**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 
| **ý****  Annual report under Section 13 or  15(d) of the Securities Exchange Act of 1934.** |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| **For the fiscal year ended December 31,  2003**                                                           |
|                                                                                                            |
| **OR**                                                                                                          |
|                                                                                                            |
| **o****  Transition report under Section 13  or 15(d) of the Exchange Act.**                     |
|                                                                                                            |
| **Commission file number 333-96703**                                                                            |

 
| **EAST  KANSAS AGRI-ENERGY, L.L.C.**                                 |
|----------------------------------------------------------------------|
| (Exact name of small business issuer as  specified in its charter)   |
|                                                                 |   |   |
| **Kansas**                                                           |   | **48-1251578** |
| (State or other jurisdiction of  incorporation or organization)      |   | (I.R.S. Employer Identification No.) |
|                                                                 |   |   |
| **P.O. Box 225,  210 1/2 East 4th Ave.  Garnett, Kansas 66032** |
| (Address of principal executive offices)                             |
|                                                                 |   |   |
| **(785) 448-2888**                                                   |
| (Issuer’s telephone number)                                     |

 

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

 

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

 

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

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Regulation S-B is not contained in this form,and no disclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB. ý

 

State issuer’s revenues for its most recent fiscalyear.   **None**

 

As of March 6, 2004, the aggregate market value of the membershipunits held by non-affiliates (computed by reference to the most recent offeringprice of such membership units) was $1,220,000.

 

As of March 6, 2004, there were 1220 membership units outstanding.

 

DOCUMENTS INCORPORATED BYREFERENCE    **None.**

 

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

 

 

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**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**                                                                        |   |   |
| **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 AND SIGNIFICANT EMPLOYEES; COMPLIANCE WITH  SECTION 16(a) OF THE EXCHANGE ACT** |   |   |
| **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

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**PART I.**

 

**ITEM1****.****                                                  ****DESCRIPTIONOF BUSINESS.**

 

East Kansas Agri-Energy, L.L.C. was formed asa Kansas limited liability company on October 16, 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 development stage.  We are organized to construct and operate anethanol plant expected to be located near Garnett, Kansas.  Our principal business office is currentlylocated at 2101⁄2 East 4th Avenue, Garnett Kansas 66032.  We are managed by a ten member Board ofDirectors.

 

**PrincipalProducts and Markets**

 

We plan to build a corn-based ethanol plant that will produce ethanol,distillers grains and carbon dioxide. The ethanol plant was originally expected to process approximately 7.5million bushels of corn and sorghum per year into 20 million gallons ofdenatured fuel grade ethanol, 64 thousand tons of dried distillers grains with solubles and 63thousand tons of raw carbon dioxide gas.  We now expect to convert, on an annual basis, approximately 9million bushels of corn and sorghum per year into 25 million gallons ofdenatured fuel grade ethanol, approximately 80 thousand tons of dried distillers grains with solubles andapproximately 79 thousand tons of raw carbon dioxide gas.  We expect this change to result in moreefficient operations.  This change isnot expected to increase the cost of construction of our ethanol plant or delayits anticipated date of operation.

 

The principal products weexpect to produce 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 ofreducing ozone and carbon monoxide vehicle emissions; and (iii) anon-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form forblending with unleaded gasoline and other fuel products.  The implementation of the Federal Clean Airact has made ethanol fuels an important domestic renewable fuel additive.  Used as a fuel oxygenate, ethanol provides ameans to control carbon monoxide emissions in large metropolitan areas.  The principal purchasers of ethanol aregenerally the wholesale gasoline marketer or blender.  We expect the principal markets for our ethanol to be petroleumterminals in Kansas and the upper Midwest area.

 

A principal by-product ofthe ethanol production process is distiller grains, a high protein, high-energyanimal feed supplement primarily marketed to the dairy and beef industry.Distiller grains contain by-pass protein that is superior to other proteinsupplements such as cottonseed meal and soybean meal.  By-pass proteins are more digestible to the animal, thusgenerating greater lactation in milk cows and greater weight gain in beefcattle.  Dry mill ethanol processingcreates three forms of distiller grains: Distillers Wet Grains (“DWS”),Distillers Modified Wet Grains (“DMWS”) and Distillers Dried Grains withSolubles (“DDGS”).  DWS is processedcorn mash that contains approximately 70% moisture.  DWS has a shelf life of approximately three days and can be soldonly to farms within the immediate vicinity of an ethanol plant.  DMWS is DWS that has been dried toapproximately 50% moisture. DMWS have a slightly longer shelf life ofapproximately ten days and are often sold to nearby markets. DDGS is DWS thathas been dried to 10% to 12% moisture. DDGS have an almost indefinite shelf life and may be sold and shipped toany market regardless of its vicinity to an ethanol plant.  We intend to market only DDGS and mayexplore possibilities of local demand for DMWS to market at least a portion ofour distillers grains in this form.

 

We also plan to market anddistribute the carbon dioxide that will be produced at the plant as aby-product of our ethanol production. On January 28, 2004, we entered in to a letter of intent with BOCGroup, Inc. of Murray Hill, New Jersey. The terms of the letter of intent provide that we will make available toBOC Group, Inc. for purchase all of the carbon dioxide produced at theplant.  The letter of intentcontemplates that BOC Group, Inc. will purchase a substantial quantity of ourraw carbon dioxide gas annually and will construct a carbon dioxideliquefaction plant.  We expect to leasea parcel of our land adjacent to our ethanol plant to BOC, Group, Inc. forconstruction of the liquefaction plant. We have not yet entered into a legally binding contract with BOC Group,Inc.

 

*Local EthanolMarkets*

 

Local markets will be limited and must be evaluated on a case-by-casebasis.  Although local markets will be the easiest to service, they may beoversold, which depresses the ethanol price.

 

3

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*Regional EthanolMarkets*

 

Typically a regional market is one that is outside of the local market,yet within the neighboring states.  This market will likely be serviced byrail, and is within a 450-mile radius of the plant.  We intend to constructa railroad spur to our plant so that we may reach regional and national marketswith our products.  Because ethanol use results in less air pollution thanregular gasoline, regional markets typically include large cities that aresubject to anti-smog measures as either carbon monoxide or ozone non-attainmentareas, such as:  Kansas City, Denver,Las Vegas, Minneapolis, Chicago, and St. Louis.

 

Generally, the regional market is good business to develop.  Thefreight is reasonable, the competition, while aggressive, is not too severe,and the turn-around time on the rail cars is an advantage.  In addition,it is often easier to obtain letters of intent to purchase product fromregional buyers than from national buyers.  These letters, while not binding,tend to raise the comfort level of the financial lending institutions. Not surprising in a regional market, letters of intent to purchase are takenquite seriously by the buyer.

 

Regional pricing tends to follow national pricing less the freightdifference.  As with national markets, the use of a group-marketingprogram or a broker is advantageous, especially in the first one to three yearsof operation.

 

Occasionally there are opportunities to obtain backhaul rates fromlocal trucking companies.  These are rates that are reduced since thetruck is loaded both ways.  Normally thetrucks drive to the refined fuels terminals empty and load gasoline product fordelivery.  A backhaul is the opportunity to load the truck with ethanol todrive to the terminal.

 

*National EthanolMarkets*

 

Recently, California has been the focus of a major ethanol campaign asMTBE is now being phased out.  MTBE is a commonly used oxygenate used infuels for compliance with Federal Clean Air Act mandates, and is a majorcompetitor of ethanol.  California has banned the use of MTBE beginningJanuary 1, 2004.  Ethanol is the most readily available substitutefor MTBE in this market.  MTBE is still used in significant quantitiesthroughout the state, but ethanol use is expected to increase now that the banis in effect.  Most California fuelrefiners and blenders have already voluntarily removed MTBE from theirterminals based on preparations for an earlier deadline.  Californiarepresents a market of about one billion gallons annually due to the oxygenaterequirement for RFG.  The recent denial of the California RFG oxygenatewaiver request has resulted in California litigating against the EPA in aneffort to overturn the denial.

 

While there is a great deal of focus on California, another emergingethanol market, according to the Renewable Fuels Association, is in theNortheast.  As in California, the primary drivers are the health and waterconcerns surrounding the use of MTBE.  For example, the state legislaturesof New York and Connecticut recently have banned the use of MTBE beginning onJanuary 1, 2004 and October 1, 2003 respectively.  Fifteen other state legislatures have phasedout MTBE.  We expect ethanol to replaceMTBE as the oxygenate in the RFG program and generate markets of approximately200 million gallons per year in New York and approximately 50 million gallonsper year in Connecticut, however, other MTBE replacements may capture a portionor all of these potential markets. The ultimate size of the California and Northeastmarkets will depend on how the RFG oxygenate and MTBE debate plays out in thepolitical arena.

 

Illinois, Ohio and Minnesota are by far the largest ethanolmarkets.  In addition to California and the Northeast, there are alsoother significant national ethanol market opportunities such as Arizona,Colorado, Texas, Michigan, Wisconsin, Washington, and North Carolina. 

 

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| **State**      |   | **Total Ethanol  Consumed in  Thousands of  Gallons (2002)** |   |
|----------------|--------|--------------------------------------------------------------|--------|
| Arizona        |   | 21,626                                                       |   |
| California     |   | 82,282                                                       |   |
| Colorado       |   | 73,493                                                       |   |
| Illinois       |   | 294,055                                                      |   |
| Minnesota      |   | 213,409                                                      |   |
| Michigan       |   | 52,043                                                       |   |
| North Carolina |   | 48,615                                                       |   |
| Ohio           |   | 185,356                                                      |   |
| Texas          |   | 59,029                                                       |   |
| Washington     |   | 21,697                                                       |   |
| Wisconsin      |   | 74,396                                                       |   |

 

Source: U.S. Department of TransportationHighway Statistics 2002

 

**DistributionMethods**

 

We intend to sell andmarket the ethanol and distillers grains produced at the plant through normaland established markets, including the local, regional and national marketsdescribed above.  We hope to market allof the ethanol produced with the assistance of one ethanol re-distributor.  We intend to engage United Bio Energy Fuels,LLC to market our ethanol and United Bio Energy Ingredients, LLC to market ourdistillers grains.  We have not yetentered into any agreement regarding the sale of our ethanol or distillersgrains with either of these companies. We expect to be extremely dependent upon United Bio Energy Fuels, LLCand United Bio Energy Ingredients, LLC to market our ethanol and distillersgrains.

 

**Competition**

 

We expect to be in directcompetition with other ethanol producers, many of who have greater resourcesthan we do.  We expect that additionalethanol producers will enter the market as the demand for ethanol increases.

 

We expect that our ethanolplant will compete with other ethanol producers on the basis of price and, to alesser extent, delivery service. We expect to compete favorably with otherethanol producers due to our proximity to ample grain supplies and multiplemodes of transportation.  We believe ourplant’s proposed location offers an advantage over other ethanol producers inthat it has ready access by rail to growing ethanol markets, which we expect toreduce our cost of sales.

 

Currently, Kansas has sixoperating ethanol plants.  A plant nearRussell, Kansas, located approximately 249 miles from our proposed plant site,produces approximately 40 million gallons per year while a plant near Campus,Kansas, located approximately 350 miles from our proposed plant site, producesapproximately 30 million gallons per year. Another plant near Colwich, Kansas, located approximately 176 miles fromour proposed plant site, produces approximately 20 million gallons peryear.  Plants near Garden City, Kansas,Atchison, Kansas and Leoti, Kansas each produce approximately 12, 9 and 1.5million gallons, respectively and range from approximately 97 miles to 413miles from our proposed plant site. There is planned for construction a 50 million gallons per year ethanolplant near Pratt, Kansas, located approximately 239 miles from our proposedplant site, and a 40 million gallons per year plant near Phillipsburg, Kansas,located approximately 335 miles from our proposed plant site.  Missouri has two operating ethanol plantsincluding a 40 million gallons per year plant near Macon, Missouri, locatedapproximately 225 miles from our proposed plant site, and a 20 million gallonsper year plant near Craig, Missouri, located approximately 170 miles away.  Another 40 million gallons per year plantnear Malta Bend, Missouri, located approximately 156 miles from our proposedplant site, is under construction and a 30 million gallons per year plant nearLaddonia, Missouri, located approximately 254 miles from our proposed plantsite, is 

 

5

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also underconsideration.  There are also numerousother producer and privately owned ethanol plants planned and operatingthroughout the Midwest and elsewhere in the United States.

