EXHIBIT 10.2
 
 
CERTIFICATE OF DESIGNATIONS,
POWERS, PREFERENCES AND RIGHTS OF THE SERIES B
 CUMULATIVE CONVERTIBLE PREFERRED STOCK

 
OF

 
PACIFIC ETHANOL, INC.
 
Pursuant to Section 151 of the
Delaware General Corporation Law
 
Pacific Ethanol, Inc. (the “Corporation”), organized and existing under the laws
of the State of Delaware, does, by its Chief Financial Officer and under its
corporate seal, hereby certify that pursuant to the authority contained in
Article Fourth of its Certificate of Incorporation and in accordance with the
provisions of Section 151 of the Delaware General Corporation Law, its Board of
Directors has adopted the following resolution creating the following classes
and series of the Corporation’s Preferred Stock and determining the voting
powers, designations, powers, preferences and relative, participating, optional
or other special rights, and the qualifications, limitations and restrictions
thereof, of such classes and series:
 
RESOLVED, that, pursuant to authority conferred upon the Board of Directors by
the Certificate of Incorporation of the Corporation (the “Certificate of
Incorporation”), there is hereby created the following series of Preferred
Stock:
 
 
·
3,000,000 shares shall be designated Series B Cumulative Convertible Preferred
Stock, par value $0.001 per share (the “Series B Preferred Stock”).

 
The designations, powers, preferences, and rights and the qualifications,
limitations and restrictions of the Series B Preferred Stock in addition to
those set forth in the Certificate of Incorporation shall be as follows:
 
Section 1.       Designation and Amount.  3,000,000 shares of the unissued
preferred stock of the Corporation shall be designated as Series B Cumulative
Convertible Preferred Stock, par value $.001 per share.  The Series B Preferred
Stock shall be issued in accordance with the Purchase Agreement at a purchase
price of $19.50 per share (the “Series B Issue Price”).
 
Section 2.       Rank.  The Series B Preferred Stock shall rank: (i) subject to
the requirements of Section 7, junior to any other class or series of capital
stock of the Corporation hereafter created specifically ranking as to dividend
rights, redemption rights, liquidation preference and other rights senior to the
Series B Preferred Stock (the “Senior Securities”); (ii) senior to all of the
Corporation’s common stock, par value $0.001 per share (the “Common Stock”);
(iii) senior to any class or series of capital stock of the Corporation
hereafter created not specifically ranking as to dividend rights, redemption
rights, liquidation preference and other rights senior to or on parity with any
Series B Preferred Stock of whatever subdivision (collectively, with the Common
Stock, the “Junior Securities”); and (iv) pari passu with respect to dividend
and liquidation rights with the Corporation’s Series A Cumulative Redeemable
Convertible Preferred Stock ( the “Series A Preferred Stock”) and, subject to
the requirements of Section 7, pari passu with respect to any class or series of
capital stock of the Corporation hereafter created specifically ranking on a
parity with the Series B Preferred Stock (collectively, the “Parity
Securities”).
 

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Section 3.        Dividends.
 
(a)           So long as shares of Series B Preferred Stock remain outstanding,
the holders of each share of the Series B Preferred Stock shall be entitled,
from and after the date of issuance of such share, to receive, and shall be paid
quarterly in arrears (beginning on the last day of the calendar quarter
following the date of the initial issuance of Series B Preferred Stock) in cash
out of funds legally available therefor, on a pari passu basis with the Holders
of Series A Preferred Stock, prior and in preference to any distribution of any
of the assets of the Corporation to the holders of the Common Stock, cumulative
dividends, of an amount equal to 7.00% of the Series B Issue Price per share (as
adjusted for any stock dividends, stock splits, combinations, recapitalizations
involving equity securities of the Corporation, reclassifications or other
similar events involving a change with respect to the Series B Preferred Stock)
per annum with respect to each share of the Series B Preferred Stock; provided,
however, that such dividend may, at the option of the Corporation, be paid to
the holders of Series B Preferred Stock in shares of the Series B Preferred
Stock valued at the Series B Issue Price (as adjusted for any stock dividends,
stock splits, combinations, recapitalizations involving equity securities of the
Corporation, reclassifications or other similar events involving a change with
respect to the Series B Preferred Stock).  The holders of shares of Series B
Preferred Stock shall be entitled to receive such dividends immediately after
the payment of any dividends to Senior Securities required by the Corporation’s
Certificate of Incorporation, as amended or amended and restated and in effect,
including for this purpose any certificate(s) of designation (the “Charter”),
prior and in preference to any dividends paid to Junior Securities but in parity
with any distribution to the holders of Series A Preferred Stock and all other
Parity Securities.
 
