Growers Association.  This increasein demand does not include implementation of a Renewable Fuels Standard orsimilar legislation, which could cause an increase in demand to be greater thancurrently projected.  If the use of MTBE is phased out on a national levelin the next few years and the RFG oxygenate requirement remains unchanged, theanticipated growth may yield a doubling of ethanol demand much sooner.

 

We currently benefit from federal ethanol supportsand federal tax incentives.  Changes tothese supports or incentives could significantly impact demand for our ethanol. If a Renewable Fuels Standard bill orsimilar legislation is adopted, we may experience a short-term decline indemand for ethanol because national ethanol production may exceed theproduction volumes required in early years.  However, we would expect the legislation toprovide a substantial long-term market for our ethanol as required volumesincrease over time.

 

Demand for ethanol may also increase as a resultof increased consumption of E85 fuel.  E85 fuel is a blend of 70% to 85%ethanol and gasoline.  According to the Energy Information Administration,E85 consumption is projected to increase from a national total of 11 milliongallons in 2003 to 47 million gallons in 2025.  E85 is used as an aviationfuel and as a hydrogen source for fuel cells.  In the U.S., there arecurrently about 3 million flexible fuel vehicles capable of operating on E85and 400 retail stations supplying it.  Automakers have indicated plans toproduce an estimated 2 million more flexible fuel vehicles per year.

 

Ethanol production continues to grow as additionalplants become operational.  Demand forethanol has been supported by higher oil prices and its refined components.  Clean air standards mandated by federalagencies have required highly populated areas to blend ethanol into theirgasoline supplies as an oxygenate.  Theintent of the air standards is to reduce harmful emissions into the atmosphere. These mandates have been challenged inseveral metropolitan areas, and are currently being reviewed by the courts.  In the future, the combination of additionalsupply, successful challenges to the clean air standards and stagnant orreduced demand may adversely affect our profit margin and our ability tomaintain positive cash flows.

 

25

----

 

*Technology Developments*

 

Anew technology has recently been introduced by Vortex Dehydration Technology ofHanover, Maryland, to remove corn oil from concentrated thin stillage (abyproduct of “dry milling” ethanol processing facilities) which would be usedas an animal feed supplement or possibly as an input for bio-dieselproduction.  Although the recovery of oil from the thin stillage may beeconomically feasible, it fails to produce the advantages of removing the oilprior to the fermentation process.  The FWS Group of Companies,headquartered out of Canada with offices in the United States, is currentlyworking on a starch separation technology that would economically separate acorn kernel into its main components.  Theprocess removes the germ, pericarp and tip of the kernel leaving only theendosperm of kernel for the production of ethanol.  This technology hasthe capability to reduce drying costs and the loading of volatile organiccompounds.  The separated germ would also be available through thisprocess for other uses such as high oil feeds or bio-diesel production. Each of these new technologies is currently in its early stages ofdevelopment.  There is no guarantee that either technology will besuccessful or that we will be able to implement the technology in our ethanolplant.

 

**Use ofFunds**

 

We expect the total funding required for the plant to be $46,793,000.  We estimate that we will need approximately$36,340,000 to construct the plant, which includes the $35,900,000 payable toICM, Inc. under the design/build agreement, and a total of approximately$10,453,000 to cover all capital expenditures necessary to complete theproject, make the plant operational and produce revenue.  The total project cost has increased by$9,793,000 due to the increase in plant production capacity.  The change includes an $8,640,000 increase inplant construction costs, an increase of $610,000 in land and site improvementand a $480,000 increase to Inventory and Working Capital resulting from ourdecision to increase our expected annual production of fuel grade ethanol from25 million gallons to 35 million gallons.

 

Basedupon initial registered offering proceeds of $13,457,000, seed capital proceedsof $610,000, additional equity from ICM, Inc. and Fagen, Inc. of $6,250,000, aterm loan of $26,000,000, we expect that we will have approximately $46,793,000of debt and equity available which would provide us with sufficient cash onhand to cover construction and related start-up costs necessary to make theplant operational.

 

With receipt of the previously stated debt and equity financing, weexpect to have sufficient cash available to cover our costs over the next12 months, including construction, staffing, office, audit, legal,compliance costs and start up working capital costs.  The following is our estimate of our costs andexpenditures for the next 12 months.  These estimates are based upon consultationwith ICM, Inc. and Fagen, Inc. It is only an estimate and our actual expensescould be much higher due to a variety of factors.

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

 

26

----

 

**Applicationof Critical Accounting Policies**

 

*Estimates*

 

Management uses estimatesand assumptions in preparing our financial statements in accordance withgenerally accepted accounting principles.  These estimates and assumptions affect thereported amount of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  Actual results could differ from the estimateused.

 

*Stock Based Compensation*

 

We recordstock based compensation based on the fair value of the units issued for thecompensation.

 

*Prepaid Offering Costs*

* *

Costs incurredrelated to the sale of units are recorded as prepaid offering costs until therelated units are issued. Upon issuance of units offering costs are deductedfrom additional paid-in capital, with any remaining amount applied to retainedearnings (deficit accumulated during the development stage). Offering costsinclude direct costs related to the offering such as legal fees, cost ofmeetings and materials and related costs associated with the Company's privateoffering and initial public offering.

 

**Liquidity and Capital Resources**

 

As of December 31, 2004, we had cash and cashequivalents of $6,210,819 and total current assets of $6,335,181.  As of December 31, 2004, we have sold units inour public offering with a price of $13,457,000, and have raised an additional$610,000 in seed capital.  Subsequent toDecember 31, 2004, we received $6,250,000 in a combined capital contributionfrom ICM, Inc. and Fagen, Inc.  Thesefunds are being used to finance construction of the ethanol plant.

 

As of December 31, 2004, we had currentliabilities of $10,246,103 consisting primarily of our accounts payable.  Our note payable to the Kansas Department ofCommerce and Housing was paid off on September 30, 2004.  Since our inception through December 31, 2004,we have an accumulated deficit of $1,518,981.  We have reduced members’ equity by $264,129,the amount of the prepaid offering costs related to the offering.  Total members’ equity as of December 31, 2004,was $13,188,019.  Since our inception, wehave generated no revenue from operations.  For the year ended December 31, 2004, we havea net loss of $314,227 primarily due to start-up business costs.

 

*Debt Financing*

 

We had originally received a written debtfinancing commitment consisting of a term loan of $20,000,000 and a $1,000,000line of credit from Home Federal Savings Bank of Rochester, Minnesota.  Due to the increase of our project cost, weneeded to increase our debt financing.

 

On November 23, 2004 we entered into a CreditAgreement with Home Federal Savings Bank, establishing a construction loanfacility for the construction of a 35 million gallon per year ethanol plant.  The construction financing is in the amount of$26,000,000 consisting of a $21,000,000 conventional term loan and a $5,000,000USDA 80% guaranteed loan, and is secured by substantially all of our assets.

 

During the construction phase, we will make monthly payments ofinterest only at a variable interest rate equal to prime plus 1.75% with afloor of 6%.  The construction phaseshall end no later than September 1, 2005.  Following construction completion, the loanwill be segmented into two loans: (1) a $21,000,000 conventional termloan, and (2) a $5,000,000 USDA 80% guaranteed loan.  The $5,000,000 USDA guaranteed loan will havean amortization period and maturity date of 10 years.  We will make monthly payments of principal andinterest on the $5,000,000 loan at a variable interest rate of prime plus1.25%.  This variable rate will beadjusted quarterly.  The $21,000,000conventional loan will have an amortization period of 10 years but will matureat the end of 5 years.  We will makemonthly payments of principal and interest on the $21,000,000 loan at avariable rate equal to prime plus 1.75% with a floor of 6%.

 

The Company paid an origination fee of$367,750 to Home Federal Savings Bank, an $80,000 origination fee for the USDAloan guarantee, and a $30,000 annual administration fee related to the creditfacility.  The credit facility is securedby a mortgage on our real property and a security interest in all personal andintangible assets of the Company, including assignment of all materialcontracts.

 

During the construction phase, a 1%prepayment penalty of the total construction of $26,000,000 will be assessed ifthe loan is placed with a lender other than Home Federal Savings Bank.  After the construction phase, the $5,000,000USDA 80% guaranteed loan will impose a prepayment penalty depending on the yearof refinancing starting with the 5% penalty in year one and decreasing to 1% inyear 5.  With respect to the $21,000,000conventional loan, a prepayment penalty will be imposed starting with a 3%penalty in year one and decreasing to 1% in year 3.

 

During the term of the loan, all depositaccounts related to the Company must be maintained at Home Federal SavingsBank.  We will also be subject to certainfinancial loan covenants consisting of minimum working capital, minimum fixedcoverage, minimum current ratio, minimum net worth and maximum debt/net worthcovenants during

 

 

27

----

 

 

the term ofthe loan.  We will also be prohibitedfrom making distributions to our members; however, we will be allowed todistribute 40% of our net income to our members after our lender has receivedaudited financial statements for the fiscal year.  We must be in compliance with all financialratio requirements and loan covenants before and after any distributions to themembers.

 

After the construction phase, the Companywill only be allowed to make annual capital expenditures up to $400,000annually without the lender’s prior approval.  During the term of the loan, we are requiredto pay to the lender an annual amount equal to the greater of (1) 75% of anyCommodity Credit Corporation Bio Energy income payments received during theyear or (2) 25% of the Company’s free cash flow for each year.  Payments consisting of USDA Commodity CreditCorporation Bio Energy income must be paid to the lender within 15 days ofreceipt of any such payments.  Thesepayments will continue until an aggregate sum of $7,500,000 has been receivedby the lender.

 

Subsequent to December 31, 2004, we issuedunits to ICM, Inc. and Fagen, Inc. in exchange for their combined capitalcontribution of $6,250,000.  To theextent that we obtain proceeds of less than $6,875,000 in our future registeredoffering, we intend to redeem the units through a distribution of our net cashflow from operations at a redemption price equal to the fair market value ofthe units as of the date of the redemption.  The amount of yearly net cash flow availablefor redemption will be subject to a reduction due to distributions to ourmembers (including ICM, Inc. and Fagen, Inc.) in an aggregate amount equal to40% of our net income for the purpose of paying income taxes related to theownership of our units.  The amount ofyearly net cash flow available for redemption will be subject to a furtherreduction equal to the greater of 75% of any Commodity Credit Corporation BioEnergy income payments we receive during such year or 25% of our free cashflow.  Any redemption of our units by usis further subject to the terms and conditions of any and all debt financingagreements executed between our lenders and us.