 

The largest ethanol producers include Archer Daniels Midland, Cargill,MGP Ingredients, Inc., Abergoa BioEnergy Corporation, New Energy Corporation,Aventine Renewable Energy, Inc., and Verasun Energy Corporation, all of whichare capable of producing more ethanol than we expect to produce.  In addition,there are several regional entities recently formed, or in the process offormation, of a similar size and with similar resources to ours.

 

The ethanol industry hasgrown to over 72 production facilities in the United States.  Industry authorities estimate that thesefacilities are capable of producing approximately 3.1 billion gallons ofethanol per year.  Plans to constructnew plants or to expand existing plans have been announced which would increasecapacity by approximately 492 million gallons per year.  We cannot determine the effect of this typeof an increase upon the demand or price of ethanol.  The following table from the Renewable FuelsAssociation identifies the ethanol production facilities located in the U.S. asof January 2004, including plants in various stages of development andconstruction:

 

 

**U.S. FUEL ETHANOL PRODUCTION CAPACITY**

million gallons per year (mmgy)

 
| **COMPANY**                      |   | **LOCATION**        |   | **FEEDSTOCK** |   | **Current  Capacity****(mmgy)** |   | **Under****Construction/****Expansions****(mmgy)** |   |
|----------------------------------|--------|---------------------|--------|---------------|--------|---------------------------------|--------|----------------------------------------------------|--------|
| Abengoa Bioenergy Corp.          |   | York, NE            |   | Corn/milo     |   | 50                              |   |                                               |   |
|                             |   | Colwich, KS         |   |          |   | 20                              |   |                                               |   |
|                             |   | Portales, NM        |   |          |   | 15                              |   |                                               |   |
| ACE Ethanol                      |   | Stanley, WI         |   | Corn          |   | 15                              |   |                                               |   |
| Adkins Energy, LLC*              |   | Lena, IL            |   | Corn          |   | 40                              |   |                                               |   |
| A. E. Stanley                    |   | Loudon, TN          |   | Corn          |   | 65                              |   |                                               |   |
| AGP*                             |   | Hastings, NE        |   | Corn          |   | 52                              |   |                                               |   |
| Agra Resources Coop. d/b/a EXOL* |   | Albert Lea, MN      |   | Corn          |   | 37                              |   |                                               |   |
| Agri-Energy, LLC*                |   | Luverne, MN         |   | Corn          |   | 21                              |   |                                               |   |
| Alchem Ltd. LLLP                 |   | Grafton, ND         |   | Corn          |   | 10.5                            |   |                                               |   |
| AL-Corn Clean Fuel*              |   | Claremont, MN       |   | Corn          |   | 30                              |   |                                               |   |
| 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          |   | 35                              |   |                                               |   |
| Badger State Ethanol, LLC*       |   | Monroe, WI          |   | Corn          |   | 48                              |   |                                               |   |
| Big River Resources, LLC*^       |   | West Burlington, IA |   | Corn          |   |                            |   | 40                                                 |   |
| Broin Enterprises, Inc.          |   | Scotland, SD        |   | Corn          |   | 9                               |   |                                               |   |
| Cargill, Inc.                    |   | Blair, NE           |   | Corn          |   | 83                              |   |                                               |   |
|                             |   | Eddyville, IA       |   | Corn          |   | 35                              |   |                                               |   |

 

6

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| Central Illinois Energy Cooperative*^ |   | Canton, IL       |   | Corn                |   |   |   | 30     |   |
|---------------------------------------|--------|------------------|--------|---------------------|--------|--------|--------|--------|--------|
| Central MN Ethanol Coop*              |   | Little Falls, MN |   | Corn                |   | 20     |   |   |   |
| Central Wisconsin Alcohol             |   | Plover, WI       |   | Seed corn           |   | 4      |   |   |   |
| Chief Ethanol                         |   | Hastings, NE     |   | Corn                |   | 62     |   |   |   |
| Chippewa Valley Ethanol Co.*          |   | Benson, MN       |   | Corn                |   | 42     |   |   |   |
| Commonwealth Agri-Energy, LLC*^       |   | Hopkinsville, KY |   | Corn                |   |   |   | 20     |   |
| Cornhusker Energy Lexington, LLC*^    |   | Lexington, NE    |   | Corn                |   |   |   | 42     |   |
| Corn Plus*                            |   | Winnebago, MN    |   | Corn                |   | 44     |   |   |   |
| Dakota Ethanol, LLC*                  |   | Wentworth, SD    |   | Corn                |   | 48     |   |   |   |
| DENCO, LLC*                           |   | Morris, MN       |   | Corn                |   | 21.5   |   |   |   |
| ESE Alcohol Inc.                      |   | Leoti, KS        |   | Seed Corn           |   | 1.5    |   |   |   |
| Ethanol2000, LLP*                     |   | Bingham Lake, MN |   | Corn                |   | 30     |   |   |   |
| Glacial Lakes Energy, LLC*            |   | Watertown, SD    |   | Corn                |   | 48     |   |   |   |
| Golden Cheese Company of California*  |   | Corona, CA       |   | Cheese whey         |   | 5      |   |   |   |
| Golden Grain Energy, LLC*^            |   | Mason City, IA   |   | Corn                |   |   |   | 40     |   |
| Golden Triangle Energy, LLC*          |   | Craig, MO        |   | Corn                |   | 20     |   |   |   |
| Gopher State Ethanol                  |   | St. Paul, MN     |   | Corn/Beverage Waste |   | 15     |   |   |   |
| Grain Processing Corp.                |   | Muscatine, IA    |   | Corn                |   | 10     |   |   |   |
| Great Plains Ethanol, LLC*            |   | Chancellor, SD   |   | Corn                |   | 42     |   |   |   |
| 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                |   | 23     |   |   |   |
| Iowa Ethanol, LLC*^                   |   | Hanlontown, IA   |   | Corn                |   |   |   | 45     |   |
| James Valley Ethanol, LLC             |   | Groton, SD       |   | Corn                |   | 45     |   |   |   |
| J.R. Simplot                          |   | Caldwell, ID     |   | Potato waste        |   | 6      |   |   |   |
|                                  |   |             |   |                |   |   |   |   |   |
| KAAPA Ethanol, LLC*                   |   | Minden, NE       |   | Corn                |   | 40     |   |   |   |
| Land O’ Lakes*                   |   | Melrose, MN      |   | Cheese whey         |   | 2.6    |   |   |   |
| Lincolnland Agri-Energy, LLC*^        |   | Robinson, IL     |   | Corn                |   |   |   | 40     |   |
| Little Sioux Corn Processors, LP*     |   | Marcus, IA       |   | Corn                |   | 40     |   |   |   |
|                                  |   |             |   |                |   |   |   |   |   |
| Merrick/Coors                         |   | Golden, CO       |   | Waste beer          |   | 1.5    |   |   |   |
| Michigan Ethanol, LLC                 |   | Caro, MI         |   | Corn                |   | 45     |   |   |   |
| MGP Ingredients, Inc.                 |   | Pekin, IL        |   | Corn/wheat starch   |   | 78     |   |   |   |
| Atchison, KS                          |   |             |   |                |   |   |   |   |   |
| Mid-Missouri Energy, LLC*^            |   | Malta Bend, MO   |   | Corn                |   |   |   | 40     |   |
| Midwest Grain Processors*             |   | Lakota, IA       |   | Corn                |   | 45     |   |   |   |
| Midwest Renewables^                   |   | Iowa Falls, IA   |   | Corn                |   |   |   | 40     |   |
| Miller Brewing Co.                    |   | Olympia, WA      |   | Brewery waste       |   | 0.7    |   |   |   |
| Minnesota Energy*                     |   | Buffalo Lake, MN |   | Corn                |   | 18     |   |   |   |

 

7

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| New Energy Corp.                        |   | South Bend, IN     |   | Corn                  |   | 95     |   |   |   |
|-----------------------------------------|--------|--------------------|--------|-----------------------|--------|--------|--------|--------|--------|
| Northeast Missouri Grain, LLC*          |   | Macon, MO          |   | Corn                  |   | 40     |   |   |   |
| Northern Lights Ethanol, LLC*           |   | Big Stone City, SD |   | Corn                  |   | 45     |   |   |   |
| Otter Creek Ethanol, LLC*^              |   | Ashton, IA         |   | Corn                  |   |   |   | 45     |   |
| Parallel Products                       |   | Louisville, KY     |   | Beverage waste        |   | 4      |   |   |   |
|                                    |   |               |   |                  |   |   |   |   |   |
| R. Cucamonga, CA                        |   | 4                  |   |                  |   |   |   |   |   |
| Permeate Refining                       |   | Hopkinton, IA      |   | Sugars & starches |   | 1.5    |   |   |   |
| Pine Lake Corn Processors, LLC*^        |   | Steamboat Rock, IA |   | Corn                  |   |   |   | 20     |   |
| Platte Valley Fuel Ethanol, LLC^        |   | 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                  |   | 18     |   |   |   |
| Sioux River Ethanol, LLC*^              |   | Hudson, SD         |   | Corn                  |   |   |   | 45     |   |
| Tall Corn Ethanol, LLC*                 |   | Coon Rapids, IA    |   | Corn                  |   | 45     |   |   |   |
| Trenton Agri Products, LLC^             |   | Trenton, NE        |   | Corn                  |   |   |   | 30     |   |
| Tri-State Ethanol Co, LLC*              |   | Rosholt, SD        |   | Corn                  |   | 18     |   |   |   |
| United Wisconsin Grain Producers, LLC*^ |   | Columbus, WI       |   | Corn                  |   |   |   | 40     |   |
| U.S. Energy Partners, LLC               |   | Russell, KS        |   | Milo/wheat starch     |   | 40     |   |   |   |
| Utica Energy, LLC                       |   | Oshkosh, WI        |   | Corn                  |   | 24     |   |   |   |
| VeraSun Energy Corporation              |   | Aurora, SD         |   | Corn                  |   | 100    |   |   |   |
| Western Plains Energy, LLC*             |   | Campus, KS         |   | Corn                  |   | 30     |   |   |   |
| Wyoming Ethanol                         |   | Torrington, WY     |   | Corn                  |   | 5      |   |   |   |
| **Total Existing Capacity**             |   | **3093.8**         |   |                  |   |
| **Total Under Construction/Expansions** |   |               |   | **557.0**             |   |
| **TOTAL CAPACITY**                      |   | **3650.8**         |   |                  |   |

 

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* farmer-owned

^ under construction

Last Updated: January 2004

 

The ethanol industry isvery competitive.  While the ethanolindustry has been growing, there is significant competition among ethanolproducers.  Nationally, ethanolproduction is concentrated in a few large companies.  Our ethanol plant will face a competitive challenge from largerfactories, from plants that can produce a wider range of products than ourplant, and from other plants similar to our planned ethanol plant.

 

Our ethanol plant will bein direct competition with other ethanol producers, many of which have greaterresources than we currently have or will have in the future.  Large ethanol producers such as ArcherDaniels Midland and Cargill, among others, are capable of producingsignificantly greater quantities than the amount of

 

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ethanol we expect toproduce. In addition, there are several mid-western regional ethanol producers,as well as others on the east and west coasts and the southern United States,that have recently formed, are in the process of forming, or are underconsideration, which are or would be of a similar or larger size to us and havesimilar resources to us.  In light ofsuch competition, there is no assurance that we can successfully construct andoperate the ethanol plant.

 

Our ethanol plant alsocompetes with producers of other gasoline additives having similar octane andoxygenate values as ethanol, such as producers of MTBE, a petrochemical derivedfrom methanol that costs less to produce than ethanol.  Although currently the subject of a federalban, many major oil companies can produce MTBE and because it ispetroleum-based, its use is strongly supported by major oil companies.  Alternative fuels, gasoline oxygenates andalternative ethanol production methods are also continually under development.  The major oil companies have significantlygreater resources than we have to market MTBE and other additives, to developalternative products, and to influence legislation and public perception ofMTBE and ethanol.  These companies alsohave sufficient resources to begin production of ethanol should they choose todo so.

 

Alternative fuels,gasoline oxygenates and ethanol production methods are continually underdevelopment by ethanol and oil companies with far greater resources that wehave.  New products or methods ofethanol production developed by larger better-financed competitors couldprovide them competitive advantages over us and harm our business.