(b)           In case the Corporation shall at any time or from time to time
declare, order, pay or make a dividend or other distribution (including, without
limitation, any distribution of stock or other securities or property or rights
or warrants to subscribe for securities of the Corporation or any of its
subsidiaries by way of a dividend, distribution or spin-off) on its Common
Stock, other than (i) a distribution made in compliance with the provisions of
Section 4 or (ii) a dividend or distribution made in Common Stock, the holders
of the Series B Preferred Stock shall be entitled to receive from the
Corporation with respect to each share of Series B Preferred Stock held, any
dividend or distribution that would be received by a holder of the number of
shares (including fractional shares) of Common Stock into which such Series B
Preferred Stock is convertible on the record date for such dividend or
distribution, with fractional shares of Common Stock deemed to be entitled to
the corresponding fraction of any dividend or distribution that would be
received by a whole share.  Any such dividend or distribution shall be declared,
ordered, paid and made at the same time such dividend or distribution is
declared, ordered, paid and made on the Common Stock.  No dividend or
distribution shall be declared, ordered, paid or made on the Common Stock unless
the dividend or distribution on the Series B Preferred Stock provided for by
this paragraph shall be declared, ordered, paid or made at the same time.
 
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Section 4.       Liquidation Preference.
 
(a)           In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of Series B Preferred
Stock shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, whether from capital, surplus or
earnings, immediately after any distributions to Senior Securities required by
the Charter, and prior and in preference to any distribution to Junior
Securities but pari passu with any distribution to the holders of Series A
Preferred Stock or other Parity Securities, an amount per share equal to the sum
of the Series B Issue Price (as adjusted for any stock splits, combinations,
recapitalizations involving equity securities of the Corporation,
reclassifications of other similar events involving a change with respect to the
Series B Preferred Stock) and any accrued but unpaid dividends on the Series B
Preferred Stock.  If upon the occurrence of such event, and after the payment in
full of the preferential amounts with respect to the Senior Securities, the
assets and funds available to be distributed among the holders of the Series B
Preferred Stock, the Series A Preferred Stock and any other Parity Securities
shall be insufficient to permit the payment to such holders of the full
preferential amounts due to such holders, respectively, then the entire assets
and funds of the Corporation legally available for distribution shall be
distributed among the holders of the Series B Preferred Stock, Series A
Preferred Stock and any other Parity Securities, pro rata, based on the amount
each such holder would receive if such full preferential amounts were paid
unless otherwise provided in the Charter.
 
(b)           Upon the completion of the distributions required by Section 4(a),
if assets remain in the Corporation, they shall be distributed to the holders of
Junior Securities other than Common Stock with respect to any liquidation
preference payable to such holders.
 
(c)           Upon the completion of the distributions required by Section 4(a)
and Section 4(b), if assets remain in the Corporation, they shall be distributed
pro rata, on an as-converted to Common Stock basis, to the holders of Common
Stock, Series A Preferred Stock and Series B Preferred Stock.
 