 

 *Grants,Government Programs and Tax Rebates*

 

We received a Value-Added AgriculturalProduct Market Development Grant of $450,000 from the USDA, which is a matchinggrant to be used for start-up costs.  Wehave applied with the City of Garnett, Kansas under the NeighborhoodRevitalization Program for a rebate of any additional property taxesattributable to our site improvements.  TheCity of Garnett, Kansas was awarded an Economic Development grant and loanthrough the U.S. Small Cities Community Development Block Program for $750,000to assist with water infrastructure improvements at the plant site.  The City has also received approval from theKansas Department of Transportation for grant funds to assist with highwayimprovements.  The program provides thatthe state will contribute 85% of the actual project construction andengineering costs.  We have entered intoan agreement with the City of Garnett, and Anderson County to share equally theremaining funds that will be required which has been estimated at a total of $400,000. We have agreed to pay one-third of thisobligation in installment payments.  TheCity has also applied with the Kansas Department of Transportation for grantfunds that would assist with rail improvements.  This grant is still pending.

 

We have applied for a grant from the USDA’sCommodity Credit Corporation.  Under thegrant program, the Commodity Credit Corporation will reimburse eligible ethanolproducers of less than 65 million gallons of bioenergy one bushel of cornfor every two and one-half bushels of corn used for the increased production ofethanol.  Under the program, no eligibleproducer may receive more than $7,500,000 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.  Becausewe expect to be an eligible producer and to annually utilize approximately 13million bushels of corn in the increased production of ethanol, we expect topotentially receive a maximum award of approximately $7,500,000.  However, the Commodity Credit Corporation mayaward only $150,000,000 annually and any award we receive may be reduced basedupon the volume of applications from other eligible producers.  In addition, payments under the program in anyone 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).  According to the FarmService Agency, payments under the program in fiscal year 2004 totaled nearly$150,000,000 and approved federal funding for fiscal year 2005 is set at$100,000,000.  We expect to be eligibleto receive an award under the program only once during the life of our project. The Commodity Credit Corporation BioEnergy Program is scheduled to expire on September 30, 2006.  The grants available under the program may notcontinue beyond their scheduled expiration date or if they do continue, thegrants may not be at the same level.  Ifour ethanol plant is not operational by the expiration of the program or hasnot had substantial operations, we may not be eligible for the grants or mayreceive a reduced amount.

 

28

----

 

*Sources of Funds*

 

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

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

 

----

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

 

**Employee**s

 

Prior to completion of the plant construction and commencement ofoperations, we intend to employ approximately 31 full-time employees.  Approximately 3 of our employees will beinvolved primarily in management and administration and the remainder will beinvolved primarily in plant operations.  Pursuantto our Management Agreement, United BioEnergy Management, LLC has hired ourplant manager who will be employed by our Company.  United Bio Energy Management, LLC has also hireda general manager pursuant to the Management Agreement who will work full timeat our plant.  Accordingly, we expectapproximately 32 full-time personnel at the ethanol plant, including thegeneral manager.

 

The followingtable represents some of the anticipated positions within the plant and theminimum number of individuals we expect will be full-time personnel:

 
| **Position**           | ** ** | **# Full-Time  Personnel** | ** ** |
|------------------------|------------|----------------------------|------------|
| 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**                     | ** ** |

 

In addition, United BioEnergy Ingredients, LLC has hired a distillersgrain merchandiser whom we expect will be their employee, but will work fulltime in our plant.  The position, titles,job responsibilities and number allocated to each position may differ when webegin to employ individuals for each position.

 

We intend to enter into written confidentiality and assignmentagreements with our officers and employees.  Among other things, these agreements willrequire such officers and employees to keep all proprietary informationdeveloped or used by us in the course of our business strictly confidential.

 

Our success will depend in part on our ability to attract and retainqualified personnel at a competitive wage and benefit level.  We must hire qualified managers, accounting,human resources and other personnel.  Weoperate in a rural area with low unemployment.  There is no assurance that we will besuccessful in attracting and retaining qualified personnel at a wage andbenefit structure at or below those we have assumed in our project.  If we are unsuccessful in this regard, suchevent may have a material adverse effect on our operations, cash flows, andfinancial performance.

 

**Off-BalanceSheet Arrangements**

 

We have nooff-balance sheet arrangements other than those listed in Note 4—Member’sEquity to our Financial Statements.

 

29

----

 

**ITEM7.  FINANCIAL STATEMENTS.**

 

EAST KANSAS AGRI-ENERGY, LLC

 

Table of Contents

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

 

30

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

The Audit Committee

**East Kansas Agri-Energy, LLC**

Garnett, Kansas

 

We have audited the accompanying balance sheets of **East Kansas Agri-Energy, LLC** (a development stagelimited liability company) as of December 31, 2004 and 2003, and therelated statements of operations, members’ equity and cash flows for the yearsthen ended and for the period from January 3, 2001 (inception) throughDecember 31, 2004.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinion onthese financial statements based upon our audits.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates by management, as well asevaluating the overall financial statement presentation.  We believe our audits provide a reasonablebasis for our opinion.

 

In our opinion, the financial statements referred to above present fairly,in all material respects, the financial position of **East Kansas Agri-Energy, LLC** as of December 31,2004 and 2003, and the results of its operations and its cash flows for theyears ended December 31, 2004 and 2003, and for the period fromJanuary 3, 2001 (inception) through December 31, 2004, in conformitywith accounting principles generally accepted in the United States of America.

 

/s/ Eide Bailly LLP

 

Minneapolis, Minnesota

March 10, 2005

 

31

----

 

**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**BALANCESHEETS**

**DECEMBER 31, 2004 AND 2003**

 
| ** **                                                                                                                                                     | ** ** | **2004**       | ** **           | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|----------------------|------------|------------|
| **ASSETS**                                                                                                                                                     |       |           |                 |       |       |
| ** **                                                                                                                                                     |       | ** **     | ** **           |       |       |
| CURRENT ASSETS                                                                                                                                                 |       | ** **     | ** **           |       |       |
| Cash and cash equivalents                                                                                                                                      |       | **$**          | **6,210,819**        | ** ** | $          | 42,587 |   |
| Grant receivable                                                                                                                                               |       | **54,906**     | ** **           | 27,059     |       |
| Prepaid offering costs                                                                                                                                         |       | **64,518**     | ** **           | 262,869    |       |
| Prepaid expense                                                                                                                                                |       | **4,938**      | ** **           | 1,419      |       |
| Total current assets                                                                                                                                           |       | **6,335,181**  | ** **           | 333,934    |       |
|                                                                                                                                                           |       | ** **     | ** **           |       |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                                                  |       | ** **     | ** **           |       |       |
| Office equipment                                                                                                                                               |       | **16,998**     | ** **           | 16,490     |       |
| Land                                                                                                                                                           |       | **170,011**    | ** **           | —     |       |
| Construction in progress                                                                                                                                       |       | **16,366,365** | ** **           | 74,695     |       |
|                                                                                                                                                           |       | **16,553,374** | ** **           | 91,185     |       |
| Less accumulated depreciation                                                                                                                                  |       | **6,818**      | ** **           | 3,494      |       |
|                                                                                                                                                           |       | **16,546,556** | ** **           | 87,691     |       |
|                                                                                                                                                           |       | ** **     | ** **           |       |       |
| OTHER ASSETS                                                                                                                                                   |       | ** **     | ** **           |       |       |
| Land option                                                                                                                                                    |       | **—**     | ** **           | 10,000     |       |
| Financing costs                                                                                                                                                |       | **552,385**    | ** **           | —     |       |
|                                                                                                                                                           |       | **552,385**    | ** **           | 10,000     |       |
| Total assets                                                                                                                                                   |       | **$**          | **23,434,122**       | ** ** | $          | 431,625 |   |
|                                                                                                                                                           |       | ** **     | ** **           | ** ** |       |   |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                                                                       |       | ** **     | ** **           |       |       |
| ** **                                                                                                                                                     |       | ** **     | ** **           |       |       |
| CURRENT LIABILITIES                                                                                                                                            |       | ** **     | ** **           |       |       |
| Current portion of long-term debt                                                                                                                              |       | **$**          | **—**           | ** ** | $          | 75,000 |   |
| Accounts payable                                                                                                                                               |       | ** **     | ** **           |       |       |
| Trade                                                                                                                                                          |       | **384,287**    | ** **           | 45,309     |       |
| Related party                                                                                                                                                  |       | **9,837,189**  | ** **           | 25,200     |       |
| Accrued payroll, taxes, and withholdings                                                                                                                       |       | **7,365**      | ** **           | 5,928      |       |
| Accrued taxes                                                                                                                                                  |       | **17,262**     | ** **           | —     |       |
| Accrued interest                                                                                                                                               |       | **—**     | ** **           | 813        |       |
| Total current liabilities                                                                                                                                      |       | **10,246,103** | ** **           | 152,250    |       |
|                                                                                                                                                           |       | ** **     | ** **           |       |       |
| MEMBERS’ EQUITY                                                                                                                                           |       | ** **     | ** **           |       |       |
| Capital contributions, 40,000 and 20,000  units authorized, 14,707 and 1,220 units issued and outstanding as of  December 31, 2004 and 2003, respectively |       | **14,707,000** | ** **           | 1,220,000  |       |
| Deficit accumulated during the development  stage                                                                                                              |       | **(1,518,981** | **)**                | (940,625   | )          |
| Total members’ equity                                                                                                                                     |       | **13,188,019** | ** **           | 279,375    |       |
| Total liabilities and equity                                                                                                                                   |       | **$**          | ** 23,434,122** | ** ** | $          |  431,625 |   |

 

See Notes to Financial Statements

 