 

**Sourcesof Raw Materials - Corn Feedstock Supply**

 

We anticipate that ourplant will need approximately 9 million bushels of grain per year orapproximately 25,000 bushels per day as the feedstock for its dry millingprocess.  We anticipateestablishing ongoing business relationships with local corn elevators toacquire the corn needed for the project, although we expect to acquire somecorn directly from local farmers.

 

In the year 2000, in the 11 county area surrounding the proposed sitefor our ethanol plant, corn production was approximately 17 million bushels andsorghum production was approximately 8 million bushels.  The following tables summarize theapproximate number of bushels of corn and sorghum produced by suppliers locatedwithin the 11 counties surrounding our proposed plant site and the three closestcounties in Missouri during the year 2000:

 

| **County**    |   | **Sorghum  (bushels)** |   | **Corn  (bushels)** |   | **Sorghum + Corn  (bushels)** |   |
|---------------|--------|------------------------|--------|---------------------|--------|-------------------------------|--------|
| Anderson      |   | 1,076,000              |   | 2,346,000           |   | 3,422,000                     |   |
| Allen         |   | 1,096,000              |   | 1,516,000           |   | 2,612,000                     |   |
| Bourbon       |   | 332,000                |   | 940,000             |   | 1,272,000                     |   |
| Coffey        |   | 1,173,000              |   | 1,764,000           |   | 2,937,000                     |   |
| Douglas       |   | 234,000                |   | 2,549,000           |   | 2,783,000                     |   |
| Franklin      |   | 759,000                |   | 2,052,000           |   | 2,811,000                     |   |
| Johnson       |   | 166,000                |   | 1,119,000           |   | 1,285,000                     |   |
| Linn          |   | 387,000                |   | 952,000             |   | 1,339,000                     |   |
| Miami         |   | 348,000                |   | 1,185,000           |   | 1,533,000                     |   |
| Osage         |   | 1,398,000              |   | 1,357,000           |   | 2,755,000                     |   |
| Woodson       |   | 1,189,000              |   | 1,339,000           |   | 2,528,000                     |   |
| Kansas Totals |   | 8,158,000              |   | 17,119,000          |   | 25,277,000                    |   |
| Cass, MO      |   | 174,000                |   | 2,931,000           |   | 3,105,000                     |   |
| Bates, MO     |   | 406,000                |   | 4,846,000           |   | 5,252,000                     |   |
| Vernon, MO    |   | 1,254,000              |   | 3,185,000           |   | 4,439,000                     |   |
| KS + MO Total |   | 9,992,000              |   | 28,081,000          |   | 38,073,000                    |   |

 

Source: U.S. Department of AgricultureStatistics 2000

 

Although the area surrounding the plant produces a significant amountof corn and we do not anticipate problems sourcing grain, there is no assurancethat a shortage will not develop, particularly if there were an extendeddrought or other production problem.  In addition, our financialprojections assume that we can purchase

 

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grain for prices near the ten-year average for corn in the area of theplant.  However, there is no assurance that we will be able to purchasegrain for these prices.  Grain prices are primarily dependent on worldfeedstuffs supply and demand and on U.S. and global corn crop production, whichcan be volatile as a result of a number of factors, the most important of whichare weather, current and anticipated stocks and prices, export prices andsupports and the government’s current and anticipated agricultural policy.  The price of grain has fluctuatedsignificantly in the past and may fluctuate significantly in the future.Because the market price of ethanol is not related to corn prices, ethanolproducers are generally not able to compensate for increases in the cost ofcorn feedstock through adjustments in prices charged for their ethanol. We therefore anticipate that our plant’s profitability will be negativelyimpacted during periods of high corn prices.  We have determined that theaverage price for corn for the fourteen Kansas counties surrounding ourproposed plant site over the last ten years has been approximately $2.34 perbushel.  We have also determined thatthe average price for sorghum for the fourteen Kansas counties surrounding ourproposed plant site over the last ten years has been approximately $2.13 perbushel.

 

We have engaged ProExporter Network of Olathe, Kansas to perform a cornorigination study.  We expect that thiswill include a corn origination analysis, flat price history, small area supplydemand, and a basis impact analysis.

 

We also intend to engage United Bio Energy Trading, LLC to ensure theconsistent scheduling of corn deliveries and to establish and fill forwardcontracts through the grain elevators.  United Bio Energy Trading, LLC is expected tocoordinate corn deliveries between the railroad and the participatingelevators.** ** We intend to buyas much grain as possible from local producers, members as well as non-members,and from local elevators.  We may purchase additional grain from outsideof our trade area as need and price dictates.

 

Due to fluctuations in the price of corn, we intend to utilize forwardcontracting and hedging strategies to manage our commodity risk exposure andoptimize finished product pricing.  We anticipate that most of our grainwill be acquired in this manner.  We intend to do this to help guardagainst price movements that often occur in corn markets.  Hedging meansprotecting the price at which we buy corn and the price at which we will sellour products in the future.  It is a way to attempt to reduce the riskcaused by price fluctuation.  The effectiveness of such hedging activitiesis dependent upon, among other things, the cost of corn and our ability to sellsufficient amounts of ethanol and distillers dried grains.  Although wewill attempt to link hedging activities to sales plans and pricing activities,such hedging activities can themselves result in costs because price movementsin corn contracts are highly volatile and are influenced by many factors thatare beyond our control.  We may incur such costs and they may besignificant.

 

**Utilities**

 

The plant will require asignificant and uninterrupted supply of electricity, natural gas and water tooperate.  We have not yet entered intoagreements with providers of these utilities.

 

*Natural Gas*

 

We anticipate that our ethanol plant will require a natural gas supplyof at least .925 billion cubic feet per year at a minimum rate of 100 MCF perhour and at a minimum of 200 psig at the plant site.  To access sufficient supplies of natural gas to operate theethanol plant, a connection to a distribution pipeline located underground atour site will be required.  We have nocurrent agreement with any third party to construct such a connection.

 

We anticipate that natural gas may also be procured from varioussuppliers on the open market and we could enter into a contract fordistribution services that would include the costs of construction of theconnection to the underground pipeline to our ethanol plant.  We currently have no agreement with anatural gas supplier.  We anticipateentering into an agreement with a natural gas supplier before we beginconstruction of the ethanol plant and that the natural gas supply will besufficient to meet our needs; however, we do not anticipate that our naturalgas supplier will guarantee that the natural gas supply will beuninterrupted.  We intend to purchase apropane tank to serve as a back-up energy source in the event of interruptionof our natural gas supply; we expect that our back-up propane tank will allowus to continue operations for about three to four days.

 

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Natural gas prices have historically fluctuated dramatically, whichcould significantly affect the profitability of our operations.

 

Wehave engaged U.S. Energy Services, Inc. of Wayzata, Minnesota to providenatural gas management services including assistance with negotiation of ournatural gas supply and transportation.

 

*Electricity*

 

The proposed ethanol plant will require a continuous supply ofapproximately 18,750 kVA, 12,400-volt electrical energy.  We expect to purchase electricity from theCity of Garnett, but have not yet entered into any agreement with the cityregarding the specific type and nature of service to be provided.  We anticipate doing so before we beginconstruction of the ethanol plant.

 

Wehave also engaged U.S. Energy Services, Inc. to provide consulting and energymanagement services for supplies of electricity.

 

*Water*

 

We will require a significant supply of water.  Fresh water requirements for a 25 milliongallon per year ethanol plant are approximately 225 gallons per minute.  Much of the water used in an ethanol plantis recycled back into the process. There are, however, certain areas of production where fresh water isneeded.  Those areas include boilermakeup water and cooling tower water. Boiler makeup water is treated on-site to minimize all elements thatwill harm the boiler and recycled water cannot be used for this process.  Cooling tower water is non-contact water (itdoes not come in contact with the mash) and, therefore, can be recycled backinto the cooling tower process.  Themakeup water requirements for the cooling tower are primarily a result of evaporation.  Depending on the type of technology utilizedin the ethanol plant design, much of the water can be recycled back into theprocess, which will minimize the effluent. This will have the long-term effect of lowering waste water treatmentcosts.  Many new plants today are zeroor near zero effluent facilities.  Atmost, there should be no more than 200 gallons per minute of effluent.  We anticipate that our water requirementswill be supplied through the City of Garnett at a cost of $0.50 per thousandgallons.

 

**Letter ofIntent with Fagen, Inc.**

 

We have executed anon-binding letter of intent with Fagen, Inc. of Granite Falls, Minnesota, inconnection with the design, construction and operation of the ethanolplant.  Fagen, Inc. has agreed to enterinto good faith negotiations with us to prepare definitive agreements forfinancial, design and construction services. ICM, Inc. is a full-service engineering,manufacturing and merchandising firm based in Colwich Kansas and is expected tobe the principal subcontractor for the ethanol plant.  ICM, Inc. is expected to provide the processengineering operations for Fagen, Inc.

 

Wehave not entered into any legally binding Design-Build Contract with Fagen,Inc., but we expect to do so within thirty days.  We expect that the Design-Build Contract that we anticipateexecuting with Fagen, Inc. will indicate that ICM, Inc. will act assubcontractor for Fagen, Inc.  However,no assurances can be given that a Design-Build Contract will be entered intowith Fagen, Inc.

 

Itis estimated that we will pay Fagen, Inc. approximately $27,700,000 in exchangefor the following services:

 

•                  Providing a preliminary design andconstruction schedule and a guaranteed maximum price for the design andconstruction of the ethanol plant;

•                  Assisting us with site evaluationand selection;

•                  Designing and building the ethanolplant; and

•                  Assisting us in locatingappropriate operational management for the ethanol plant.

 

Wewill also be responsible for fees and expenses related to financing, such asprinting and publication expenses, legal fees, ratings, credit enhancements,trustee or agent fees and any registration fees.

 

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**United Bio Energy Group**

 

We expect to engage the United Bio Energy Group to provide us with a variety of servicesincluding ethanol plant general management, ethanol and distillers grainsmarketing, grain origination services and overall risk management.  The United Bio Energy Group of companies wascreated by merging subsidiaries owned by Fagen, Inc. and ICM, Inc.  We expect that United Bio Energy Fuels, LLCwill market our ethanol, United Bio Energy Ingredients, LLC will market ourdistillers grains and United Bio Energy Trading, LLC will provide consultingservices with respect to commodity trading and hedging.  We have not yet entered into contracts withany of these companies, but expect to do so before completion of construction.

 

**FagenEngineering, LLC**

 

Wehave engaged Fagen Engineering, LLC to provide preliminary civil engineeringfor our ethanol plant.  The estimatedfees proposed for preliminary site development and a deliverable site are$30,000.

 

**ValueAdded Ventures, LLC**

 

OnJuly 1, 2002, we entered into an agreement with Value Added Ventures, LLCto engage Value Added Ventures, LLC as our project consultant.  We terminated this agreement effectiveapproximately February 14, 2003.

 

**Effect ofGovernmental Regulation**

 

Ethanol has importantapplications, primarily as a high quality octane enhancer and an oxygenatecapable of reducing air pollution and improving automobile performance. Theethanol industry is heavily dependent, however, on several economic incentivesto produce ethanol, including federal ethanol supports.

 

Ethanol sales have beenfavorably affected by the Clean Air Act amendments of 1990, particularly theFederal Oxygen 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. This program became effective January 1,1995, and requires the sale of reformulated gasoline in nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog.  Increasinglystricter EPA regulations are expected to increase the number of metropolitanareas deemed in non-compliance with Clean Air Standards, which could increasethe demand for ethanol.

 

The use of ethanol as anoxygenate to blend with fuel to comply with federal mandates also has beenaided by federal tax policy. The Energy Tax Act of 1978 exempted ethanolblended gasoline from the federal gas tax as a means of stimulating thedevelopment of a domestic ethanol industry and mitigating the country’sdependence on foreign oil.  As amended,the federal tax exemption currently allows the market price of ethanol tocompete with the price of domestic gasoline. The exemption for a 10% ethanol blend is the equivalent of providing aper gallon “equalization” payment that allows blenders 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.  Under current legislation, the federalgasoline tax exemption for a 10% ethanol blend is 5.2 cents per gallon.  The exemption will gradually drop to 5.1cents in 2005.  This federal taxexemption is scheduled to expire in 2007.