(d)           A sale, lease, conveyance or disposition of all or substantially
all of the capital stock or assets of the Corporation or a merger,
consolidation, share exchange, reorganization or other transaction or series of
related transactions (whether involving the Corporation or a subsidiary thereof)
in which the Corporation’s stockholders immediately prior to such transaction do
not retain a majority of the voting power in the surviving entity (a
“Transaction”), shall be deemed to be a liquidation, dissolution or winding up
within the meaning of this Section 4, unless (i) the holders of 66 2/3% of the
then outstanding shares of the Series B Preferred Stock vote affirmatively or
consent in writing that such transaction shall not be treated as a liquidation,
dissolution or winding up within the meaning of this Section 4 or (ii) such
Transaction shall have resulted in the conversion of the Series B Preferred
Stock in accordance with Section 5(b); provided, however, that each holder of
Series B Preferred Stock shall have the right to elect the conversion benefits
of the provisions of Section 5(a) or other applicable conversion provisions in
lieu of receiving payment in liquidation, dissolution or winding up of the
Corporation pursuant to this Section; and provided, further, that shares of the
surviving entity held by holders of the capital stock of the Corporation
acquired by means of other than the Transaction shall not be used in determining
if the shareholders of the Corporation own a majority of the voting power of the
surviving entity, but shall be used for determining the total outstanding voting
power of such entity.
 
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(e)           Prior to the closing of a Transaction described in Section 4(d)
which would constitute a liquidation, dissolution or winding up within the
meaning of this Section 4, the Corporation shall, at its sole option, either (i)
make all distributions of cash or other property that it is required to make to
the holders of Series B Preferred Stock pursuant to the first sentence of
Section 4(a), (ii) set aside sufficient funds or other property from which the
distributions required to be made to such holders can be made, or (iii)
establish an escrow or other similar arrangement with a third party pursuant to
which the proceeds payable to the Corporation from the Transaction will be used
to make the liquidating payments to such holders immediately after the
consummation of the Transaction.  In the event that the Corporation is unable to
fully comply with any of the foregoing alternatives, the Corporation shall
either: (x) cause such closing to be postponed until the Corporation complies
with one of the foregoing alternatives, or (y) cancel such Transaction, in which
event the rights of the holders of Series B Preferred Stock shall be the same as
existing immediately prior to such proposed Transaction.
 
Section 5.       Conversion of Series B Preferred Stock.  The Corporation and
the record holders of the Series B Preferred Stock shall have conversion rights
as follows:
 
(a)           Right to Convert.  Each record holder of Series B Preferred Stock
shall be entitled to convert whole shares of Series B Preferred Stock for the
Common Stock issuable upon conversion of the Series B Preferred Stock, at any
time at the option of the holder thereof, subject to adjustment and limitations
on conversion prior to obtaining stockholder approval as provided in Section
5(d) hereof, as follows: Each share of Series B Preferred Stock shall be
convertible into such number of fully paid and nonassessable shares of Common
Stock as is obtained by (I) multiplying the number of shares of Series B
Preferred Stock so to be converted by the Series B Issue Price and (II) dividing
the result thereof by the Conversion Price.  The Conversion Price shall
initially be $6.50 per share of Series B Preferred Stock, subject to adjustment
as provided in Section 5(d).  Accrued but unpaid dividends will be paid in cash
upon any such conversion.
 
(b)           Forced Conversion.  (i)  In the event of a Transaction which will
result in an Internal Rate of Return to holders of Series B Preferred Stock of
25.00% or more, each share of outstanding Series B Preferred Stock shall,
concurrently with the closing of such Transaction, be converted into fully-paid
and non-assessable shares of Common Stock.  Any such conversion shall be made
into the number of shares of Common Stock determined pursuant to Section 5(a)
using the Conversion Price, as last adjusted.  Accrued but unpaid dividends will
be paid in cash on any such conversion.
 
(ii)           Notwithstanding anything to the contrary herein, no shares of
outstanding Series B Preferred Stock shall be converted into Common Stock
pursuant to this Section 5(b) unless at the time of such proposed conversion the
Corporation shall have on file with the Securities and Exchange Commission an
effective registration statement with respect to the shares of Common Stock
issued or issuable to the holders on conversion of the Series B Preferred Stock
then issued or issuable to such holders and such shares of Common Stock are
eligible for trading on NASDAQ (or approved by and listed on a stock exchange
approved by the holders of 66 2/3% of the then outstanding shares of Series B
Preferred Stock).
 