32

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTSOF OPERATIONS**

 
| ** **                                             | ** ** | **Year  Ended  December 31,  2004** | ** **         | **Year  Ended  December 31,  2003** | ** ** | **From January 3,  2001 (Date of  Inception) to  December 31,  2004** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|--------------------|-------------------------------------|------------|-----------------------------------------------------------------------|------------|
| REVENUE                                                |       | **$**                               | **—**         | ** **                          | $          | —                                                                |       | $ | — |   |
|                                                   |       | ** **                          | ** **         | ** **                          |       |                                                                  |       |   |   |   |
| OPERATING EXPENSES                                     |       | ** **                          | ** **         |                                |       |                                                                  |       |
| Organizational expenses                                |       | **—**                          | ** **         | —                              |       | 3,643                                                                 |       |
| Start-up expenses                                      |       | **357,591**                         | ** **         | 159,262                             |       | 677,672                                                               |       |
|                                                   |       | **357,591**                         | ** **         | 159,262                             |       | 681,315                                                               |       |
|                                                   |       | ** **                          | ** **         |                                |       |                                                                  |       |
| OTHER INCOME (expense)                                 |       | ** **                          | ** **         |                                |       |                                                                  |       |
| Interest income                                        |       | **47,020**                          | ** **         | 1,773                               |       | 53,648                                                                |       |
| Interest expense                                       |       | **(3,656**                          | **)**              | (1,131                              | )          | (4,787                                                                | )          |
| Other income                                           |       | **—**                          | ** **         | —                              |       | 2,000                                                                 |       |
|                                                   |       | **43,364**                          | ** **         | 642                                 |       | 50,861                                                                |       |
|                                                   |       | ** **                          | ** **         |                                |       |                                                                  |       |
| NET LOSS                                               |       | **$**                               | ** (314,227** | **)**                               | $          |  (158,620                                                        | )          | $ |  (630,454 | ) |
| BASIC AND DILUTED LOSS PER UNIT                        |       | **$**                               | **(29**            | **)**                               | $          | (130                                                                  | )          |   |   |
|                                                   |       | ** **                          | ** **         | ** **                          |       |                                                                  |       |   |   |
| WEIGHTED AVERAGE UNITS OUTSTANDING, BASIC  AND DILUTED |       | **10,662**                          | ** **         | 1,220                               |       |                                                                  |       |

 

See Notes to Financial Statements

 

33

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTS OF CHANGES IN MEMBERS’ EQUITY**

 
| ** **                                       | ** ** | **Units**  | ** ** | **Contributed  Capital** | ** **     | **Deficit  Accumulated  During the  Development  Stage** | ** ** | **Total**      | ** ** |
|--------------------------------------------------|------------|------------|------------|--------------------------|----------------|----------------------------------------------------------|------------|----------------|------------|
| Balance, January 3, 2001 (Date of  inception)    |       | —     |       | $                        | —         |                                                     | $          | —         |       | $ | — |   |
| Net loss for the period ended December 31,  2001 |       | —     |       | —                   |           | (30,484                                                  | )          | (30,484        | )          |
|                                             |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of December 31, 2001                  |       | —     |       | —                   |           | (30,484                                                  | )          | (30,484        | )          |
| Units issued                                     |       | 1,220      |       | 610,000                  |           | —                                                   |       | 610,000        |       |
| Impact of units issued at a discount             |       | —     |       | 610,000                  |           | (610,000                                                 | )          | —         |       |
| Cost of raising capital                          |       | —     |       | —                   |           | (14,398                                                  | )          | (14,398        | )          |
| Net loss for the year ended December 31,  2002   |       | —     |       | —                   |           | (127,123                                                 | )          | (127,123       | )          |
|                                             |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of December 31, 2002                  |       | 1,220      |       | 1,220,000                |           | (782,005                                                 | )          | 437,995        |       |
| Units issued                                     |       | —     |       | —                   |           | —                                                   |       | —         |       |
| Impact of units issued at a discount             |       | —     |       | —                   |           | —                                                   |       | —         |       |
| Cost of raising capital                          |       | —     |       | —                   |           | —                                                   |       | —         |       |
| Net loss for the year ended December 31,  2003   |       | —     |       | —                   |           | (158,620                                                 | )          | (158,620       | )          |
|                                             |       |       |       |                     |           |                                                     |       |           |       |
| Balance as of December 31, 2003                  |       | 1,220      |       | 1,220,000                |           | (940,625                                                 | )          | 279,375        |       |
| Units issued                                     |       | 13,457     |       | 13,457,000               |           | —                                                   |       | 13,457,000     |       |
| Units issued for compensation                    |       | 30         |       | 30,000                   |           | —                                                   |       | 30,000         |       |
| Cost of raising capital                          |       | —     |       | —                   |           | (264,129                                                 | )          | (264,129       | )          |
| Net loss for the year ended December 31,  2004   |       | —     |       | —                   |           | (314,227                                                 | )          | (314,227       | )          |
|                                             |       | **14,707** | ** ** | **$**                    | **14,707,000** | ** **                                               | **$**      | **(1,518,981** | **)**      | **$** | **13,188,019** | ** ** |

 

See Notes to Financial Statements

 

34

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTSOF CASH FLOWS**

 
| ** **                                                                  | ** ** | **Year  Ended  December 31,  2004** | ** **    | **Year  Ended  December 31,  2003** | ** ** | **From January 3,  2001 (Date of  Inception) to  December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------|---------------|-------------------------------------|------------|-----------------------------------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                        |       |                                |          |                                |       |                                                                  |       |
| Net loss                                                                    |       | **$**                               | **(314,227**  | **)**                               | $          | (158,620                                                              | )          | $ | (630,454 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |       | ** **                          | ** **    |                                |       |                                                                  |       |
| Depreciation                                                                |       | **3,324**                           | ** **    | 3,096                               |       | 6,818                                                                 |       |
| Noncash compensation for capital units                                      |       | **30,000**                          | ** **    | —                              |       | 30,000                                                                |       |
| Increase in current assets                                                  |       | ** **                          | ** **    |                                |       |                                                                  |       |
| Grant receivable                                                            |       | **(27,847**                         | **)**         | (27,059                             | )          | (54,906                                                               | )          |
| Prepaid expense                                                             |       | **(3,519**                          | **)**         | (1,419                              | )          | (4,938                                                                | )          |
| Increase (decrease) in current liabilities                                  |       | ** **                          | ** **    |                                |       |                                                                  |       |
| Accounts payable                                                            |       | **36,452**                          | ** **    | 5,384                               |       | 106,961                                                               |       |
| Accrued payroll, taxes and withholdings                                     |       | **1,437**                           | ** **    | 4,520                               |       | 7,365                                                                 |       |
| Accrued taxes                                                               |       | **17,262**                          | ** **    | —                              |       | 17,262                                                                |       |
| Accrued interest                                                            |       | **(813**                            | **)**         | 813                                 |       | —                                                                |       |
| Net cash used in operating activities                                       |       | **(257,931**                        | **)**         | (173,285                            | )          | (521,892                                                              | )          |
| CASH FLOWS FROM INVESTING ACTIVITIES                                        |       | ** **                          | ** **    |                                |       |                                                                  |       |
| Purchase of equipment                                                       |       | **(508**                            | **)**         | (11,470                             | )          | (16,998                                                               | )          |
| Purchase of land and land option payments                                   |       | **(160,011**                        | **)**         | (5,000                              | )          | (170,011                                                              | )          |
| Construction in process                                                     |       | **(6,241,673**                      | **)**         | (6,271                              | )          | (6,316,368                                                            | )          |
| Net cash used in investing activities                                       |       | **(6,402,192**                      | **)**         | (22,741                             | )          | (6,503,377                                                            | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |       | ** **                          | ** **    |                                |       |                                                                  |       |
| Cost of raising capital                                                     |       | **(1,260**                          | **)**         | (135,577                            | )          | (278,527                                                              | )          |
| Payment of financing costs                                                  |       | **(552,385**                        | **)**         | —                              |       | (552,385                                                              | )          |
| Proceeds from notes payable                                                 |       | **—**                          | ** **    | —                              |       | 137,000                                                               |       |
| Repayment of notes payable                                                  |       | **—**                          | ** **    | —                              |       | (137,000                                                              | )          |
| Proceeds from long-term debt                                                |       | **—**                          | ** **    | —                              |       | 75,000                                                                |       |
| Repayment of long-term debt                                                 |       | **—**                          | ** **    | —                              |       | (75,000                                                               | )          |
| Capital contributions                                                       |       | **13,457,000**                      | ** **    | —                              |       | 14,067,000                                                            |       |
| Net cash provided by (used in) financing  activities                        |       | **12,828,355**                      | ** **    | (135,577                            | )          | 13,236,088                                                            |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                       |       | **6,168,232**                       | ** **    | (331,603                            | )          | 6,210,819                                                             |       |
|                                                                        |       | ** **                          | ** **    |                                |       |                                                                  |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                             |       | **42,587**                          | ** **    | 374,190                             |       | —                                                                |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                    |       | **$**                               | **6,210,819** | ** **                          | $          | 42,587                                                                |       | $ | 6,210,819 |   |

 

(continued on next page)

 

35

----

 

**STATEMENTS OF CASH FLOWS—Page 2**

 
| ** **                                                                                      | ** ** | **Year  Ended  December 31,  2004** | ** ** | **Year  Ended  December 31,  2003** | ** ** | **From January 3,  2001 (Date of  Inception) to  December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------|------------|
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                               |       |                                |       |                                |       |                                                                  |       |
| Cash paid during the period for interest                                                        |       | $                                   | 3,338      |                                | $          | 318                                                                   |       | $ | 3,656 |   |
|                                                                                            |       |                                |       |                                |       |                                                                  |       |
| NON CASH INVESTING AND FINANCING ACTIVITIES                                                     |       |                                |       |                                |       |                                                                  |       |
| Deferred offering costs incurred                                                                |       | $                                   | 64,518     |                                | $          | 9,649                                                                 |       | $ | 64,518 |   |
| Property, plant and equipment costs  incurred                                                   |       | $                                   | 10,049,997 |                                | $          | 17,621                                                                |       | $ | 10,049,997 |   |
| Cost of raising capital reclassified to  members’ equity                                   |       | $                                   | 264,129    |                                | $          | —                                                                |       | $ | 264,129 |   |
| Capital contributions issued at discount                                                        |       | $                                   | —     |                                | $          | —                                                                |       | $ | 610,000 |   |
| Capital contributions issued for  compensation expensed during the year ended December 31, 2004 |       | $                                   | 15,000     |                                | $          | —                                                                |       | $ | 15,000 |   |
| Liability converted into capital units                                                          |       | 15,000                              |       | —                              |       | 15,000                                                                |       |
|                                                                                            |       | $                                   | 30,000     |                                | $          | —                                                                |       | $ | 30,000 |   |

 

See Notes to Financial Statements

 

36

----

 

**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO FINANCIAL STATEMENTS**

 

**NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*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 plantwith distribution within the United States.  East Kansas Agri-Energy, LLC (the Company)anticipates completing construction by the summer of 2005.  As of December 31, 2004, the Company isin the development stage with its efforts being principally devoted tofinancing and construction activities.

 

The Company was formally organized as alimited 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 accrual basis ofaccounting in accordance with accounting principles generally accepted in theUnited States of America.  This methodrecognizes revenues as earned and expenses as incurred.

 

*Revenue Recognition*

 

Revenue from the production of ethanol andrelated products will be recorded upon delivery to customers.  Interest income is recognized as earned.