 

A bill (S. 791, 108thCong.) including provisions known as the Renewable Fuels Standard has beenintroduced in the United States Senate. It would revise the current method in which fuel ethanol use isrequired.  The proposed legislationwould determine the specific volume of ethanol to be used in gasoline on anationwide basis.  The anticipatedvolumes would begin in the year 2004 at 2.3 billion gallons and grow at a rateof approximately 300 million gallons per year to a volume of 5 billion gallonsin 2012.  However, consideration of thebill has been postponed indefinitely.

 

Congress is currently considering amending the present excise taxstructure.  Currently, ethanol-blendedfuel is taxed at a lower rate than regular gasoline (5.2 cents on a 10% blend).  If enacted, the existing ethanol excise taxexemption would be eliminated, thereby allowing the full federal excise tax of18.4 cents per gallon of gasoline

 

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to be collected and allocated to the highway trust fund.  In place of the current exemption, the billcreates a new volumetric ethanol excise tax credit (VEETC) of 52 cents pergallon of ethanol blended.  Refiners andgasoline blenders would apply for this credit on the same tax form as beforeonly it would be a credit from general revenue, not the highway trustfund.  Based on volume, the VEETC isexpected to allow greater refinery flexibility in blending ethanol.

 

The ethanol industry andour business will depend upon continuation of the federal ethanol supportsdiscussed above.  These incentives havesupported a market for ethanol that might disappear without theincentives.  Alternatively, theincentives may be continued at lower levels than at which they currentlyexist.  The elimination or reduction ofsuch federal ethanol supports would make it more costly for us to produce andsell our ethanol.

 

**Costs andEffects of Compliance with Environmental Laws**

 

We will be subject toextensive air, water and other environmental regulations and we will berequired to obtain a number of environmental permits to construct and operatethe plant.  We haveengaged Environmental Resource Group of Minneapolis, Minnesota, to coordinate and assist us withobtaining proper permits and to advise us on environmental compliance generally.

 

We will be required obtainair pollution construction permits, a pollutant discharge elimination systempermit, storm water discharge permits, a water withdrawal permit, and analcohol fuel producer’s permit.  In addition,we will be required to complete a spill prevention control and countermeasuresplan prior to commencement of plant operations.  The air pollution construction permit and the storm waterdischarge permit is expected to cost approximately $25,000.  The other permits are expected to cost lessthan $70,000.  The cost ofongoing compliance for the operation of the ethanol plant, which complianceincludes notification, reporting, monitoring, inspection and record keeping, isexpected to cost less than $50,000 for equipment and less than $40,000 per yearfor labor.

 

We received our Air Emission Source Construction Permit on June 3,2003.  This permit is required prior tobeginning construction on our ethanol plant. Evenif we are successful in obtaining all of the other permits currently required,any retroactive change in environmental regulations, either at the federal orstate level, could require us to obtain additional or new permits or spendconsiderable resources on complying with such regulations.

 

We are subject tooversight 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 are subject to change, and any suchchanges could result in greater regulatory burdens on plant operations.  We could also be subject to environmental ornuisance claims from adjacent property owners or residents in the area arisingfrom possible foul smells or other air or water discharges from the plant.  Such claims may result in an adverse resultin court if we are deemed to engage in a nuisance that substantially impairsthe fair use and enjoyment of real estate.

 

**Employees**

 

We currently have an office staff comprised of two full-time and twopart-time employees.  One of the full-timeemployees, Jill Zimmerman, is also a director and the principal financialofficer of the company.  See “CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.”

 

**ITEM 2****.****                                                  ****DESCRIPTION OFPROPERTY.**

 

We plan to acquire 23 acres of land in the Golden Prairie IndustrialPark on the edge of Garnett, Kansas to construct our ethanol plant.  We have received an option to purchase thereal estate from the City of Garnett, Kansas. That option was obtained for a cost of $1.00 and was scheduled to expireon December 1, 2002, but was extended for six months to June 3,2003.  The option granted us the rightto purchase the real estate for $1.00. On May 13, 2003, the Garnett City Commission extended the option foranother year to June 1, 2004.  Theoption was extended without additional costs to us.

 

We have also received an option to purchase ten acres of real estate inAnderson County, Kansas from Clarence L White and Berniece F. White to allowthe placement of a railroad spur from the proposed plant site to

 

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existing Union PacificRailroad track in Garnett, Kansas.  Thatoption granted us the right to purchase approximately ten acres for $9,000 peracre and was obtained at a cost of $5,000. The option was scheduled to expire on March 31, 2003, but wasextended until March 14, 2004 in exchange for an additional payment of$5,000.  The option was extended asecond time to July 1, 2004 for an additional $5,000 payment.  The purchase price of the land will bereduced by the amounts paid for the option and extensions.  The real estate was used as a surfacedumpsite many years ago and waste needs to be moved and buried.  The estimated cost to clean up the site is$7,500 which we expect will be completed by June 30, 2004.  The City of Garnett, Kansas has applied forgrant funds to pay for clean up required on the site.

 

**ITEM3****.****                                                  ****LEGALPROCEEDINGS.**

 

We are not a party to any pending legal proceeding nor are we aware ofany proceeding contemplated by a governmental authority.

 

**ITEM4****.****                                                  ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

We submitted no matters to a vote of security holders during the fourthquarter of the fiscal year covered by this report.

 

**PARTII.**

 

**ITEM5****.****                                                   MARKETFOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS.**

 

There is no public trading market for membership units.  As of December 31, 2003, there areapproximately 122 holders of our membership units.

 

Distributions are payable at the discretionof our board of directors, subject to the provisions of the Kansas LimitedLiability Company Act and our amended and restated operating agreement.  The board has no obligation to distributeprofits, if any, to members.  We havenot declared or paid any distributions on our units.  In addition, distributions may be restricted by loan covenants inour construction loan and financing agreements.

 

**ITEM6****.****                                                  ****MANAGEMENT’SDISCUSSION AND ANALYSIS.**

 

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

 

**Application of Critical Accounting Policies**

 

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

 

**Overview**

 

East Kansas Agri-Energy, LLC was formed as a Kansas limited liabilitycompany on October 16, 2001, for the purpose of constructing and operatingan ethanol plant near Garnett, Kansas. We expect the project to cost

 

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approximately $37,000,000.  Weraised equity by a public offering registered with the Securities and ExchangeCommission on Form SB-2 (SEC Registration No. 333-96703) as amended, which wasdeclared effective on January 24, 2003 and terminated January 24,2004.  The offering was for a minimum$9,000,000 and a maximum of $18,000,000. During the offering we sold 13,457 membership units for a total of$13,457,000 in subscription proceeds. The proceeds were placed in an account with Garnett State Savings Banksubject to an escrow agreement dated November 14, 2002 and amendedeffective December 31, 2003.

 

Additionally, as of December 31, 2003, we had raised approximately$610,000 in seed capital.  The seedcapital was raised through two offerings. On January 2, 2002, we issued 110 membership units to our directorsfor $500 per unit in an offering exempt from federal and stateregistration.  On February 1, 2002,we issued 1,110 membership units to other seed capital investors for $500 perunit in an offering registered with the state of Kansas and exempt from federalregistration.

 

We have received a written debt financing commitment consisting of aterm loan of $20,000,000 and a $1,000,000 line of credit from Home FederalSavings Bank of Rochester, Minnesota. We have also received a written commitment from Fagen, Inc. to providesubordinated debt financing of up to $2,000,000.  In return for the written commitment for subordinated debtfinancing from Fagen Inc., we have agreed to engage the United Bio Energy Group ofcompanies to provide us services including ethanol plant general management,ethanol and distillers grains marketing, grain origination services and overallrisk management.  The United Bio EnergyGroup was created by merging subsidiaries owned by Fagen, Inc. and ICM, Inc.

 

We released proceeds of our equity offering from escrow onMarch 22, 2004.  We placed $150,000of the proceeds in our money market account with Garnett State Savings Bank tocover our short-term development needs. The remaining proceeds were placed in a separate account with GarnettState Savings Bank and will be governed by a Master Repurchase Agreementexecuted with Garnett State Savings Bank on March 16, 2004.  We may draw on these funds at any time, butdo not intend to do so prior to the commencement of substantial construction ofthe ethanol plant.

 

We plan to build a corn-based ethanol plant that will produce ethanol,distillers grains and carbon dioxide. The ethanol plant was originally expected to process approximately 7.5million bushels of corn and sorghum per year into 20 million gallons ofdenatured fuel grade ethanol, 64 thousand tons of dried distillers grains with solubles and 63thousand tons of raw carbon dioxide gas.  We now expect to convert , on an annual basis, approximately 9million bushels of corn and sorghum per year into 25 million gallons ofdenatured fuel grade ethanol, approximately 80 thousand tons of dried distillers grains with solubles andapproximately 79 thousand tons of raw carbon dioxide gas.  We expect this change to result in moreefficient operations.  This change isnot expected to increase the cost of construction of our ethanol plant or delayits anticipated date of operation.

 

We expect that the project will cost approximately $37,000,000.  We are still in the development phase, anduntil the proposed ethanol plant is operational, will generate no revenue.  We anticipate that accumulated losses willcontinue to increase until the ethanol plant is operating.  We expect that it will take approximately 14to 16 months from the date we released funds from escrow to construct theethanol plant and commence start-up operations.  Our anticipated date of substantial completion is currentlysummer of 2005.

 

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

 

We expect to spend the next 12 months in design development andconstruction of the ethanol plant. We plan to negotiate and execute finalizedcontracts needed in connection with the construction and operation of theethanol plant, including the provision of electricity, natural gas and otherpower sources, and marketing agreements for ethanol and distiller grainsales.  We are currently in the processof negotiating a Design-Build Contract with Fagen, Inc.  We expect that initial start-up andoperations of the plant will be under the general direction and guidance ofFagen, Inc. employees, the United Bio Energy Group and our own personnel, who willhave experience in ethanol production or will have received on-site trainingprovided by Fagen, Inc. or the UnitedBio Energy Group.  We furtheranticipate that additional on-site support will be provided by Fagen, Inc. orthe United Bio Energy Groupfor the first 30 days of plant operation.

 

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We expect to have sufficient cash available to cover our costs over thenext 12 months, including construction, staffing, office, audit, legal,compliance costs and start up working capital costs.  The following is our estimate of our costs and expenditures forthe next 12 months.  Theseestimates are based upon consultation with Fagen, Inc. who is expected to beact as our Design-Builder, ICM, Inc. who is expected to act as our primesubcontractor, and financial advisor’s experience with other businesses.  It is only an estimate and our actualexpenses could be much higher due to a variety of factors described in our FormSB-2 registration statement under the section entitled “Risk Factors.” 

USE OF FUNDS

 
| Plant construction                    |   | $          | 27,700,000 |   |
|---------------------------------------|--------|------------|------------|--------|
| Land & site development costs     |   | 900,000    |       |
| Railroad                              |   | 1,210,000  |       |
| Fire Protection / Water Supply        |   | 420,000    |       |
| Construction insurance costs          |   | 65,000     |       |
| Construction contingency              |   | 600,000    |       |
| Capitalized interest                  |   | 500,000    |       |
| Rolling stock                         |   | 190,000    |       |
| Start up costs:                       |   |       |       |
| Financing costs                       |   | 550,000    |       |
| Organization costs                    |   | 650,000    |       |
| Pre Production period costs           |   | 500,000    |       |
| Spare parts - process equipment       |   | 200,000    |       |
| Working capital                       |   | 2,165,000  |       |
| Inventory - corn and milo             |   | 450,000    |       |
| Inventory - chemicals and ingredients |   | 250,000    |       |
| Inventory - Ethanol and DDGS          |   | 650,000    |       |
|                                  |   |       |       |
|                                  |   | 37,000,000 |       |

 

We expect the total funding required for the plant to be$37,000,00.  We estimate that we willneed approximately $27,700,000 to construct the plant and a total ofapproximately $9,300,000 to cover all capital expenditures necessary tocomplete the project, make the plant operational and produce revenue.  The total project cost has increased.  The change includes a $2,455,000 increase toInventory and Working Capital resulting from our decision to increase ourexpected annual production of fuel grade ethanol from 20 million gallons to 25million gallons.

 

Based upon offering proceeds of $13,457,000, seed capital proceeds of$610,000, a term loan of $20,000,000, a line of credit of $483,000, grantfinancing of $450,000, and subordinated debt of $2,000,000, we expect that wewill have approximately $37,000,000 of capital available, which means we expectto have sufficient cash on hand to cover construction and related start-upcosts necessary to make the plant operational.