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(c)           Mechanics of Conversion.  In order to convert Series B Preferred
Stock into full shares of Common Stock if (i) such conversion is pursuant to
Section 5(a), the holder shall (A) fax a copy of a fully executed notice of
conversion (“Notice of Conversion”) to the Corporation at the office of the
Corporation or to the Corporation’s designated transfer agent (the “Transfer
Agent”) for the Series B Preferred Stock stating that the holder elects to
convert, which notice shall specify the date of conversion, the number of shares
of Series B Preferred Stock to be converted, the Conversion Price (together with
a copy of the front page of each certificate to be converted) and (B) surrender
to a common courier for either overnight or two (2) day delivery to the office
of the Corporation or its transfer agent, the original certificates representing
the Series B Preferred Stock (the “Preferred Stock Certificates”) being
converted, duly endorsed for transfer, and (ii) such conversion is pursuant to
Section 5(b), the Corporation shall fax a copy of a Notice of Conversion to the
holders of Series B Preferred Stock stating that the shares of Series B
Preferred Stock shall be converted into Common Stock, which notice shall
describe the Transaction and the calculation of the Internal Rate of Return and
specify the date of such conversion, the number of shares of Series B Preferred
Stock that are being converted, the Conversion Price and a calculation of the
number of shares of Common Stock issuable upon such conversion (together with a
copy of the front page of each certificate to be converted); provided, however,
that the Corporation’s failure to deliver a Notice of Conversion to each holder
shall not affect the conversion of such shares of Series B Preferred Stock on
the date of the closing of the Transaction and the cancellation of the
certificates representing such shares of Series B Preferred Stock.  In the event
of a conversion pursuant to Section 5(b), the outstanding shares of Series B
Preferred Stock shall be converted automatically without any further action by
the holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent and the
Corporation shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon such conversion unless either the Preferred Stock
Certificates are delivered to the Corporation or the Transfer Agent as provided
above, or the holder notifies the Corporation or its Transfer Agent that such
certificates have been lost, stolen or destroyed (subject to the requirements of
Section 5(c)(i) below).
 
(i)           Lost or Stolen Certificates.  Upon receipt by the Corporation of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series B Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Corporation, and upon surrender and cancellation of the Preferred Stock
Certificates, if mutilated, the Corporation shall execute and deliver new
Preferred Stock Certificates of like tenor and date; provided that the
Corporation shall pay all costs of delivery (including insurance against loss
and theft until delivered in an amount satisfactory to the holders of Series B
Preferred Stock).  However, the Corporation shall not be obligated to reissue
such lost or stolen Preferred Stock Certificates if the holder contemporaneously
requests the Corporation to convert such Series B Preferred Stock into Common
Stock or if such shares of Series B Preferred Stock have been otherwise
converted into Common Stock.
 
(ii)           Delivery of Common Stock Upon Conversion.  The Corporation no
later than 6:00 p.m. (Pacific time) on the third (3rd) business day after
receipt by the Corporation or its transfer agent of all necessary documentation
duly executed and in proper form required for conversion, including the original
Preferred Stock Certificates to be converted (or after provision for security or
indemnification in the case of lost, stolen or destroyed certificates, if
required), shall issue and surrender to a common courier for either overnight or
(if delivery is outside the United States) two (2) day delivery to the holder as
shown on the stock records of the Corporation a certificate for the number of
shares of Common Stock to which the holder shall be entitled as aforesaid.
 
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(iii)           Date of Conversion.  The date on which a voluntary conversion
pursuant to Section 5(a) occurs (the “Date of Voluntary Conversion”) shall be
deemed to be the date the applicable Notice of Conversion is faxed to the
Corporation or the Transfer Agent, as the case may be, provided that the copy of
the Notice of Conversion is faxed to the Corporation on or prior to 6:00 p.m.
(Pacific time) on the Date of Conversion.  A forced conversion pursuant to
Section 5(b) shall occur on the date on which such forced conversion is deemed
to occur pursuant to Section 5(b) (the “Date of Forced Conversion”, and together
with the Date of Voluntary Conversion, the “Date of Conversion”).  The original
Preferred Stock Certificates representing the shares of Series B Preferred Stock
to be converted shall be surrendered by depositing such certificates with a
common courier for either overnight or two (2) day delivery, as soon as
practicable following the Date of Voluntary Conversion or as soon as practicable
following the date such holder receives notice of the Date of Forced Conversion.
The person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on the Date of Conversion.
 