 

*Prepaid Offering Costs*

 

Costs incurred related to the sale of unitsare recorded as prepaid offering costs until the related units are issued.  Upon issuance of units offering costs arededucted from additional paid-in capital, with any remaining amount applied toretained earnings (deficit accumulated during the development stage).  Offering costs include direct costs related tothe offering such as legal fees, cost of meetings and materials and relatedcosts associated with the Company’s private offering and initial publicoffering.

 

*Property and Equipment*

 

Property and equipment are stated at cost.  Significant additions are capitalized, whileexpenditures for maintenance, repairs and minor renewals are charged tooperations when incurred.  Officeequipment is depreciated over the estimated useful life of 5 to 10 yearson a straight-line basis.

 

Construction in progress consists of amountsincurred for the construction of buildings, processing equipment and otherrelated construction activities including capitalized interest and other coststhat meet capitalization criteria.

 

The Company reviews its property andequipment for impairment whenever events indicate that the carrying amount ofthe asset may not be recoverable.  Animpairment loss is recorded when the sum of the future cash flows is less thanthe carrying amount of the asset. The amount of the loss is determined bycomparing the fair market value of asset to the carrying amount of the asset.

 

(continued on next page)

 

37

----

 

**EAST KANSAS AGRI-ENERGY, LLC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO FINANCIAL STATEMENTS**

 

*Other Income*

 

Other income consists of amounts receivedfrom unaffiliated organizations to assist in the organization and developmentof the Company. Amounts are recorded as other income when there is noobligation to assist in the organization and development of the Company.

 

*Organization and Start-up Costs*

 

Organizational and start-up costs areexpensed as incurred. Organizational costs consist of amounts related to theformation of the company. Start-up costs consist of amounts incurred during thedevelopment stage related to the operation and management of the Company, whichdo not qualify as capitalized costs.

 

*Grants and Bargain Purchases*

 

Amounts received as grants are recorded as areduction of the expense or cost for which the grant was provided. Amountsreceived as a bargain purchase are recorded as a reduction of the cost basis ofthe asset.

 

*Financing Costs*

 

Costs incurred related to origination of debtfinancing are recorded as an asset and amortized to interest capitalized duringconstruction or interest expense over the expected term of the debt.

 

*Estimates*

 

Management uses estimates and assumptions inpreparing financial statements.  Thoseestimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expenses.  Actual results could differ from the estimatesused.

 

*Income Taxes*

 

The Company is organized as a limitedliability under state law and is treated as a partnership for income taxpurposes.  Under this type of organization,the Company’s earnings pass through to the partners and are taxed at thepartner level.  Accordingly, no incometax provision has been calculated.  Differences between financial statement basisof assets and tax basis of assets is related to capitalization and amortizationof organizational and start-up costs for tax purposes, whereas these costs areexpensed for financial statement purposes.

 

*Cash Equivalents*

 

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

 

*Earnings Per Unit*

 

Earnings per unit are calculated based on theperiod of time units have been issued and outstanding.  For purposes of calculating diluted earningsper capital unit, units subscribed for but not issued are included in thecomputation of outstanding capital units.  As of December 31, 2004, the Company hadno subscribed units.  As ofDecember 31, 2003, there was not a difference between basic and dilutedearnings per unit since calculation of diluted earnings per unit for the effectof units subscribed but not issued would have been anti-dilutive.

 

(continued on next page)

 

38

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTESTO FINANCIAL STATEMENT**

 

*Stock Based Compensation*

 

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

 

**NOTE 2—NOTES PAYABLE—UNSECURED CREDITORS**

 

During 2001, the Company borrowed $1,000 eachfrom 137 unsecured creditors.  Theamounts were received from the creditors as investments at risk, with noguarantee of repayment and no interest due on repayment.  During the year ended December 31, 2002,the Company repaid the remaining balance of these notes payable.

 

**NOTE 3—LONG-TERM DEBT**

 

Long-term obligations of the Company aresummarized as follows at December 31, 2004 and 2003, respectively.

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note payable to Kansas Department of  Commerce and Housing (KDOCH). Repayment is contingent on the escrow related  to the Company’s initial public offering being broken. If the escrow is  broken by October 31, 2003, the Company will repay the amount within seven  days. In the event escrow is broken after October 31, 2003, within seven days  of that date, the Company will repay $75,000 plus 6.50% simple interest  compounded annually from October 31, 2003. |       | $        | —     |     | $          | 75,000 |   |
| Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | —   |       | 75,000   |       |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | $        | —     |     | $          | — |   |

 

During 2004, the Company repaid the abovenote payable.

 

Management estimates that the fair value ofthe above debt instrument was approximately $75,000 at December 2003.

 

**NOTE 4—MEMBER’S EQUITY**

 

As specified in the Company’s OperatingAgreement, voting rights are one vote for each voting unit registered in thename of such Member as shown on the Membership Registration maintained by theCompany. No Member shall directly or indirectly own or control more than 25% ofthe issued and outstanding voting membership interest in the Company at anytime.

 

Income and losses of the Company shall beallocated among the Members in proportion to each Member’s respectivepercentage of Units when compared with the total Units issued.

 

(continued on next page)

 

39

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTESTO FINANCIAL STATEMENTS**

 

The Company’s cash flow shall first beapplied to the payment of the Company’s operating expenses (including debtservice) and then to maintenance of adequate cash reserves as determined by theBoard of Directors in its sole discretion, shall be distributed from time totime to the Members in proportion to their respective percentage Units. Nomember has the right to demand and receive any distribution from the Companyother than in cash. No distribution shall be made if, as a result thereof, theCompany would be in violation of any loan agreement, or if the Company’s totalassets would be less than the sum of its total liabilities.

 

Transfer, disposition or encumbrance ofCapital Units is subject to certain restrictions, including approval by theBoard of Directors.

 

Initial investors purchased their units at$500 per unit subject to a private placement memorandum.  As part of the Company’s initial publicoffering, units have been offered at a minimum of $1,000 per unit.  The difference has been reflected as adiscount on the units and has been recorded as a distribution.

 

Upon completion of the private placementmemorandum, costs related to the issuance of the units of $14,398 were chargedto members’ equity.

 

In addition to transactions discussed inNote 2, the Company issued during 2004, a total of 30 units forcompensation.  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 tothis bonus totaled $15,000 for the year ended December 31, 2004.

 

During September 2004, the Companyamended its Operating Agreement whereby the number of authorized units wasincreased from 20,000 to 40,000 units.  In addition, the amendments to the OperatingAgreement provide for two classes of members of the Board of Directors,Class A and Class B. Class A members of the Board of Directorsconsist of previously existing members of the Board of Directors, prior toamendment. Up to (3) Class B members of the Board of Directors may beappointed by Fagen, Inc., ICM, Inc., or both of these parties inconjunction with their agreement to purchase units.

 

The Company has entered into a Unit Purchaseand Redemption Agreement for membership units with Fagen, Inc. andICM, Inc.  The total number of unitssubject to the agreement shall not exceed 6,250 units at $1,000 per unit, fortotal proceeds of $6,250,000.  TheCompany also has an obligation to repurchase the units from the proceeds of aproposed equity offering at a rate of $1,100 per unit, or a total $6,875,000 orfrom the cash flow provided by the operations of the ethanol plant.  For each $2,000,000 of units related to thisagreement, ICM, Inc. and Fagen, Inc. are entitled to one boardmember.  As the units are repurchased bythe Company, the number of Class B Board members is reduced by one foreach $2,000,000 of units repurchased.  Because of the Company’s obligation torepurchase the units, the amount received will be recorded as a liability forfinancial statement purposes.

 

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

 

(continued on next page)

 

40

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTESTO FINANCIAL STATEMENTS**

 

**NOTE 5—CONCENTRATION OF CREDIT RISK**

 

The Company maintains cash balances at afinancial institution in its trade area.  The account is secured by the Federal DepositInsurance Corporation up to $100,000.  Attimes, the Company’s bank balance may exceed $100,000.

 

**NOTE 6—GRANT INCOME**

 

The Company received grants as follows duringthe period ended December 31, 2001:

 
| Kansas Grain Sorghum Commission       |   | $     | 5,000  |   |
|---------------------------------------|--------|-------|--------|--------|
| Kansas Corn Commission                |   | 7,000 |   |
| Kansas Cooperative Development Center |   | 5,000 |   |
|                                  |   | $     | 17,000 |   |

 

Each of the above grants was provided to theCompany for purposes of funding a feasibility study.  As of December 31, 2002, all of the abovegrants were received.  The grants havebeen deducted from the costs related to the feasibility study incurred anddeducted from start-up expenses.

 

**NOTE 7—RELATED PARTY TRANSACTIONS**

 

The former project coordinator (Note 8)purchased membership units during the period ended December 31, 2002.

 

Of the previously unsecured creditors(Note 2), 122 are members of record as of December 31, 2003, owning10 units each.

 

Other agreements with related parties andaffiliates are discussed in Note 8.

 

**NOTE 8—COMMITMENTS AND CONTINGENCIES**

 

The Company has entered into an optionagreement to purchase approximately 10 acres of land.  The option was originally purchased for$5,000, plus $5,000 for an extension during 2003, and provides for a purchaseprice of $9,000 per acre, plus the cost to replace boundary fencing andrelocate an existing structure along with water and electric utilities.  The option was extended to September 1,2004 and the Company paid an additional $5,000 for the extension.  On September 1, 2004, the option wasextended until such time as closing on the property would occur.  The purchase price of the land will be reducedby amounts previously paid for the option and extension.

 

On November 18, 2004, the Companyexercised the land option and purchased approximately 19 acres of real estatein Anderson County, Kansas.  The Companypaid $170,010, which excluded the cost to replace boundary fencing and relocatean existing structure along with water and electric utilities.  Previous deposits totaling $20,000 wereapplied to the purchase price and a sum of $150,010 was paid at closing.

 

(continued on next page)

 

41

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTESTO FINANCIAL STATEMENTS**

 

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

 

During the year ended December 31, 2003,the Company terminated its agreement with Value Added Ventures, LLC (VAV).  The Company has been notified by VAVrequesting payment for services from the inception of the contract through thedate of termination totaling $33,380.  The Company and VAV are negotiating settlementof this contract.  The Company has aliability related to this agreement of $5,847 as of December 31, 2004 and2003.

 

During the year ended December 31, 2003,the Company negotiated with a board member to perform certain consultingservices, which were to begin on October 1, 2003.  The parties did not execute a contract for theseservices.  Subsequent toDecember 31, 2003, the board member resigned and the Company received aclaim for the payment of approximately $50,000, consisting of approximately$2,000 and 48 Units of the Company.  TheCompany contends that since a contract was not executed and services were notperformed related to the proposed agreement, no liability exists.  The Company intends to vigorously defenditself against the claim.