 

We expect to engage the United Bio Energy Group to provide ethanol plant generalmanagement, ethanol and distillers grains marketing, grain origination servicesand overall risk management.  Weanticipate entering into an agreement with the United Bio Energy Group prior to substantial completion ofconstruction of the ethanol plant.

 

**Employees**

 

Upon completion of the ethanol plant, we intend to hire approximately31 full-time employees.  Approximatelythree of our employees will be involved primarily in management andadministration and the remainder will be involved primarily in plantoperations.  We expect that the UnitedBio Energy Group will also employ and provide our General Manager.  Accordingly, we expect approximately 32full-time personnel at the ethanol plant.

 

The following table represents some of the anticipated positions withinthe plant and the minimum number of individuals we intend will be employed foreach position:

 

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

 

**Liquidity and Capital Resources**

 

As of December 31, 2003, we had cash and cash equivalents of$42,587 and total assets of $431,625. Our total assets include $262,869 of prepaid offering costs related tothe offering.  Upon issuance of theunits from the offering, these costs will be netted against the proceedsreceived.  To date, we have raised atotal of $610,000 in seed capital, which we have used to fund our organizationand operation to date.  As ofDecember 31, 2003, we had current liabilities of $152,250, which consistsprimarily of our accounts payable and a note payable to the Kansas Departmentof Commerce and Housing.  Since ourinception through December 31, 2003, we have an accumulated deficit of$940,625.  Total members’ equity as ofDecember 31, 2003 was $279,375. Since our inception, we have generated no revenue from operations.  For the year ended December 31, 2003,we have a net loss of $158,620 primarily due to start-up costs.

 

Subsequent to the period covered by this report, we have received awritten debt financing commitment consisting of a term loan of $20,000,000 andup to a $1,000,000 line of credit from Home Federal Savings Bank of Rochester,Minnesota.  The loan commitment requiresa minimum of $17,000,000 of equity, grants or subordinate debt, with at least$14,800,000 of equity and grants.  Theloan commitment provides that interest will be variable of prime plus 1.5% witha floor of 6%, with a maturity of up to ten years on the term debt and the lineof credit subject to annual renewal.  Weexpect that the senior debt facility would be secured by substantially all ofour assets.  We have also received awritten commitment from Fagen, Inc. to provide subordinated debt financing ofup to $2,000,000.  The commitmentprovides for 9% interest and repayment over a term not to exceed ten years.

 

We received a Value-Added Agricultural Product Market Development Grantof $450,000 from the USDA, which is a matching grant to be used for start-upcosts.

 

We will be applying for a grant from the USDA’s Commodity CreditCorporation. Under the grant program, the Commodity Credit Corporation willreimburse eligible ethanol producers of less than 65 million gallons ofbioenergy one bushel of corn for every two and one-half bushels of corn usedfor the increased production of ethanol. No eligible producer may receive morethan $7.5 million under the program. However, some ethanol producers have received more than this amount whenthe start-up period has extended over more than one fiscal year of the U.S.government.  Because we expect to be aneligible producer and to annually utilize approximately 9 million bushelsof corn annually in the increased production of ethanol, we expect topotentially receive a maximum award of approximately $7.5 million.  However, the Commodity Credit Corporationmay award only $150 million annually fiscal years 2003 through 2006, andany award we received may be reduced based upon the volume of applications fromother eligible producers.  In addition,payments under the program in any one fiscal year may be less if Congress doesnot fully fund the program for that fiscal year (funding for the program issubject to an annual appropriation).  Weexpect to be eligible to receive an award under the program only once duringthe life of our project.  The CommodityCredit Corporation Bioenergy Program is scheduled to expire onSeptember 30, 2006.  The grantsavailable under the CCC program may not continue beyond their scheduledexpiration date or if they do continue, the grants may not be at the samelevel.  If our ethanol plant is notoperational by the expiration of the CCC program or has not had substantialoperations, we may not be eligible for the grants or may receive a reducedamount.

 

17

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The following schedule sets forth our estimated sources offunds.  This schedule could changein the future depending on whether we receive additional offering proceeds andgrants.  The schedule may alsochange depending on the level of subordinated debt incurred.

 

| **Source of Funds**         |   |   |           | **Percent of Total** |       |
|-----------------------------|--------|--------|----------------|----------------------|------------|
| Member  Equity              |   | $      | 14,067,000     |                 | 38.02      | % |
| Term  Debt                  |   | $      | 20,000,000     |                 | 54.05      | % |
| Subordinated  Debt          |   | $      | 2,000,000      |                 | 5.41       | % |
| Line  of Credit             |   | $      | 483,000        |                 | 1.31       | % |
| Grants                      |   | $      | 450,000        |                 | 1.22       | % |
|                        |   |   |           |                 |       |
| **Total  Sources of Funds** |   | **$**  | **37,000,000** | ** **           | **100.00** | **%** |

 

**Off-BalanceSheet Arrangements**

 

We do not have any off-balance sheet arrangements.

 

18

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**ITEM7****.****                                                   FINANCIALSTATEMENTS.**

 

**EASTKANSAS AGRI-ENERGY, LLC**

 

***FINANCIAL STATEMENTS***

***DECEMBER 31, 2003 AND 2002***

 

**EASTKANSAS AGRI-ENERGY, LLC**

 

Table of Contents

 

 
| **INDEPENDENT AUDITORS  REPORT**              |   |   |
|-----------------------------------------------|--------|--------|
|                                          |   |   |
|                                          |   |   |
| **FINANCIAL  STATEMENTS**                     |   |   |
| Balance Sheets                                |   |   |
| Statements  of Operations                     |   |   |
| Statement of  Changes in Members’ Equity |   |   |
| Statement  of Cash Flows                      |   |   |
| Notes to Financial  Statements                |   |   |

 

19

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## **INDEPENDENTAUDITORS’ REPORT**

 

 

To the Board of Directors

### **East KansasAgri-Energy, LLC**

Garnett, Kansas

 

We have audited theaccompanying balance sheets of **East KansasAgri-Energy, LLC**, (a development stage limited liability company) asof December 31, 2003 and 2002, and the related statements of operations,changes in members’ equity and cash flows for the years ended December 31,2003 and 2002 and the period from January 3, 2001 (inception) toDecember 31, 2003.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of **EastKansas Agri-Energy, LLC** as of December 31, 2003 and 2002, andthe results of its operations and its cash flows for the periods then ended inconformity with accounting principles generally accepted in the United Statesof America.

 
| /s/ Eide Bailly LLP    |   |
|------------------------|--------|
| Minneapolis, Minnesota |
| March 22, 2004    |

 

20

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**BALANCE SHEETS**

**DECEMBER 31,2003 AND 2002**

 
|                                                                                |   | **2003**      |        | **2002**   |   |
|-------------------------------------------------------------------------------------|--------|---------------|-------------|------------|--------|
| **ASSETS**                                                                          |   |          | ** **  |       |   |
|                                                                                |   |          | ** **  |       |   |
| CURRENT  ASSETS                                                                     |   |          | ** **  |       |   |
| Cash  and cash equivalents                                                          |   | **$**         | **42,587**  | ** ** | $      | 374,190 |   |
| Grant  receivable                                                                   |   | **27,059**    | ** **  | —     |   |
| Prepaid  offering costs                                                             |   | **262,869**   | ** **  | 140,148    |   |
| Prepaid  expense                                                                    |   | **1,419**     | ** **  | —     |   |
| Total  current assets                                                               |   | **333,934**   | ** **  | 514,338    |   |
|                                                                                |   |          | ** **  |       |   |
| PROPERTY,  PLANT AND EQUIPMENT                                                      |   |          | ** **  |       |   |
| Office  equipment                                                                   |   | **16,490**    | ** **  | 6,600      |   |
| Construction  in progress                                                           |   | **74,695**    | ** **  | 62,243     |   |
|                                                                                |   | **91,185**    |        | 68,843     |   |
| Less  accumulated depreciation                                                      |   | **3,494**     | ** **  | 398        |   |
|                                                                                |   | **87,691**    |        | 68,445     |   |
| OTHER  ASSETS                                                                       |   |          | ** **  |       |   |
| Land  option                                                                        |   | **10,000**    | ** **  | 5,000      |   |
|                                                                                |   |          | ** **  |       |   |
| Total  assets                                                                       |   | **$**         | **431,625** | ** ** | $      | 587,783 |   |
|                                                                                |   |          | ** **  |       |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                                            |   |          | ** **  |       |   |
|                                                                                |   |          | ** **  |       |   |
| CURRENT  LIABILITIES                                                                |   |          | ** **  |       |   |
| Current  portion of long-term debt                                                  |   | **$**         | **75,000**  | ** ** | $      | 75,000 |   |
| Accounts  payable                                                                   |   |          | ** **  |       |   |
| Trade                                                                               |   | **45,309**    | ** **  | 47,883     |   |
| Related  party                                                                      |   | **25,200**    | ** **  | 25,497     |   |
| Accrued  payroll, taxes, and withholdings                                           |   | **5,928**     | ** **  | 1,408      |   |
| Accrued  interest                                                                   |   | **813**       | ** **  | —     |   |
| Total  current liabilities                                                          |   | **152,250**   | ** **  | 149,788    |   |
|                                                                                |   |          | ** **  |       |   |
| MEMBERS’  EQUITY                                                               |   |          | ** **  |       |   |
| Capital  contributions, 20,000 units authorized, 1,220 units issued and outstanding |   | **1,220,000** | ** **  | 1,220,000  |   |
| Deficit  accumulated during the development stage                                   |   | **(940,625**  | **)**       | (782,005   | )      |
| Total  members’ equity                                                         |   | **279,375**   | ** **  | 437,995    |   |
|                                                                                |   |          | ** **  |       |   |
| Total  liabilities and equity                                                       |   | **$**         | **431,625** | ** ** | $      | 587,783 |   |

 

See Notes to FinancialStatements

 

21

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENTS OF OPERATIONS**

 
|                                                   |   | **Year  Ended  December 31,  2003** |         | **Year  Ended  December 31,  2002** |   | **From  January 3,  2001 (Date of  Inception) to  December 31,  2003** |   |
|--------------------------------------------------------|--------|------------------------------------------|--------------|------------------------------------------|--------|----------------------------------------------------------------------------------|--------|
|                                                   |   |                                     | ** **   |                                     |   |                                                                             |   |
| REVENUE                                                |   | **$**                                    | **—**   | ** **                               | $      | —                                                                           |   | $ | — |   |
|                                                   |   |                                     | ** **   |                                     |   |                                                                             |   |
| OPERATING  EXPENSES                                    |   |                                     | ** **   |                                     |   |                                                                             |   |
| Organizational  expenses                               |   | **—**                               | ** **   | —                                   |   | 3,643                                                                            |   |
| Start-up  expenses                                     |   | **159,262**                              | ** **   | 133,978                                  |   | 320,081                                                                          |   |
|                                                   |   | **159,262**                              |         | 133,978                                  |   | 323,724                                                                          |   |
| OTHER  INCOME (expense)                                |   |                                     | ** **   |                                     |   |                                                                             |   |
| Interest  income                                       |   | **1,773**                                | ** **   | 4,855                                    |   | 6,628                                                                            |   |
| Interest  expense                                      |   | **(1,131**                               | **)**        | —                                   |   | (1,131                                                                           | )      |
| Other  income                                          |   | **—**                               | ** **   | 2,000                                    |   | 2,000                                                                            |   |
|                                                   |   | **642**                                  |         | 6,855                                    |   | 7,497                                                                            |   |
|                                                   |   |                                     | ** **   |                                     |   |                                                                             |   |
| NET  LOSS                                              |   | **$**                                    | **(158,620** | **)**                                    | $      | (127,123                                                                         | )      | $ | (316,227 | ) |
|                                                   |   |                                     | ** **   |                                     |   |                                                                             |   |
| BASIC  AND DILUTED LOSS PER UNIT                       |   | **$**                                    | **(130**     | **)**                                    | $      | (113                                                                             | )      |   |   |
|                                                   |   |                                     | ** **   |                                     |   |                                                                             |   |
| WEIGHTED  AVERAGE UNITS OUTSTANDING, BASIC AND DILUTED |   | **1,220**                                | ** **   | 1,128                                    |   |                                                                             |   |

 

See Notes to FinancialStatements

 

22

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENT OF CANGES IN MEMBER’SEQUITY**

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

 

See Notes to FinancialStatements

 

23

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**EASTKANSAS AGRI-ENERGY, LLC**