(iv)           No Fractional Shares on Conversion.  No fractional shares of
Common Stock shall be issued upon conversion of the Series B Preferred
Stock.  In lieu of any fractional share to which the holder would otherwise be
entitled, the Corporation shall (after aggregating all shares into which shares
of Series B Preferred held by each holder could be converted) pay cash equal to
such fraction multiplied by the Market Price per share of Common Stock on the
Date of Conversion.
 
(d)           Adjustment of Conversion Price.
 
(i)           Adjustments of Conversion Price Upon Issuance of Common Stock.  If
at any time after the first filing of this Certificate of Designations, the
Corporation shall issue or sell, or is, in accordance with Section 5(d)(i)(A)
through (G) below, deemed to have issued or sold, any shares of Common Stock for
a consideration per share less than the Conversion Price in effect immediately
prior to the time of such issue or sale or deemed issue or sale, then, forthwith
upon such issue or sale or deemed issue or sale, the Conversion Price shall be
reduced to the price determined by dividing (x) an amount equal to the sum of
(a) the number of shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing Conversion Price and (b) the
consideration, if any, received by the Corporation upon such issue or sale, by
(y) the total number of shares of Common Stock outstanding immediately after
such issue or sale.  For purposes of determining the number of shares of Common
Stock outstanding as provided in clauses (x) and (y) above, the number of shares
of Common Stock issuable upon conversion of all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, exercise of all outstanding
Options (as defined below) and conversion of all outstanding Convertible
Securities (as defined below) shall be deemed to be outstanding. Notwithstanding
any other provision in this subsection to the contrary, if an adjustment to the
Conversion Price pursuant to this Section 5(d) would require the Corporation,
(I) to issue any shares of Common Stock upon conversion of the Series B
Preferred Stock in excess of 19.99% of the total number of shares of Common
Stock outstanding immediately prior to the closing (the “Closing”) of the
transactions contemplated by the Purchase Agreement (when aggregated with all
shares of Common Stock issued or issuable to such holders upon conversion of the
Series B Preferred Stock or upon the payment of a dividend on the Series B
Preferred Stock) at a price less than the greater of the Market Price per share
immediately prior to the Closing or the Corporation’s book value per share at
December 31, 2007 as reflected in the Corporation’s Form 8-K filed with the
Securities and Exchange Commission immediately after the Closing (the
“Conversion Limitation”), or (II) to otherwise obtain stockholder approval of
the transactions contemplated by the Purchase Agreement pursuant to NASDAQ
Marketplace Rule 4350(i), and such stockholder approval has not been obtained,
(1) the Conversion Price shall not be reduced below the maximum extent that
would not require shareholder approval under NASDAQ Marketplace Rule 4350(i),
and (2) the Corporation shall use its commercially best efforts to obtain such
stockholder approval as soon as reasonably practicable, including by calling a
special meeting of the stockholders to vote on such Conversion Price
adjustment.  In no event shall the Corporation be obligated to issue any shares
of Common Stock upon conversion of the Series B Preferred Stock in excess of the
Conversion Limitation until stockholder approval has been obtained. Once
stockholder approval of the transactions contemplated by the Purchase Agreement
has been obtained, the Conversion Limitation shall be of no further force or
effect.
 