 

The Company completed its initial publicoffering and escrow was broken in March 2004.  A total of 13,457 units were subscribed andpaid for during the year ended December 31, 2004.

 

The Company has increased its expected annualproduction of fuel grade ethanol from 25 million gallons to35 million gallons.  Based on theincreased capacity of the ethanol plant, the Company expects that the projectwill cost approximately $48,000,000 instead of the $37,000,000 previouslyplanned.

 

The Company has entered into a design-buildcontract with ICM, Inc. for a fixed price of $35,900,000 excluding certainowner furnished costs, pursuant to an agreement for the construction of the35 million gallon annual capacity ethanol plant.  As of December 31, 2004, the remainingobligation on the contract was approximately $20,825,000 and the Company hadincurred costs of $9,800,391 included in accounts payable.

 

On November 12, 2004, the Companyentered into a Trading Agreement with United Bio Energy Trading, LLC, anaffiliated related party, in which United Bio Energy Trading, LLC will providemarket information and consulting services for the Company.  The Company anticipates that the term of theagreement will be for at least five years and will pay a monthly fee of $6,000.

 

On November 12, 2004, the Companyentered into a Distiller’s Grains Marketing Agreement with United Bio EnergyIngredients, LLC, an affiliated related party, pursuant to which United BioEnergy Ingredients, LLC will purchase all dried and wet distiller’s grainsproduced at the plant for a term of five years at a price of a percentage ofthe price United Bio Energy Ingredients, LLC charges its buyers of drieddistiller’s grains, and 95% of the price United Bio Energy Ingredients, LLCcharges its buyers of wet distiller’s grains.  The Company is responsible for supplying alllabor and equipment to load or unload trucks or rail cars without charge toUnited Bio Energy Ingredients, LLC and is required to provide storage for atleast 10 days production of wet and dry distiller’s grains.  In addition, the distiller’s grains must meetquality requirements so that they will meet current industry standards forprimary animal feed ingredients.  If theCompany fails to supply distiller’s grains that comply with industry standards,United Bio Energy Ingredients, LLC may reject them.

 

(continued on next page)

 

42

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTESTO FINANCIAL STATEMENTS**

 

On November 12, 2004, the Companyentered into a Raw Grains Agreement with United Bio Energy Ingredients, LLC, anaffiliated related party.  The Raw GrainsAgreement provides for the Company to purchase all raw grains necessary forethanol production from United Bio Energy Ingredients, LLC for a period of atleast five years.  Pursuant to theagreement, United Bio Energy Ingredients, LLC will use its best efforts toarrange for the purchase of grain at the lowest price available underprevailing market conditions and we will supply all labor and equipmentnecessary to load or unload trucks or rail cars.  For its service, the Company will pay UnitedBio Energy Ingredients, LLC the actual cash procurement price and allreasonable and necessary expenses to get the grain to the plant plus a perbushel fee.  The title, risk of loss andresponsibility for the quality of grain will transfer to the Company when itunloads the grain at the plant.  Prior tothat time, United Bio Energy Ingredients, LLC will bear the risk of loss.  All grain delivered to the plant shall meetcertain quality standards and the Company will have the option to reduce theprice the Company will pay or fully reject any delivery that fails to conformto these standards, depending upon the severity of the noncompliance.

 

On November 12, 2004, the Company alsoentered into an Ethanol Agreement with United Bio Energy Fuels, LLC, anaffiliated related party.  The terms ofthe agreement provide that United Bio Energy Fuels, LLC will market allfuel-grade ethanol produced at our plant.  In exchange, the Company agreed to pay UnitedBio Energy Fuels, LLC a fee for each gallon of ethanol produced at the Company’splant during the term of the agreement.  The Company expects that the term of theagreement will be at least five years.  United Bio Energy Fuels, LLC also agreed touse its best efforts to obtain the highest price for ethanol available underprevailing market conditions.

 

On November 12, 2004, the Companyentered into a Management Agreement with United Bio Energy Management, LLC, arelated party, in which United Bio Energy Management, LLC will supervise anddirect the general operations of the plant for an anticipated period of atleast five years.  United Bio EnergyManagement, LLC will provide the services of a full-time general manager to theplant.  United Bio Energy Management, LLCis wholly owned by ICM, Inc. and Fagen, Inc. Accordingly, the Companymay not be able to negotiate any further transactions at arms length, as theCompany would be able to do with an independent party.  The Company has agreed to compensate UnitedBio Energy Management, LLC an annual fee of $250,000 for these services payablein monthly installments of $20,833, plus an incentive bonus based on theattainment of certain financial benchmarks.  United Bio Energy Management, LLC will appointa general manager to be based on site at our plant, and shall work exclusivelyfor us.  In the event of a dispute, theManagement Agreement provides that the Company will first attempt to amicablysettle any dispute or difference privately between United Bio EnergyManagement, LLC and the Company.  If theCompany cannot resolve the dispute as a result of the discussions, then theCompany must submit the matter to non-binding mediation.  In the event that the dispute is not settledthrough mediation, the matter must be resolved by non-appealable arbitration inaccordance with the rules of the American Arbitration Association as applicablein the State of Kansas.  Thedetermination of the arbitrator is expected to be final and may not be appealedto any court.  The prevailing party inany arbitration proceeding is entitled to recover reasonable attorneys’ feesand expenses incurred.

 

On November 23, 2004, the Companyentered into a Credit Agreement with Home Federal Savings Bank, establishing aconstruction loan facility for the construction of a 35 million gallon peryear ethanol plant.  The constructionfinancing is in the amount of $26,000,000 consisting of a $21,000,000conventional term loan and a $5,000,000 USDA 80% guaranteed loan, and issecured by substantially all of our assets.

 

(continued on next page)

 

43

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTESTO FINANCIAL STATEMENTS**

 

During theconstruction phase, the Company will make monthly payments of interest only ata variable interest rate equal to prime plus 1.75% with a floor of 6%.  The construction phase shall end no later thanSeptember 1, 2005. Following construction completion, the loan will besegmented into two loans (1) a $5,000,000 USDA 80% guaranteed loan, and(2) a $21,000,000 conventional term loan.  The $5,000,000 USDA guaranteed loan will havean amortization period and maturity date of ten years.  The Company will make monthly payments ofprincipal and interest on the $5,000,000 loan at a variable interest rate ofprime plus 1.25%.  This variable ratewill be adjusted quarterly.  The$21,000,000 conventional loan will have an amortization period of ten years butwill mature at the end of five years.  The Company will make monthly payments ofprincipal and interest on the $21,000,000 loan at a variable rate equal toprime plus 1.75% with a floor of 6%.

 

The Company will pay a $30,000 annualadministration fee related to the credit facility.  The credit facility is secured by a mortgageon our real property and a security interest in all personal and intangibleassets of the Company, including assignment of all material contracts.

 

During the construction phase, a 1%prepayment penalty of the total construction loan of $26,000,000 will beassessed if the loan is placed with a lender other than Home Federal SavingsBank.  After the construction phase, the$5,000,000 USDA 80% guaranteed loan will impose a prepayment penalty dependingon the year of refinancing starting with the 5% penalty in year one and decreasingto 1% in year five.  With respect to the$21,000,000 conventional loan, a prepayment penalty will be imposed startingwith a 3% penalty in year one and decreasing to 1% in year three.

 

During the term of the loan, all depositaccounts related to the Company must be maintained at Home Federal SavingsBank.  The Company will also be subjectto certain financial loan covenants consisting of minimum working capital,minimum fixed coverage, minimum current ratio, minimum net worth and maximumdebt/net worth covenants during the term of the loan.  The Company will also be prohibited frommaking distributions to their members, however, the Company will be allowed todistribute 40% of our net income to our members after our lender has receivedaudited financial statements for the fiscal year.  The Company must be in compliance with allfinancial ratio requirements and loan covenants before and after anydistributions to the members.

 

After the construction phase, the Companywill only be allowed to make annual capital expenditures up to $400,000annually without the lender’s prior approval.  During the term of the loan, the Company isrequired to pay to the lender an annual amount equal to the greater of(1) 75% of any Commodity Credit Corporation Bio-Energy income paymentsreceived during the year or (2) 25% of the Company’s free cash flow foreach year.  Payments consisting of USDACommodity Credit Corporation Bio-Energy income must be paid to the lenderwithin 15 days of receipt of any such payments.  These payments will continue until anaggregate sum of $7,500,000 has been received by the lender.

 

The Company has entered into a letter ofagreement with Southern Star Central Gas Pipeline to estimate the constructioncosts to design and build a measurement station capable of flowing natural gasin sufficient hourly quantities to meet the total daily requirements, which thedesign specifications requested by the Company were 4,000 MMBtu per day (167Mcf per hour) at a minimum of 60 PSIG at the outlet of Southern Star CentralPipeline’s measurement station.  TheCompany has paid a fee of $25,000 for the development of this analysis andagreed to pay an additional $15,000 prior to commencement of any workassociated with the estimation along with an additional $5,000 per month fortwo months.  The $25,000 payment for thisanalysis will be applied to the costs of constructing and installing thefacilities if both parties agree to go forward with the natural gas pipeline.

 

(continued on next page)

 

44

----

 

**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**NOTESTO FINANCIAL STATEMENTS**

 

**NOTE 9—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.  TheGrant can be used to pay for certain organizational, offering and start-upcosts related to the formation and capitalization of the Company.  For the years ended December 31, 2004 and2003, the Company qualified for reimbursement of $209,221 and $240,779,respectively, of which $1,409 and $34,240, respectively, related to cost ofraising capital.  For the period frominception though December 31, 2004, the Company qualified forreimbursement of $450,000 of costs, of which $61,602 related to cost of raisingcapital and $333,492 was recorded as a reduction of start-up costs, and $54,906reduced loan origination fees.

 

**NOTE 10—INCOME TAXES**

 

As of December 31, 2004 and 2003, thetax basis of assets exceeded the book basis of assets by approximately $670,000and $278,000, respectively.

 

**NOTE 11—SUBSEQUENT EVENTS**

 

In February 2005, the Company enteredinto a real estate contract with an unrelated party to purchase land inAnderson County, Kansas.  The sum of$90,083 is anticipated to be paid at the time of closing, estimated to occurabout March 18, 2005.

 

Subsequent to December 31, 2004, theCompany entered into agreement for construction of facilities for the deliveryof natural gas and electricity totaling approximately $830,000.

 

In addition, the Company entered into anagreement for the purchase of water treatment chemicals.  The agreement commences when the plant beginsproducing ethanol and ends three years after that date.  Monthly payments under the agreement areapproximately $7,050, for a total obligation under the agreement ofapproximately $254,000.