**(ADEVELOPMENT STAGE COMPANY)**

**STATEMENT OF CASH FLOWS**

 
|                                                                        |   | **Year  Ended  December 31,  2003** |         | **Year  Ended  December 31,  2002** |   | **From  January 3,  2001 (Date of  Inception) to  December 31,  2003** |   |
|-----------------------------------------------------------------------------|--------|------------------------------------------|--------------|------------------------------------------|--------|----------------------------------------------------------------------------------|--------|
| CASH  FLOWS FROM OPERATING ACTIVITIES                                       |   |                                     | ** **   |                                     |   |                                                                             |   |
| Net  loss                                                                   |   | **$**                                    | **(158,620** | **)**                                    | $      | (127,123                                                                         | )      | $ | (316,227 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities |   |                                     | ** **   |                                     |   |                                                                             |   |
| Depreciation                                                                |   | **3,096**                                | ** **   | 398                                      |   | 3,494                                                                            |   |
| Increase  in current assets                                                 |   |                                     | ** **   |                                     |   |                                                                             |   |
| Grant  receivable                                                           |   | **(27,059**                              | **)**        | —                                   |   | (27,059                                                                          | )      |
| Prepaid  expense                                                            |   | **(1,419**                               | **)**        | —                                   |   | (37,173                                                                          | )      |
| Increase  (decrease) in current liabilities                                 |   |                                     | ** **   |                                     |   |                                                                             |   |
| Accounts  payable                                                           |   | **5,384**                                | ** **   | 26,410                                   |   | 43,239                                                                           |   |
| Accrued  payroll, taxes, and withholdings                                   |   | **4,520**                                | ** **   | 1,408                                    |   | 5,928                                                                            |   |
| Accrued  interest                                                           |   | **813**                                  | ** **   | —                                   |   | 813                                                                              |   |
| Net  cash (used in) operating activities                                    |   | **(173,285**                             | **)**        | (98,907                                  | )      | (326,985                                                                         | )      |
|                                                                        |   |                                     | ** **   |                                     |   |                                                                             |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                       |   |                                     | ** **   |                                     |   |                                                                             |   |
| Purchase  of equipment                                                      |   | **(11,470**                              | **)**        | (5,020                                   | )      | (16,490                                                                          | )      |
| Purchase  of land option                                                    |   | **(5,000**                               | **)**        | (5,000                                   | )      | (10,000                                                                          | )      |
| Construction  in process                                                    |   | **(6,271**                               | **)**        | (50,803                                  | )      | (57,074                                                                          | )      |
| Net  cash (used in) investing activities                                    |   | **(22,741**                              | **)**        | (60,823                                  | )      | (83,564                                                                          | )      |
|                                                                        |   |                                     | ** **   |                                     |   |                                                                             |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                       |   |                                     | ** **   |                                     |   |                                                                             |   |
| Cost  of raising capital                                                    |   | **(135,577**                             | **)**        | (81,889                                  | )      | (231,864                                                                         | )      |
| Proceeds  from notes payable                                                |   | —                                   | ** **   | —                                   |   | 137,000                                                                          |   |
| Repayment  of notes payable                                                 |   | **—**                               | ** **   | (126,000                                 | )      | (137,000                                                                         | )      |
| Proceeds  from long-term debt                                               |   | **—**                               | ** **   | —                                   |   | 75,000                                                                           |   |
| Capital  contributions                                                      |   | **—**                               | ** **   | 555,000                                  |   | 610,000                                                                          |   |
| Net  cash provided by financing activities                                  |   | **(135,577**                             | **)**        | 347,111                                  |   | 453,136                                                                          |   |
|                                                                        |   |                                     | ** **   |                                     |   |                                                                             |   |
| NET  INCREASE IN CASH AND CASH EQUIVALENTS                                  |   | **(331,603**                             | **)**        | 187,381                                  |   | 42,587                                                                           |   |
|                                                                        |   |                                     | ** **   |                                     |   |                                                                             |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                             |   | **374,190**                              | ** **   | 186,809                                  |   | —                                                                           |   |
|                                                                        |   |                                     | ** **   |                                     |   |                                                                             |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                   |   | **$**                                    | **42,587**   | ** **                               | $      | 374,190                                                                          |   | $ | 42,587 |   |

 

Continued on Next Page

 

24

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|                                                          |   | **Year  Ended  December 31,  2003** |       | **Year  Ended  December 31,  2002** |   | **From  January 3,  2001 (Date of  Inception) to  December 31,  2003** |   |
|---------------------------------------------------------------|--------|------------------------------------------|------------|------------------------------------------|--------|----------------------------------------------------------------------------------|--------|
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION             |   |                                     |       |                                     |   |                                                                             |   |
| Cash  paid during the period for interest                     |   | **$**                                    | **318**    |                                     | $      | —                                                                           |   | $ | 318 |   |
|                                                          |   |                                     |       |                                     |   |                                                                             |   |
| NON  CASH INVESTING AND FINANCING ACTIVITIES                  |   |                                     |       |                                     |   |                                                                             |   |
| Prepaid  expenses reclassified to deferred offering costs     |   | **$**                                    | **—** |                                     | $      | 35,754                                                                           |   | $ | 35,754 |   |
|                                                          |   |                                     |       |                                     |   |                                                                             |   |
| Deferred  offering costs incurred                             |   | **$**                                    | **9,649**  |                                     | $      | 22,505                                                                           |   | $ | 9,649 |   |
|                                                          |   |                                     |       |                                     |   |                                                                             |   |
| Property,  plant, and equipment costs incurred                |   | **$**                                    | **17,621** |                                     | $      | 13,020                                                                           |   | $ | 17,621 |   |
|                                                          |   |                                     |       |                                     |   |                                                                             |   |
| Cost  of raising capital reclassified to members’ equity |   | **$**                                    | **—** |                                     | $      | 14,398                                                                           |   | $ | 14,398 |   |
|                                                          |   |                                     |       |                                     |   |                                                                             |   |
| Capital  contributions issued at discount                     |   | **$**                                    | **—** |                                     | $      | 610,000                                                                          |   | $ | 610,000 |   |

 

See Notes to FinancialStatements

 

25

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**EASTKANSAS AGRI-ENERGY, LLC**

**NOTES TO FINANCIAL STATEMENTS**

 

**NOTE 1 -****                      SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

*Natureof Business*

 

East Kansas Agri-Energy,LLC, (a development stage Kansas limited liability company) to be located inGarnett, Kansas, was organized to pool investors to build a 20 million gallonethanol plant with distribution within the United States.  The Company anticipates completingconstruction by the summer of 2005.  Asof December 31, 2003, the Company is in the development stage with itsefforts being principally devoted to organizational, construction and financingactivities.

 

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

 

*Basisof Accounting*

 

The Company uses theaccrual basis of accounting in accordance with accounting principles generallyaccepted in the United States of America. This method recognizes revenues as earned and expenses as incurred.

 

*RevenueRecognition*

 

Revenue from theproduction of ethanol and related products will be recorded upon delivery tocustomers.  Interest income isrecognized as earned.

 

*PrepaidOffering Costs*

 

Costs incurred related tothe sale of units are recorded as prepaid offering costs until the relatedunits are issued.  Upon issuance ofunits, offering costs are deducted from additional paid-in capital, with anyremaining amount applied to retained earnings (deficit accumulated during thedevelopment 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.

 

*Propertyand Equipment*

 

Property and equipmentare stated at cost.  Significantadditions are capitalized, while expenditures for maintenance, repairs andminor renewals are charged to operations when incurred.  Office equipment is depreciated over theestimated useful life of 5 to 10 years on a straight-line basis.

 

Construction in progressconsists of amounts incurred for the engineering and other constructionplanning costs of the ethanol plant, capitalized interest and other costs thatmeet capitalization criteria.  As ofDecember 31, 2003 and 2002, construction in progress consisted ofengineering and permit application costs.

 

The Company reviews itsproperty and equipment for impairment whenever events indicate that thecarrying amount of the asset may not be recoverable.  An impairment loss is recorded when the sum of the future cashflows is less than the carrying amount of the asset. The amount of the loss isdetermined by comparing the fair market values of the asset to the carryingamount of the asset.

 

Continued on Next Page

 

26

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*OtherIncome*

 

Other income consists ofamounts received from unaffiliated organizations to assist in the organizationand development of the Company.  Amountsare recorded as other income when there is no obligation to repay the organization.

 

*Organizationaland Start-up Costs*

 

Organizational andstart-up costs are expensed as incurred. Organizational costs consist of amounts related to the formation of thecompany.  Start-up costs consist ofamounts incurred during the development stage related to the operation andmanagement of the Company, which do not qualify as a capitalized cost.

 

*Grantsand Bargain Purchases*

 

Amounts received asgrants are recorded as a reduction of the expense or cost for which the grantwas provided.  Amounts received as abargain purchase are recorded as a reduction of the cost basis of the asset.

 

*Estimates*

 

Management uses estimatesand assumptions in preparing financial statements.  Those estimates and assumptions affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses.  Actual results could differfrom the significant estimates used.

 

*IncomeTaxes*

 

The Company is organizedas a limited liability company under state law and is treated as a partnershipfor income tax purposes.  Under thistype of organization, the Company’s earnings pass through to the partners andare taxed at the partner level. Accordingly, no income tax provision has been calculated.  Differences between financial statementbasis of assets and tax basis of assets is related to capitalization andamortization of organization and start-up costs for tax purposes, whereas thesecosts are expensed for financial statement purposes.

 

*CashEquivalents*

 

For purposes of thestatement of cash flows, the Company considers all highly liquid debtinstruments purchased with an original maturity of three months or less to becash equivalents.

 

*EarningsPer Unit*

 

Earnings per unit arecalculated based on the period of time units have been issued andoutstanding.  For purposes ofcalculating diluted earnings per capital unit, units subscribed for but notissued are included in the computation of outstanding capital units.  As of December 31, 2003, there was nota difference between basic and diluted earnings per unit since calculation ofdiluted earnings per unit for the effect of units subscribed but not issuedwould have been anti-dilutive.  Therewere no units subscribed as of December 31, 2002.

 

Continued on Next Page

 

27

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**NOTE 2 -****                      NOTESPAYABLE – UNSECURED CREDITORS**

 

During 2001, the Companyborrowed $1,000 each from 137 unsecured creditors.  The amounts were received from the creditors as investments atrisk, with no guarantee 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 TERMDEBT**

 

Long-term obligations ofthe Company are summarized as follows at December 31, 2003 and 2002,respectively.

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **2003**   |       | **2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|----------|--------|
| 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** |     | $      | 75,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |       |       |     |   |
| Less:  Current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **75,000** |       | 75,000   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |       |       |     |   |
| Long-term  portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **$**      | **—** |     | $      | — |   |

 

If the Companytransfers the project or project rights to a location or entity outside thestate of Kansas, the Company shall pay KDOCH within thirty days $75,000 plus10% simple interest from the date funds were disbursed and an ongoing royaltyof 4% of gross sales for the life of the related product.

 

If the Company, inexercising its best business judgment determines not to commercialize, sell,license or market its product, then no amounts shall be payable to KDOCH underthis agreement in excess of the salvage or resale value of the equipmentpurchased.

 

Subsequent toDecember 31, 2003, the Company amended the agreement to provide a maturitydate of June 1, 2004.  Allremaining provisions of the original agreement remain in full force and effect.

 

Management estimates thatthe fair value of the above debt instrument is approximately $75,000 and $71,600at December 31, 2003 and 2002, respectively.

 

Continued on Next Page

 

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**NOTE 4 -****                      MEMBERS’EQUITY**

 

As specified in theCompany’s Operating Agreement, voting rights are one vote for each voting unitregistered in the name of such Member as shown on the Membership Registrationmaintained by the Company.  No Membershall directly or indirectly own or control more than 25% of the issued andoutstanding voting membership interests of the Company at any time.

 

Income and losses of theCompany shall be allocated among the Members in proportion to each Member’srespective percentage of Units when compared with the total Units issued.

 

The Company’s cash flowshall first be applied to the payment of the Company’s operating expenses(including debt service) and then to maintenance of adequate cash reserves asdetermined by the Board of Directors. Any cash remaining after satisfaction of the preceding provision, asdetermined by the Board of Directors in its sole discretion, shall bedistributed from time to time to the Members in proportion to their respectivepercentage of Units.  No member has theright to demand and receive any distribution from the Company other than in cash.  No distribution shall be made if, as aresult thereof, the Company would be in violation of any loan agreement, or ifthe Company’s total assets would be less than the sum of its total liabilities.

 

Transfer, disposition orencumbrance of Capital Units is subject to certain restrictions, includingapproval by the Board of Directors.

 

Initial investorspurchased their units at $500 per unit subject to a private placementmemorandum.  As part of the Company’sinitial public offering, units have been offered at a minimum of $1,000 perunit.  The difference has been reflectedas a discount on the units and has been recorded as a distribution.

 

The units issued inaccordance with the private placement memorandum are not subject to repurchasein the event escrow related to the initial public offering is not broken.

 

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

 

**NOTE 5 -****                      GRANT INCOME**

 

The Company receivedgrants as follows during the 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 grantswas provided to the Company for purposes of funding a feasibility study. As ofDecember 31, 2002, all of the above grants were received. ThroughDecember 31, 2002 and 2001, the grants have been deducted from the costsrelated to the feasibility study incurred and deducted from start-up expenses.

 

Continued on Next Page

 

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**NOTE 6 -****                      RELATEDPARTY TRANSACTIONS**

 

The former projectcoordinator (Note 7) purchased membership units during the period endedDecember 31, ù 2002.

 

Of the previouslyunsecured creditors (Note 2), 122 are members of record as of December 31,2003, owning 10 units each.

 

 

**NOTE 7 -****                      COMMITMENTSAND CONTINGENCIES**

 

The Company has enteredinto an option agreement to purchase approximately 10 acres of land. The optionwas originally purchased for $5,000 and provides for a purchase price of $9,000per acre, plus the cost to replace boundary fencing and relocate an existingstructure along with water and electric utilities. The option was extended toMarch 13, 2004, and the Company paid an additional $5,000 for theextension.  Subsequent toDecember 31, 2003, the option was extended to July 1, 2004, and theCompany paid an additional $5,000 for the extension. The purchase price of theland will be reduced by amounts previously paid for the option and extension.

 

The Company has an agreementwith its former project coordinator to defer a portion of fees earned untilstock sales are authorized. The former project coordinator provides limitedservice on an ongoing basis. The deferred amount included in accounts payable –related party as of December 31, 2003 and 2002 was $15,000 and $25,160,respectively.

 

On May 14, 2002, theCompany entered into an option to purchase real property for the plant sitewith a fair value of approximately $172,500. The option is for the purchase ofapproximately 23 acres within the Golden Prairie Industrial Park of the City ofGarnett, Kansas for $1. The option was extended and expires on June 1,2004.

 

The Company leases officespace for $550 payable on the first of each month.  The lease expired on November 30, 2003.  The Company continues to rent the officespace on a month-to-month basis.  Rentexpense for the years ended December 31, 2003 and 2002 was $6,600 and $3,949,respectively.

 

The Company entered intoan agreement for preliminary engineering for the proposed ethanol plant withFagen Engineering LLC. The agreement obligates the Company for no more than$30,000, of which approximately $17,600 had been incurred as ofDecember 31, 2003.

 

During the year endedDecember 31, 2003, the Company terminated its agreement with Value AddedVentures, LLC (VAV). The Company has been notified by VAV requesting paymentfor services from the inception of the contract through the date of terminationtotaling $33,380. The Company and VAV are negotiating settlement of thiscontract. The Company has recorded a liability related to this agreement of$5,847 as of December 31, 2003.

 

During the year endedDecember 31, 2003, the Company negotiated with a board member to performcertain consulting services which were to begin on October 1, 2003.  The parties did not execute a contract forthese services.  Subsequent toDecember 31, 2003, the board member resigned and the Company received aclaim for payment of approximately $50,000, consisting of approximately $2,000and 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.

 

Continued on Next Page

 

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The Board of Directorsapproved a registration statement filed with the Securities and ExchangeCommission for the sale of units in an initial public offering. A minimum of9,000 units and a maximum of 18,000 units (exclusive of units issued prior tothe initial public offering) will be offered for sale in the public offering ata price of $1,000 per unit. Each investor is required to purchase a minimum of10 units. The minimum amount of the offering is $9,000,000, with a maximumpotential amount raised of $18,000,000. In the event subscriptions for theminimum are not received and accepted or events occur that prevent the escrowfrom being broken (such as non-execution of debt financing agreements), amountsreceived from subscriptions will be returned to the purchaser with interestbased on interest earned on the escrow account, less applicable fees.Subscriptions require submission of 10% of the offering price, with theremaining amount subject to call of the Board of Directors. In the event asubscriber does not pay for their units in full, all amounts previouslycollected are forfeited to the Company. As of December 31, 2003, theamount held in escrow totaled $779,400 representing subscriptions of $6,571,000for 6,571 units. Amounts held in escrow are not included in the accompanyingfinancial statements, as the Company does not have title to the proceeds of thesubscriptions until the terms of the escrow agreement have been met and thesubscriptions are released to the Company.

 

The Company entered intoan agreement with Garnett State Savings Bank to provide security for balancesheld in escrow related to subscriptions received as part of the Company’sinitial public offering.  The Company hasreceived subscriptions for the sale of 6,571 units.  The company has collected $779,400 as a result of thesesubscriptions and is holding these funds in escrow in accordance with theagreement.

 

**NOTE 8 -****                      CONCENTRATIONOF CREDIT RISK**

 

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

 

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

 

**NOTE 9 -****                      INCOME TAXES**

 

As of December 31,2003, the tax basis of assets exceeded the book basis of assets byapproximately $278,000.  As ofDecember 31, 2002, there were no significant differences between the bookbasis and tax basis of assets.

 

**NOTE 10-****               VALUEADDED GRANT**

 

During the year endedDecember 31, 2003, the Company received notification of award of a UnitedStates Department of Agriculture Value-Added Agricultural Product MarketDevelopment Grant (the Grant) for approximately $450,000. The Grant can be usedto pay for certain organizational, offering and start-up costs related to theformation and capitalization of the Company. The Company qualified forreimbursement of $209,221 of costs, of which $60,193 related to cost of raisingcapital and $149,028 was recorded as a reduction of start-up costs for the yearended December 31, 2003.  In addition,at December 31, 2003 the Company was entitled to a grant receivable of$27,059 for the reimbursement of start-up costs and cost of raising capital.

 

Continued on Next Page

 

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**NOTE 11-****               SUBSEQUENTEVENTS**

 

Subsequent toDecember 31, 2003, the Company signed a letter of intent for carbondioxide purchase agreement.  The termsprovide for the purchase of all the gaseous CO2 that will be produced.  In addition, the Company will provide fornominal consideration, land suitable for erecting and operating the CO2liquefaction plant.  The contract shallcommence on or before March 1, 2005, providing the product and site isavailable.

 

Subsequent toDecember 31, 2003, the Company entered into a conditional loan commitmentfor approximately $20,000,000 of construction debt converting to term debt anda $1,000,000 line of credit.  Terms ofthe proposed loan agreement include a minimum of $17,000,000 of equity, grantsor subordinate debt, with at least $14,800,000 of equity and grants.  Interest on the debt will be based on avariable rate structure of prime plus 1.5%, with a floor of 6%, with a maturityof up to 10 years on the term debt and the line of credit subject to renewal onan annual basis.  The term debt alsoincludes prepayment penalties and requires compliance with certain financialcovenants, including limitation of distribution of earnings of the Company andrequires prepayment of principal on an annual basis determined by a portion offree cash flow or 75% of amounts received from any CCC Bio Energy Program.  Fees for origination of the loan areexpected to be approximately $435,000, plus out of pocket costs related tocompletion of loan documentation. Collateral for the debt will include amortgage of the property, assignment of certain agreements, and a securityinterest in all assets.  The commitmentis conditioned upon completion of terms and conditions in form and substancesatisfactory to the lender, including participation by other financial institutionsof $15,000,000 and receipt of a USDA loan guarantee on $5,000,000 of the debt.

 

Subsequent toDecember 31, 2003, the Company received a commitment for subordinated debtof up to $2,000,000 from Fagen, Inc. The proposed terms include interest at 9%, and repayment over a term notto exceed 10 years.  In addition, Fagen,Inc. has subscribed for units of the Company, and is also negotiating acontract for the construction of the ethanol plant with the Company.

 

Subsequent toDecember 31, 2003 the Company completed its initial public offering.  The Company received subscriptions for13,457 units, which totals $13,457,000.

 

Subsequent toDecember 31, 2003, the Company closed its escrow account related to theinitial public offering, and transferred $150,000 to an operating account.  The remaining proceeds were placed in aseparate account with Garnett State Savings Bank and will be governed by aMaster Repurchase Agreement executed with Garnett State Savings Bank.

 

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

 

Eide Bailly LLP has been our independent auditor since theCompany’s inception and is the Company’s independent auditor at the presenttime.  The Company has had nodisagreements with its auditors.

 

**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 in ensuringthat material information related to us is recorded, processed, summarized andreported within the time periods required by the forms and rules of theSecurities and Exchange Commission.

 

Our management, includingour principal executive officer and principal financial officer, have reviewedand evaluated any changes in our internal control over financial reporting thatoccurred as of the end of the period covered by this report and there has beenno change that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

 

 

**PARTIII.**

 

**ITEM 9****.****                                                   DIRECTORS,EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.**

 

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

 

 

As of December 31,2003, our Board of Directors consists of the following directors:

 

*WilliamPracht, Chairman, President and Director, Age 46*

 

Mr. Pracht is afarmer/rancher working near Westphalia, Kansas and is one of the communityleaders of the Cherry Mound 4-H Club as well as a member of the Anderson CountyFair Board.  At the present time he isserving on the Kansas Livestock Association Board of Directors as well asChairman of the Tax Committee.

 

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Mr. Pracht has served asa director since our inception. Pursuant to our operating agreement, he will serve until one (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, Vice-Chairman,  Age 45*

 

Mr. Brummel has been themanager of the family owned business, Brummel Farm Service, since 1995.

 

Mr. Brummel, has servedas a director since our inception.  Pursuantto our operating agreement, he will serve until one (1) year after substantialcompletion of the construction of the ethanol plant and until a successor iselected and qualified, or until the earlier death, resignation, removal ordisqualification of such director.

 

*Jill Zimmerman, Treasurer, Age 30*

 

Ms. Zimmerman has beenemployed as our equity drive coordinator since February 10, 2003.  Previously, she was the Director ofValue-Added Programs for the Kansas Corn Growers Association in Garnett sinceJanuary 2002.  From May 1996 toJanuary 2002, Ms. Zimmerman was the County Extension Agent, Agriculturefor Kansas State Research and Extension, Anderson County.  In addition, Ms. Zimmerman is a partnerwith her brother in Zimmerman Farms, a small grain farming operation consistingof wheat and grain sorghum in Sumner County, Kansas.

 

Ms. Zimmerman has servedas a director since our inception. Pursuant to our operating agreement, she will serve until one (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.

 

*Daniel Morgan, Secretary, Age 33*

 

Mr. Morgan is co-owner ofH&M Angus Farms, Inc., a registered Angus seedstock producer in easternKansas.  He is also a certified cropadvisor and shares a Pioneer Seed dealership with his father.  He is a director of United Cooperatives andcurrently is its board secretary.

 

Mr. Morgan has served asa director since our inception. Pursuant to our operating agreement, he will serve until one (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.

 

*Scott Burkdoll, Age 47*

 

Mr. Burkdoll, is an ownerand operator of Burkdoll Bros., Inc. a Kansas family farm corporation.  Mr. Burkdoll has served as Vice Presidentfor this company since 1978.  He is partowner and has served since 1989 as Secretary/Treasurer of Sunflower Pork, Inc.,which produces 75,000 head of market hogs annually.  Mr. Burkdoll has been President of BG-5, an oil and gasproduction company in east central Kansas, since 1994.  Mr. Burkdoll is an owner and has servedsince 1998 as managing member of J-6 Cattle Ranch LLC.  He is also an owner and managing member ofSunflower Central, LLC.

 

Mr. Burkdoll has servedas a director since our inception. Pursuant to our operating agreement, he will serve until one (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.

 

*Glenn A. Caldwell, Jr., Age 56*

 

Mr. Caldwell has been theVice-President of Caldwell Enterprises Inc. since 1980 and, in that capacity,oversees the operation of crude oil production on several oil leases in twocounties.  In 1982, he became Presidentof Caldwell Farms, Inc. operating several thousand tillable acres in threecounties.