 

45

----

 

**ITEM 8.                   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

 

Eide Bailly LLP has been our independent registeredpublic accounting firm since our inception and is our independent registeredpublic accounting firm at the present time.  We have had no disagreements with ourauditors.

 

**ITEM 8A.                CONTROLSAND PROCEDURES.**

 

Ourmanagement, including our President (the principal executive officer), WilliamPracht, and our Treasurer (the principal financial officer), Jill Zimmerman,have reviewed and evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based upon this review and evaluation, theseofficers believe that our disclosure controls and procedures are effective inensuring that material information related to us is recorded, processed,summarized and reported within the time periods required by the forms and rulesof the Securities and Exchange Commission except that our management has notedthe following material weaknesses in our internal controls: 1) there is a lackof segregation of duties due to the limited number of personnel involved inprocessing of accounting data; 2) accounting for costs of raising capital werenot accumulated as part of the internal control process; and 3) disclosuresincluded in the notes to the draft financial statements prepared by the Companyand submitted to the auditors included incorrect information related to factualinformation, dates and amounts that were significant to the financialpresentation.

 

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

 

**PART III.**

 

**ITEM 9.****                   DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS**

 

**Identification of Directors, Executive Officers andSignificant Employees**

 

Effective January 24, 2005, Douglas L. Strickler andJames A. Westagard resigned as directors of East Kansas Agri-Energy, LLC. Mr. Strickler and Mr. Westagard hadserved as directors since our inception.  The following is a brief description ofthe business experience and background of our officers and directors as ofMarch 23, 2005.

 

**William R. Pracht, Director, Chairman, and President,**Age 47—20477 SW Florida Rd., Westphailia, Kansas 66093

 

Mr. Pracht is a farmer/rancher working nearWestphalia, Kansas and is one of the community leaders of the Cherry Mound4-H Club as well as a member of the Anderson County Fair Board.  He has served on the Kansas LivestockAssociation Board of Directors and Chairman of the Tax Committee.

 

Mr. Pracht has served as a director since ourinception. Pursuant to our operating agreement, he will serve until 1 yearafter substantial completion of the construction of the ethanol plant and untila successor is elected and qualified, or until the earlier death, resignation,removal or disqualification of such director.

 

**Roger Brummel, Director, Vice Chairman, and Vice President,** Age 45—802 S.Oak, Garnett, Kansas 66032

 

Mr. Brummelhas been the manager of the family owned business, Brummel Farm Service, since1995.

 

46

----

 

Mr. Brummel,has served as a director since our inception. Pursuant to our operatingagreement, he will serve until 1 year after substantial completion of theconstruction of the ethanol plant and until a successor is elected andqualified, or until the earlier death, resignation, removal or disqualificationof such director.

 

**Jill A. Zimmerman, Director and Treasurer,** Age 31—420 S.Cottonwood, Garnett, Kansas 66032

 

Ms. Zimmermanhas been employed as our equity drive coordinator since February 10, 2003.Previously, she was the Director of Value-Added Programs for the Kansas CornGrowers Association in Garnett since January 2002. From May 1996 toJanuary 2002, Ms. Zimmerman was the County Extension Agent,Agriculture for Kansas State Research and Extension, Anderson County. Inaddition, Ms. Zimmerman is a partner with her brother in Zimmerman Farms,a small grain farming operation consisting of wheat and grain sorghum in SumnerCounty, Kansas.

 

Ms. Zimmermanhas served as a director since our inception. Pursuant to our operatingagreement, she will serve until 1 year after substantial completion of theconstruction of the ethanol plant and until a successor is elected andqualified, or until the earlier death, resignation, removal or disqualificationof such director.

 

**Daniel V. Morgan, Director and Secretary,** Age 33—196 TexasRd., Greeley, Kansas 66033

 

Mr. Morganis co-owner of H&M Angus Farms, Inc., a registered Angus seedstockproducer in eastern Kansas. He is also a certified crop advisor and shares aPioneer Seed dealership with his father.  He is a director of United Cooperatives andcurrently is its board secretary.

 

Mr. Morganhas served as a director since our inception. Pursuant to our operatingagreement, he will serve until 1 year after substantial completion of theconstruction of the ethanol plant and until a successor is elected andqualified, or until the earlier death, resignation, removal or disqualificationof such director.

 

**Scott A. Burkdoll, Director,** Age 48—3939Ellis Rd., Rantoul, Kansas 66079

 

Mr. Burkdoll,is an owner and operator of Burkdoll Bros., Inc. a Kansas family farmcorporation. Mr. Burkdoll has served as Vice President for this companysince 1978. He is part owner and has served since 1989 as Secretary/Treasurerof Sunflower Pork, Inc., which produces 75,000 head of market hogsannually. Mr. Burkdoll has been President of BG-5, an oil and gasproduction company in east central Kansas, since 1994. Mr. Burkdoll is anowner and has served since 1998 as managing member of J-6 CattleRanch LLC. He is also an owner and managing member of Sunflower Central,LLC.

 

Mr. Burkdollhas served as a director since our inception. Pursuant to our operatingagreement, he will serve until 1 year after substantial completion of theconstruction of the ethanol plant and until a successor is elected andqualified, or until the earlier death, resignation, removal or disqualificationof such director.

 

**Glenn A. Caldwell, Jr., Director,**Age 57—P.O. Box 181, Garnett, Kansas 66032

 

Mr. Caldwellhas been the Vice-President of Caldwell Enterprises Inc. since 1980 and,in that capacity, oversees the operation of crude oil production on several oilleases in two counties.  In 1982, hebecame President of Caldwell Farms, Inc. operating several thousandtillable acres in 3 counties.

 

Mr. Caldwellhas served as a director since our inception. Pursuant to our operatingagreement, he will serve until 1 year after substantial completion of theconstruction of the ethanol plant and until a successor is elected andqualified, or until the earlier death, resignation, removal or disqualificationof such director.

 

**Daniel L. Guetterman, Director,** Age53—P.O. Box 32, Bucyrus, Kansas 66013

 

Mr. Guettermanhas been farming in northeast Kansas since 1969 and has been the owner/operatorof DKG Farms, Inc. since 1999. In 1978, he formed Guetterman BrothersElevator and built a grain elevator in Bucyrus.  Some of his duties consisted of buying andselling grain, fertilizer, seed and chemicals. Mr. Guetterman served9 years on the board of the Kansas Soybean Association and is currentlyserving his fourth year on the Kansas Corn Commission as treasurer.

 

47

----

 

Mr. Guettermanhas served as a director since our inception. Pursuant to our operatingagreement, he will serve until 1 year after substantial completion of theconstruction of the ethanol plant and until a successor is elected andqualified, or until the earlier death, resignation, removal or disqualificationof such director.

 

**Donald S. Meats, Director,** Age 61—17242nd Rd. S.E., Neosho Falls, Kansas 66758

 

Mr. Meatslives on a farm near LeRoy, Kansas and operates a stocker program. He retiredin 2001 from the LeRoy Coop after 36 years of employment; 33 years asgeneral manager.  He is currentlyemployed by the First National Bank of LeRoy as an Agriculture Loan Officer.

 

Mr. Meatshas served as a director since our inception. Pursuant to our operatingagreement, he will serve until 1 year after substantial completion of theconstruction of the ethanol plant and until a successor is elected andqualified, or until the earlier death, resignation, removal or disqualificationof such director.

 

**Dave Vander Griend,** Age 52—310 N. First Street, P.O. Box 397,Colwich, Kansas 67030

 

Mr.Vander Griend has been the Chief Executive Officer, President and majorityowner of ICM, Inc. for the past ten years. He also serves as director forWestern Plains Energy, LLC.

 

Mr.Vander Griend was appointed as a director to our board by Fagen, Inc. and ICM,Inc. on February 1, 2005. Pursuant to our operating agreement,Mr. Vander Griend will serve at the pleasure of Fagen, Inc. and ICM, Inc.until the number of directors Fagen, Inc. and ICM, Inc. are entitled to appointis reduced or eliminated by our redemption of their units.

 

**Jerry Jones, Director,** Age 54—310 N.First Street, P.O. Box 397, Colwich, Kansas 67030

 

Mr.Jones has served as the Chief Financial Officer for ICM, Inc. since July 2000.Previously, he was the controller for PPI, Inc.

 

Mr.Jones was appointed as a director to our board by Fagen, Inc. and ICM, Inc. onFebruary 1, 2005. Pursuant to our operating agreement, Mr. Jones willserve at the pleasure of Fagen, Inc. and ICM, Inc. until the number ofdirectors Fagen, Inc. and ICM, Inc. are entitled to appoint is reduced oreliminated by our redemption of their units.

 

**Brian D. Thome, Director,** Age 31—501 WestHighway 212, P.O. Box 159, Granite Falls, Minnesota 56241

 

Mr.Thome is the Director of Financial Investments for Fagen, Inc. where he hasbeen employed since December 2004. Prior to his employment at Fagen Inc., heserved as Second Vice President to First National Bank of Omaha.

 

Mr.Thome was appointed as a director to our board by Fagen, Inc. and ICM, Inc. onFebruary 1, 2005. Pursuant to our operating agreement, Mr. Thome willserve at the pleasure of Fagen, Inc. and ICM, Inc. until the number ofdirectors Fagen, Inc. and ICM, Inc. are entitled to appoint is reduced or eliminatedby our redemption of their units.

 

**Involvement in Certain Legal Proceedings**

 

One of our directors, Donald Meats, issubject to a continuing Cease and Desist Order originally entered by the Stateof Kansas Securities Commissioner on November 27, 1996. This order required himto cease and desist from the sale of unregistered securities. Mr. Meats, alongwith others, was found to have participated in a program several years beforehis involvement with our organization which was determined to have violated thesecurities laws of the State of Kansas as it constituted the unlawful sale ofunregistered securities. Mr. Meats cooperated in the investigation of thismatter and no further action was taken against him. Mr. Meats did notparticipate in the sale of our membership units during our original offeringand will not participate in the sale of our membership units for any futureoffering.

 

48

----

 

**Significant Employees**

 

*General Manager*

 

Pursuant to the Management Agreement weentered into with United Bio Energy Management, LLC dated effective as ofNovember 12, 2004, United Bio Energy Management, LLC will supervise and directthe general operations of the plant, including providing the services of afull-time general manager, who will be based on site at our plant, and who willwork exclusively for us. Accordingly, the general manager will not be anemployee of ours.  United Bio EnergyManagement, LLC has hired a general manager for our plant.

 

**Adoption of Code of Ethics**

 

Our Board ofDirectors has adopted a code of ethics that applies to our principal executiveofficer, William Pracht, our principal financial officer, Jill Zimmerman, ourvice president, Roger Brummel, and our secretary, Daniel Morgan.  Each of these individuals signed anacknowledgment of his or her receipt of our code of ethics.  Wefiled a copy of our Code of Ethics with the Securities Exchange Commission byincluding the Code of Ethics as Exhibit 14.1 to our Annual Report of Form 10KSBfor the fiscal year ended December 31, 2003, and is included as a currentexhibit 14.1 to this Report by incorporation by reference.

 

**Audit Committee and Audit Committee Financial Expert**

 

On March 22, 2004, the Board of Directors appointed an audit committeeconsisting of Daniel Morgan, Doug Strickler, Glenn Caldwell, and DanielGuetterman.  Doug Strickler resignedeffective January 24, 2005 and no replacement has yet been appointed to the auditcommittee. We currently have no audit committee financial expert servingon the audit committee.  We have no auditcommittee financial expert at this time because we are a start-up company inthe development stage.  We may appoint anaudit committee financial expert to serve on the audit committee whenconstruction of the ethanol plant is complete and the plant is operational.

 

**ITEM 10.               EXECUTIVECOMPENSATION.**

 

The following table sets forth all compensationpaid or payable by the Company during the last three fiscal years to our Chairman,President and Chief Executive Officer. We do not have any compensatory securityoption plan for our executive officers and directors. None of our directors orofficers has any options, warrants, or other similar rights to purchasesecurities of the Company.

 
| **Name and Principal Position** | ** ** | **Year**         | ** ** | **Salary** | ** ** | **All Other  Compensation** | ** ** |
|---------------------------------|------------|------------------|------------|------------|------------|-----------------------------|------------|
| William Pracht,                 |       | Fiscal Year 2004 |       | $          | 0          |                        | $          | 1,200 |   |
| President, Chief  Executive     |       | Fiscal Year 2003 |       | $          | 0          |                        | $          | 0 |   |
| Officer and Chairman            |       | Fiscal Year 2002 |       | $          | 0          |                        | $          | 0 |   |

 

In 2004, our Treasurer and principalfinancial officer, Jill Zimmerman, was compensated a total of $45,692.72 incash pursuant to her employment agreement with us.  She also received 5 units totaling $5,000 as abonus for her services.  We reimburse ourofficers for expenses incurred relating to services rendered on the Company’sbehalf.  We do not have any employmentagreements with any other officer or director. Our directors are paid $100.00 per month for their attendance at boardmeetings.

 

**ITEM 11.****                                                  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBERMATTERS.**

 

**SecurityOwnership of Certain Beneficial Owners**

 

The following table sets forth certain information regarding thebeneficial ownership of our units as of March 23, 2005, by each person orentity known by us to be the beneficial owner of more than 5% of theoutstanding units:

 
| **Title of  Class** | ** ** | **Name and Address**                                                                | ** ** | **Amount and Nature of Beneficial Owner** | ** ** | **Percent of Class** | ** ** |
|---------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|
| Membership Units    |       | Ron Fagen  Fagen, Inc.  501 West Highway 212  P.O. Box 159  Granite Falls, MN 56241 |       | 5,125                                     | (1)        | 24.5                 | %          |
| Membership Units    |       | Dave Vander  Griend ICM, Inc.  310 N. First Street  P.O. Box 397  Colwich, KS 67030 |       | 5,125                                     | (2)        | 24.5                 | %          |

 

----

(1)          Includes 4,125 units held in the name of Fagen, Inc. and 1,000 units held in the name of Fagen Energy, Inc. Ron Fagen owns and controls both Fagen, Inc. and Fagen Energy, Inc.

 

(2)          Includes 400 units held in the name of Dave Vander Griend individually, 4,625 units held in the name of ICM, Inc. and 100 units held in the name of United Bio Energy, LLC.

 

49

 

**Security Ownership of Management**

 

As of March 23, 2005, members of our board of directors own membershipunits as follows:

 

# **UNITS BENEFICIALLY OWNED BY DIRECTORS AND OFFICERS**

 
| ** **                            | ** ** | ** **                                                                                      | ** ** | ** **                                 | ** ** | ** **                              | ** ** | **Percentage of Total After the Offering** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| **Title of  Class**                   | ** ** | **Name and Address of  Beneficial Owner**                                                       | ** ** | **Amount and Nature  of Beneficial Owner** | ** ** | **Percent of Class  Prior to Offering** | ** ** | **Maximum Units  Sold in Offering**        | ** ** | **Minimum Units Sold  in Offering** | ** ** |
| Membership Units                      |       | William R. Pracht,  Director and Chairman/President  20477 SW Florida Rd.  Westphalia, KS 66093 |       | 60 Units                                   |       | 0.286                                   | %          | 0.200                                      | %          | 0.263 | % |
| Membership Units                      |       | Roger Brummel,  Director and Vice Chairman/Vice President   802 S. Oak St.  Garnett, KS 66032   |       | 60 Units                                   |       | 0.286                                   | %          | 0.299                                      | %          | 0.263 | % |
| Membership Units                      |       | Jill A. Zimmerman,  Director and Treasurer  420 S. Cottonwood St.  Garnett, KS 66032            |       | 15 Units                                   |       | 0.072                                   | %          | 0.033                                      | %          | 0.0441 | % |
| Membership Units                      |       | Daniel V. Morgan, Director and Secretary 196 Texas Rd.  Greeley, KS 66033                       |       | 10 Units                                   |       | 0.048                                   | %          | 0.200                                      | %          | 0. 263 | % |
| Membership Units                      |       | Scott A. Burkdoll,  Director  3939 Ellis Rd.  Rantoul, KS 66079                                 |       | 60 Units                                   |       | 0.286                                   | %          | 0.200                                      | %          | 0.263 | % |
| Membership Units                      |       | Glenn A. Caldwell,  Director  P.O. Box 181  Garnett, KS 66032                                   |       | 100 Units                                  |       | 0.477                                   | %          | 0.333                                      | %          | 0.4395 | % |
| Membership Units                      |       | Daniel L. Guetterman,  Director  P.O. Box 32  Bucyrus, KS 66013                                 |       | 25 Units                                   |       | 0.119                                   | %          | 0.083                                      | %          | 0.110 | % |
| Membership Units                      |       | Donald S. Meats,  Director  1724 2nd Rd. S.E.  Neosho Falls, KS 66758                           |       | 10 Units                                   |       | 0.048                                   | %          | 0.033                                      | %          | 0.044 | % |
| Membership Units                      |       | Dave Vander Griend  Director  ICM, Inc.  310 N. First Street  P.O. Box 397  Colwich, KS 67030   |       | 5,125 Units (1)                            |       | 24.455                                  | %          | 17.06                                      | %          | 22.50 | % |
| All Directors and Officers as a Group |       |                                                                                            |       | 5,465 Units                                |       | 26.08                                   | %          | 18.19                                      | %          | 23.99 | % |

 

----

(1)          Includes 400 units held in the name of DaveVander Griend, individually, 4625 units held in the name of ICM, Inc. and 110units held in the name of United BioEnergy, LLC.

 

50

----

 

**ITEM 12.               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

 

*Jill Zimmerman**, Treasurer, Principal Financial Officer, Director and Member*

 

On February 10, 2003, we entered into an employment agreement with JillZimmerman who serves as our Treasurer, principal financial officer anddirector. Ms. Zimmerman is also a member of the Company. Under the agreement,the Company engages Ms. Zimmerman as a full-time equity drive coordinator. Underthe terms of the agreement, Ms. Zimmerman is responsible for monitoring projectdevelopment, public relations and other on-site development issues. Thecontract provides that we will pay Ms. Zimmerman $37,700.00 annually plus a $101.75monthly stipend for these services. The agreement is expected to last until July1, 2005.

 

*ICM, Inc.and Fagen, Inc.*

 

On August 9, 2004, weexecuted a design/build agreement with ICM, Inc. to design and build ourethanol plant using Fagen, Inc. as principal subcontractor. ICM, Inc. ismajority owned and controlled by Dave Vander Griend and Fagen, Inc. is ownedand controlled by Ron Fagen. Dave Vander Griend and Ron Fagen each currentlyown 24.5% of our outstanding units including the additional capital contributedthrough their respective companies under the terms of the Unit Purchase andRedemption Agreement. Pursuant to the terms of the design/build agreement, wewill pay ICM, Inc. $35,900,000 to design and build our ethanol plant and weexpect a significant portion of the contract price to be paid by ICM, Inc. toFagen, Inc. for its work as our principal subcontractor.

 

We have entered into severaloperating contracts with various companies owned by United Bio Energy, LLC, ofWichita, Kansas. United Bio Energy, LLC is majority owned by Dave Vander Griendthrough ICM Marketing, Inc. and by Ron Fagen through Fagen Management, LLC.Under the terms of these agreements, we will be paying subsidiaries of UnitedBio Energy, LLC a significant amount in fees for the management of our plant,marketing of our ethanol and distillers grains and overall risk managementservices.

 

On October 11, 2004, we executed a Unit Purchase and RedemptionAgreement with ICM, Inc. and Fagen, Inc. in which we agreed to issue a total of6,250 units to them in exchange for their combined capital contribution of$6,250,000. In connection with this capital contribution, we amended ouroperating agreement to allow ICM, Inc. and Fagen, Inc. to appoint a total of 3directors to our board of directors, subject to our ability to terminate one oftheir director positions for every $2,000,000 in redemption payments made toeither or both of ICM, Inc. and Fagen, Inc. We have agreed to redeem all 6,250units from ICM, Inc. and Fagen, Inc. using the proceeds from the sales of unitsregistered in this offering or, to the extent this offering is unsuccessful,from net cash flow generated by operations subject to certain loan covenants,restrictions and tax distributions. The redemption price will be $1,100 perunit if we are able to raise at least $6,875,000 in this offering. Otherwise,the redemption price will be based on the current fair market value of theunits. On January 19, 2005, we closed on the purchase of these units and issued3,125 units to ICM, Inc. and 3,125 units to Fagen, Inc. Brian Thome, directorof Financial Investments of Fagen, Inc., Dave Vander Griend, Chief ExecutiveOfficer, President and majority owner of ICM, Inc., and Jerry Jones, ChiefFinancial Officer of ICM, Inc., have been appointed to our board of directors.