 

Mr. Caldwell has servedas a director since our inception. Pursuant to our operating agreement, he will serve until one (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.

 

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*Daniel L. Guetterman, Age 52*

 

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

 

Mr. Guetterman has servedas a director since our inception. Pursuant to our operating agreement, he will serve until one (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.

 

*Don Meats*, Age 60

 

Mr. Meats lives on a farmnear LeRoy, KS and operates a stocker program. He retired in 2001 from the LeRoy Coop after 36 years of employment; 33years as general manager.  He iscurrently employed by the First National Bank of LeRoy as an Agriculture LoanOfficer.

 

Mr. Meats has served as adirector since our inception.  Pursuantto our operating agreement, he will serve until one (1) year after substantialcompletion of the construction of the ethanol plant and until a successor iselected and qualified, or until the earlier death, resignation, removal ordisqualification of such director.

 

*Doug Strickler, Age 43*

 

Mr. Strickler is a thirdgeneration farmer from Iola, Kansas who has been farming since 1984.  Mr. Strickler has served on severalboards of directors including the local electric cooperative, water district,farm bureau and church board.

 

Mr. Strickler has servedas a director since our inception. Pursuant to our operating agreement, he will serve until one (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.

 

*Jim Westagard, Age 42*

 

Mr. Westagard startedfarming in 1986 and presently farms approximately 3000 acres, raising corn,grain sorghum, soybeans and winter wheat. Mr. Westagard handles all management and day-to-day operations.  He and his wife also have a commercialcattle operation.  Mr. Westagard hasserved on the United Cooperative Board of Directors for the past 12 years.

 

Mr. Westagard has servedas a director since our inception. Pursuant to our operating agreement, he will serve until one (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.

 

*KenClark, Age 60*

 

On September 30,2003, Ken Clark was appointed a director. Mr. Clark was previously employed by the Kansas City Southern RailwayCompany since 1969.  Mr. Clark submittedhis resignation effective February 1, 2004.  He has not been replaced on our board of directors.

 

**Involvementin Certain Legal Proceedings**

 

One of our directors, DonMeats, is subject to a continuing Cease and Desist Order originally entered bythe State of Kansas Securities Commissioner on November 27, 1996.  This order required him to cease and desistfrom the sale of unregistered securities. Mr. Meats, along with others, was found to have participated in aprogram several years before his involvement with our organization which wasdetermined to have violated the securities laws of the State of Kansas as itconstituted the unlawful sale of unregistered securities.  Mr. Meats cooperated in the investigation ofthis matter and no further action was taken against him.  Mr. Meats did not participate in the sale ofour membership units during our offering.

 

35

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**Adoption of Code of Ethics**

 

Our Board of Directorshas adopted a code of ethics that applies to our principal executive officer,William Pracht, our principal financial officer, Jill Zimmerman, our vicepresident, Roger Brummel, and our secretary, Daniel Morgan.  Each of these individuals signed anacknowledgment of his or her receipt of our code of ethics.  We are filing a copy of our code of ethicswith the Securities and Exchange Commission by including the code of ethics asExhibit 14.1 to this report.

 

**Identification of Audit Committee and Financial Expert**

 

On March 22, 2004,the Board of Directors appointed an audit committee consisting of DanielMorgan, Doug Strickler, Glenn Caldwell, and Daniel Guetterman.  We currently have no audit committeefinancial expert serving on the audit committee.  We have no audit committee financial expert at this time becausewe are a start-up company in the development stage.  We may appoint an audit committee financial expert to serve onthe audit committee when construction of the ethanol plant is complete and theplant is  operational.

 

**ITEM 10****.****                                            EXECUTIVECOMPENSATION.**

 

In 2003, our Treasurer and principal financial officer, JillZimmerman, was compensated a total of $33,202.02 pursuant to her employmentagreement with us.  We reimburse our officersfor expenses incurred relating to services rendered on the Company’sbehalf.  We do not have any employmentagreements with any other officer or director.

 

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

 

**Security Ownership ofCertain Beneficial Owners**

 

As of December 31, 2003, there were no beneficial owners of5% or more of our outstanding membership units.

 

**Security Ownership ofManagement**

 

As of March 6, 2004, members of our board of directors ownmembership units as follows:

 

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| **Title of Class** |   | **Name and Address of Beneficial  Owner**                                                  |   | **Amount and  Nature of  Beneficial  Owner** |   | **Percent of  Class** |   |
|--------------------|--------|--------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|-----------------------|--------|
|               |   |                                                                                       |   |                                         |   |                  |   |
| Membership Units   |   | Bill Pracht,  Chairperson, Director  20477 SW Florida Road  Westphalia, KS  66093     |   | 10 Units                                     |   | 0.82                  | %      |
| Membership Units   |   | Roger Brummel,  Vice-Chairperson,  Director  802 South Oak Street  Garnett, KS  66032 |   | 10 Units                                     |   | 0.82                  | %      |
| Membership Units   |   | Dan Morgan, Secretary,  Director  196 Texas Road  Greeley, KS  66033                  |   | 20 Units                                     |   | 1.64                  | %      |
| Membership Units   |   | Jill Zimmerman,  Treasurer, Director  420 S. Cottonwood Street  Garnett, KS  66032    |   | 10 Units                                     |   | 0.82                  | %      |
| Membership Units   |   | Dan Guetterman,  Director  P.O. Box 32  Bucyrus, KS  66013                            |   | 10 Units                                     |   | 0.82                  | %      |
| Membership Units   |   | Jim Westagard, Director  32376 N.W. Idaho Road  Richmond, KS  66080                   |   | 20 Units                                     |   | 1.64                  | %      |
| Membership Units   |   | Don Meats, Director  1724 2nd Road, S.E.  Neosho Falls, KS 66758                           |   | 10 Units                                     |   | 0.82                  | %      |
| Membership Units   |   | Doug Strickler,  Director  218 Cardinal Drive  Iola, KS  66749                        |   | 10 Units                                     |   | 0.82                  | %      |
| Membership Units   |   | Scott Burkdoll,  Director  3939 Ellis Road  Rantoul, KS  66079                        |   | 20 Units                                     |   | 1.64                  | %      |
| Membership Units   |   | Glenn Caldwell,  Director  P.O. Box 181  Garnett, KS  66032                           |   | 20 Units                                     |   | 1.64                  | %      |
| Membership Units   |   | All Directors and  Officers as a Group(1)                                                  |   | 120 Units                                    |   | 9.84                  | %      |

 

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(1)             Dan Morgan, JimWestagard, and Glenn Caldwell are each shareholders of United Cooperative,Inc., whose ten Units have been included in each of those member’s “Number ofUnits,” but which are included only once in the total for all Directors andOfficers as a Group.

 

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

 

*JillZimmerman**, Treasurer, Principal Financial Officer, Directorand Member*

 

On February 10,2003, we entered into an employment agreement with Jill Zimmerman who serves asour Treasurer, principal financial officer and director.  Ms. Zimmerman is also a member of theCompany.  Under the agreement, theCompany engages Ms. Zimmerman as a full-time equity drive coordinator.  Under the terms of the agreement, Ms.Zimmerman is responsible for monitoring project development, public relationsand other on-site development issues. We will pay Ms. Zimmerman $37,700 annually plus a $101.75 monthlystipend for these services.  Theagreement is expected to last until September 30, 2004.

 

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**ITEM 13****.****                                           ****EXHIBITS AND REPORTS ON FORM 8-K.**

 

(a)                                  Thefollowing exhibits are included herein:

 

**Exhibits Filed as Part of this Report and ExhibitsIncorporated by Reference.**

 

The following exhibitsare filed as part of this report. Exhibits previously filed are incorporated 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.                                              |
|            |   |                                                                                                                                                                                                                                                                  |
| 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.                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                  |
| 10.1            |   | Letter of Intent by and  between Fagen, Inc. and East Kansas Agri-Energy, LLC dated July 23,  2001.  Filed as Exhibit 10.1 to the  registrant’s registration statement on Form SB-2 (Commission File 333-96703)  and incorporated by reference herein. |
|            |   |                                                                                                                                                                                                                                                                  |
| 10.1            |   | Memorandum of Extension  from City of Garnett, Kansas.  Filed  as Exhibit 10.1 to the registrant’s quarterly report for period ended  March 31, 2003 on Form 10-QSB (Commission File 333-96703) and  incorporated by reference herein.                 |
|            |   |                                                                                                                                                                                                                                                                  |
| 10.3            |   | Option to Purchase Real  Estate from City of Garnett, Kansas.   Filed as Exhibit 10.3 to the registrant’s registration statement on  Form SB-2 (Commission File 333-96703) and incorporated by reference herein.                                            |
|            |   |                                                                                                                                                                                                                                                                  |
| 10.4            |   | March 14, 2002  Option to Purchase Real Estate from Clarence L. White and Berniece F.  White.  Filed as Exhibit 10.4 to the  registrant’s registration statement on Form SB-2 (Commission File 333-96703)  and incorporated by reference herein.       |
|            |   |                                                                                                                                                                                                                                                                  |
| 10.5            |   | March 14, 2003  Option to Purchase Real Estate from Clarence L. White and Berniece F. White.                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                  |
| 10.6            |   | Employment Agreement  dated February 10, 2003 by and between East Kansas Agri-Energy, LLC and  Jill Zimmerman.                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                  |
| 14.1            |   | Code of Ethics of East  Kansas Agri-Energy, LLC, adopted March 22, 2004.                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                  |
| 31.1            |   | Certificate pursuant to  17 CFR 240.15d-14(a).                                                                                                                                                                                                                        |

 

38

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| 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. |

 

(b)                                 Reportson Form 8-K.

 

None.

 

**ITEM 14****.****                                           ****PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 
| **Category**        |   | **Year** |   | **Fees** |   |
|---------------------|--------|----------|--------|----------|--------|
| Audit  Fees         |   | 2003     |   | $        | 28,537 |   |
|                |   | 2002     |   | $        | 28,917 |   |
| Audit-Related  Fees |   | 2003     |   | $        | 14,788 |   |
|                |   | 2002     |   | $        | 3,514  |   |
| Tax  Fees           |   | 2003     |   | $        | 0      |   |
|                |   | 2002     |   | $        | 0      |   |
| All  Other Fees     |   | 2003     |   | $        | 0      |   |
|                |   | 2002     |   | $        | 0      |   |

 

Consistent with theSecurities and Exchange Commission requirements regarding auditor independence,the Audit committee has adopted a policy to pre-approve all audit andpermissible non-audit services provided by the independent auditor.  Consistent with the Securities and ExchangeCommission requirements regarding auditor independence, the audit committee hasadopted a policy to pre-approve all future audit and permissible non-auditservices provided by the independent auditor. Under the policy, the audit committee must pre-approve services prior tothe commencement of the specified service. Prior to appointment of the audit committee, the Board of Directorsapproved all services provided by Eide Bailly LLP.

 

**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   | EAST KANSAS  AGRI-ENERGY, LLC                           |
|--------|---------------------------------------------------------|
|   |                                                    |
|   |                                                    |
| Date:  | March 30, 2004                                     |   |  /s/ William Pracht |
|   | William Pracht                                          |
|   | President  (Principal Executive Officer)                |
|   |                                                    |
|   |                                                    |
| Date:  | March 30, 2004                                     |   |  /s/ Jill Zimmerman |
|   | Jill Zimmerman                                          |
|   | Treasurer  (Principal Financial and Accounting Officer) |

 

39

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In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 

 
| Date:  March 30, 2004 |  /s/ William Pracht         |   |
|---------------------------------|----------------------------------|--------|
|                            | William Pracht                   |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Roger Brummel          |   |
|                            | Roger Brummel                    |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/Jill Zimmernan          |   |
|                            | Jill Zimmerman                   |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Daniel Morgan          |   |
|                            | Daniel Morgan                    |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Scott Burkdoll         |   |
|                            | Scott Burkdoll                   |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Glenn A. Caldwell, Jr. |   |
|                            | Glenn A. Caldwell, Jr.           |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Daniel L. Guetterman   |   |
|                            | Daniel L. Guetterman             |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Don Meats              |   |
|                            | Don Meats                        |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Doug Strickler         |   |
|                            | Doug Strickler                   |
|                            |                             |
|                            |                             |
| Date:  March 30, 2004 |  /s/ Jim Westagard          |   |
|                            | Jim Westagard                    |

 

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