 

51

----

 

**ITEM 13.               EXHIBITS.**

 

**Exhibits Filed as Part of this Report andExhibits Incorporated by Reference.**

 

The followingexhibits are filed as part of this report. Exhibits previously filed areincorporated by reference, as noted.

 
| **Exhibit  No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                      |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 3.1              |       | Articles of Organization of registrant.  Filed as Exhibit 3.1 to the registrant’s registration statement on Form SB-2  (Commission File 333-96703) and incorporated by reference herein.                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 3.2              |       | Amended and Restated Operating Agreement of  the registrant. Filed as Exhibit 3.2 to the registrant’s registration  statement on Form SB-2 (Commission File 333-96703) and incorporated by reference  herein.                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 3.2.2            |       | First Amendment to Amended and Restated  Operating agreement of East Kansas Agri-Energy, LLC dated September 16, 2004  filed as Exhibit 3.2.1 to the registrants quarterly report on Form 10-QSB  dated September 30, 2004 and incorporated by reference herein.                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 4.1              |       | Form of Membership Unit Certificate. Filed  as Exhibit 4.1 to the registrant’s registration statement on Form SB-2  (Commission File 333-96703) and incorporated by reference herein.                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 4.2              |       | Form of Subscription Agreement of  Registrant. Filed as Exhibit 4.2 to the registrant’s Registrant’s  Pre-Effective Amendment No. 3 to Form S-2B (Commission File 333-96703) and  incorporated by reference herein.                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 4.3              |       | Escrow Agreement dated November 14, 2002.  Filed as Exhibit 4.3 to the Registrant’s Registrant’s Pre-Effective Amendment  No. 3 to Form S-2B (Commission File 333-96703) and incorporated by reference  herein.                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 4.4              |       | First Amendment to Escrow Agreement dated  December 31, 2003. Filed as Exhibit 4.4 to the registrant's December 31,  2003 10-KSB and incorporated by reference herein.                                                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.1             |       | Option to Purchase Real Estate from City of  Garnett, Kansas. Filed as Exhibit 10.3 to the registrant’s initial  registration statement on Form SB-2 (Commission File 333-96703)  and incorporated by reference herein.                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.2             |       | Memorandum of Extension from City of  Garnett, Kansas. Filed as Exhibit 10.1 to the registrant’s quarterly  report dated March 31, 2003 on Form 10-QSB and incorporated  by reference herein.                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.3             |       | Option to Purchase Real Estate from  Clarence L. White and Berniece F. White dated March 13, 2003.  Filed as Exhibit 10.5 to the registrant’s annual report dated December 31,  2003 on Form 10-KSB and incorporated by reference herein.                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.4             |       | Employment Agreement dated February 10,  2003 between East Kansas Agri-Energy, LLC and Jill Zimmerman. Filed as Exhibit 10.6  to the registrant’s annual report dated December 31, 2003 on Form 10-KSB  and incorporated by reference herein.                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.5             |       | Letter Agreement dated March 9, 2004  between East Kansas Agri-Energy, L.L.C. and U.S. Energy Services, Inc.  Filed as Exhibit 10.7 to registrant’s quarterly report dated March 31,  2004 on Form 10-QSB and incorporated by reference herein.                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.6             |       | Letter Agreement dated March 9, 2004  between East Kansas Agri-Energy, L.L.C. and U.S. Energy Services, Inc.  Filed as Exhibit 10.8 to registrant’s quarterly report dated March 31,  2004 on Form 10-QSB and incorporated by reference herein                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.7             |       | Option to Purchase Real Estate from  Clarence L. White and Berniece F. White dated March 15, 2004. Filed as Exhibit 10.9  to registrant’s quarterly report dated March 31, 2004 on Form 10-QSB  and incorporated by reference herein.                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.8             |       | Option to Purchase Real Estate from  Clarence L. White and Berniece F. White dated July 1, 2004. Filed as Exhibit 10.10  to registrant’s quarterly report dated June 30, 2004 on Form 10-QSB  and incorporated by reference herein.                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.9             |       | Agreement between Owner and Design/Builder  on the Basis of a Stipulated Price dated August 9, 2004 between East  Kansas Agri-Energy, L.L.C. and ICM, Inc. Filed as Exhibit 10.11 to  registrant’s quarterly report dated September 30, 2004 on Form 10-QSB  and incorporated by reference herein. |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.10            |       | Unit Purchase and Redemption Agreement  dated October 11, 2004 between East Kansas Agri-Energy, L.L.C., ICM, Inc.,  and Fagen, Inc. Filed as Exhibit 10.12 to registrant’s quarterly  report dated September 30, 2004 on Form 10-QSB and  incorporated by reference herein.                   |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.11            |       | Management Agreement dated November 12,  2004 between East Kansas Agri-Energy, L.L.C. and United Bio Energy  Management, LLC. filed as an exhibit to registrants registration statement on  Form SB-2 (Commission File 333-121323) and incorporated by reference herein.                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.12            |       | Raw Grains Agreement dated November 12,  2004 between East Kansas Agri-Energy, L.L.C. and United Bio Energy  Ingredients, LLC. filed as an exhibit to registrants registration statement  on Form SB-2 (Commission File 333-121323) and incorporated by reference  herein.                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.13            |       | Ethanol Agreement dated November 12,  2004 between East Kansas Agri-Energy, L.L.C. and United Bio Energy Fuels,  LLC. filed as an exhibit to registrants registration statement on Form SB-2  (Commission File 333-121323) and incorporated by reference herein.                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.14            |       | Distillers Grains Marketing Agreement dated  November 12, 2004 between East Kansas Agri-Energy, L.L.C. and United Bio  Energy Ingredients, LLC. filed as an exhibit to registrants registration  statement on Form SB-2 (Commission File 333-121323) and incorporated by  reference herein.                                 |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.15            |       | Trading Agreement dated November 12,  2004 between East Kansas Agri-Energy, L.L.C. and United Bio Energy Trading,  LLC. filed as an exhibit to registrants registration statement on Form SB-2  (Commission File 333-121323) and incorporated by reference herein.                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.16            |       | Credit Agreement dated November 23,  2004 between East Kansas Agri-Energy, L.L.C. and Home Federal Savings Bank.  filed as an exhibit to registrants registration statement on Form SB-2  (Commission File 333-121323) and incorporated by reference herein.                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.17            |       | Disbursing Agreement dated November 23,  2004 between East Kansas Agri-Energy, L.L.C. and Home Federal Savings Bank.  filed as an exhibit to registrants registration statement on Form SB-2 (Commission  File 333-121323) and incorporated by reference herein.                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.18            |       | Security Agreement dated November 23,  2004 between East Kansas Agri-Energy, L.L.C. and Home Federal Savings Bank.  filed as an exhibit to registrants registration statement on Form SB-2  (Commission File 333-121323) and incorporated by reference herein.                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 10.19            |       | Mortgage-Collateral Real Estate Mortgage  dated November 23, 2004 between East Kansas Agri-Energy, L.L.C. and Home  Federal Savings Bank.* filed as an exhibit to registrants registration  statement on Form SB-2 (Commission File 333-121323) and incorporated by  reference herein.                                      |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 14.1             |       | Code of Ethics of East Kansas Agri-Energy,  LLC, adopted March 22, 2004, filed as an exhibit to Registrant’s  10-KSB dated December 31, 2003 and incorporated by reference.                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 31.1             |       | Certificate pursuant to 17 CFR  240.15d-14(a).                                                                                                                                                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 31.2             |       | Certificate pursuant to 17 CFR  240.15d-14(a).                                                                                                                                                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 32.1             |       | Certificate pursuant to 18 U.S.C. Section  1350.                                                                                                                                                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                             |
| 32.2             |       | Certificate pursuant to 18 U.S.C. Section  1350.                                                                                                                                                                                                                                                                                 |

 

52

----

 

**ITEM 14.               PRINCIPALACCOUNTANT FEES AND SERVICES.**

 
| **Category**       | ** ** | **Year** | ** ** | **Fees** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees         |       | 2003     |       | $        | 28,537     |   |
|               |       | 2004     |       | $        | 44,080     |   |
| Audit-Related Fees |       | 2003     |       | $        | 14,788     |   |
|               |       | 2004     |       | $        | 9,328      |   |
| Tax Fees           |       | 2003     |       | $        | 0          |   |
|               |       | 2004     |       | $        | 0          |   |
| All Other Fees     |       | 2003     |       | $        | 0          |   |
|               |       | 2004     |       | $        | 0          |   |

 

Consistent with the Securities and ExchangeCommission requirements regarding auditor independence, the Audit committee hasadopted a policy to pre-approve all audit and permissible non-audit servicesprovided by the independent auditor. Consistent with the Securities andExchange Commission requirements regarding auditor independence, the auditcommittee has adopted a policy to pre-approve all future audit and permissiblenon-audit services provided by the independent auditor. Under the policy, theaudit committee must pre-approve services prior to the commencement of thespecified service. Prior to appointment of the audit committee, the Board ofDirectors approved all services provided by Eide Bailly LLP.

 

**SIGNATURES**

 

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

 

 
|   |           | EAST KANSAS AGRI-ENERGY, LLC                            |
|--------|----------------|---------------------------------------------------------|
|   |           |                                                    |
|   |           |                                                    |
| Date:  | March 31, 2005 |                                                    | /s/ William Pracht |   |
|   |           | William Pracht                                          |
|   |           | President  (Principal Executive Officer)                |
|   |           |                                                    |
|   |           |                                                    |
| Date:  | March 31, 2005 |                                                    | /s/ Jill Zimmerman |   |
|   |           | Jill Zimmerman                                          |
|   |           | Treasurer  (Principal Financial and Accounting Officer) |

 

53

----

 

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 

 
| Date: March 31, 2005 |   /s/ William Pracht         |   |
|----------------------|----------------------------------------|--------|
|                 | William Pracht                         |   |
|                 |                                   |   |
|                 |                                   |   |
| Date: March 31, 2005 |   /s/ Roger Brummel          |   |
|                 | Roger Brummel                          |   |
|                 |                                   |   |
|                 |                                   |   |
| Date: March 31, 2005 |   /s/ Jill Zimmerman         |   |
|                 | Jill Zimmerman                         |   |
|                 |                                   |   |
|                 |                                   |   |
| Date: March 31, 2005 |   /s/ Daniel Morgan          |   |
|                 | Daniel Morgan                          |   |
|                 |                                   |   |
|                 |                                   |   |
| Date: March 31, 2005 |   /s/ Scott Burkdoll         |   |
|                 | Scott Burkdoll                         |   |
|                 |                                   |   |
|                 |                                   |   |
| Date: March 31, 2005 |   /s/ Glenn A. Caldwell, Jr. |   |
|                 | Glenn A. Caldwell, Jr.                 |   |

 

54

----