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For purposes of this Section 5(d)(i), the following subparagraphs (A) to (G) of
this Section 5(d)(i) shall also be applicable:
 
(A)           Issuance of Rights or Options.  In case at any time the
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called “Options” and such convertible or exchangeable
stock or securities being called “Convertible Securities”) whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof
(in all cases excluding the effect of a net issue election), by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Conversion
Price in effect immediately prior to the time of the granting of such Options,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such Options
shall be deemed to have been issued for such price per share as of the date of
granting of such Options and thereafter shall be deemed to be
outstanding.  Except as otherwise provided in Section 5(d)(i)(C), no adjustment
of the Conversion Price shall be made upon the actual issue of such Common Stock
or of such Convertible Securities upon exercise of such Options or upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
 
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(B)           Issuance of Convertible Securities.  In case the Corporation shall
in any manner issue (whether directly or by assumption in a merger or otherwise)
or sell any Convertible Securities, whether or not the rights to exchange or
convert any such Convertible Securities are immediately exercisable, and the
price per share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the total amount received or receivable by
the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or exchange thereof, by (ii) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the Conversion
Price in effect immediately prior to the time of such issue or sale, then the
total maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
for such price per share as of the date of the issue or sale of such Convertible
Securities and thereafter shall be deemed to be outstanding; provided that (a)
except as otherwise provided in Section 5(d)(i)(C), no adjustment of the
Conversion Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities and (b) if any such issue
or sale of such Convertible Securities is made upon exercise of any Options to
purchase any such Convertible Securities for which adjustments of the Conversion
Price have been or are to be made pursuant to other provisions of this Section
5(d)(i), no further adjustment of the Conversion Price shall be made by reason
of such issue or sale.
 
(C)           Change in Option Price or Conversion Rate.  Upon the happening of
any of the following events, namely, if (1) the purchase price or exercise price
provided for in any Option referred to in Section 5(d)(i)(A), (2) the number of
shares into which the Option is exercisable, (3) the additional consideration,
if any, payable upon the conversion or exchange of any Convertible Securities
referred to in Section 5(d)(i)(A) or (B), or (4) the rate at which Convertible
Securities referred to in Section 5(d)(i)(A) or (B) are convertible into or
exchangeable for Common Stock shall change at any time (including, but not
limited to, changes under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event shall
forthwith be readjusted to the Conversion Price which would have been in effect
at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time initially granted, issued or sold.
 
(D)           Stock Dividends.  In case the Corporation shall declare a dividend
or make any other distribution upon any stock of the Corporation (other than
Common Stock, Series A Preferred Stock or Series B Preferred Stock) payable in
Common Stock, then any Common Stock issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold for $.001 per share,
unless the holders of at least 66 2/3% of the then outstanding Series B
Preferred Stock shall have consented to such dividend or distribution.
 
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(E)           Consideration for Stock.  In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith.  In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board, without deduction of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith.  In case any Options shall be issued in
connection with the issue and sale of other securities of the Corporation,
together comprising one integral transaction in which no specific consideration
is allocated to such Options by the parties thereto, such Options shall be
deemed to have been issued for such consideration as determined in good faith by
the Board.
 
(F)           Record Date.  In case the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in Common Stock, Options or Convertible
Securities or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
 
(G)           Treasury Shares.  The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or for the account
of the Corporation, and the disposition of any such shares shall be considered
an issue or sale of Common Stock for the purpose of this Section 5(d)(i).
 
(ii)           Certain Issues Excepted.  Anything herein to the contrary
notwithstanding, the Corporation shall not be required to make any adjustment of
the Conversion Price in the case of the issuance or sale from and after the date
of filing of this Certificate of Designations of Anti-Dilution Excluded
Securities (as defined below).
 
(iii)           Adjustments for Subdivisions, Common Stock Dividends,
Combinations or Consolidations of Common Stock.  If the outstanding shares of
Common Stock shall be subdivided or increased, by stock split, stock dividend or
otherwise, into a greater number of shares of Common Stock, the Conversion Price
shall concurrently with the effectiveness of such subdivision or payment of such
stock dividend, be proportionately decreased.  If the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
shall, concurrently with the effectiveness of such combination or consolidation,
be proportionately increased.
 
(iv)           Adjustments for Reclassification, Exchange and Substitution. If
the Common Stock issuable upon conversion of the Series B Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for
above), the Conversion Price shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted such that the
Series B Preferred Stock shall be convertible into, in lieu of the number of
shares of Common Stock which the holders would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock equivalent
to the number of shares of Common Stock that would have been subject to receipt
by the holders upon conversion of the Series B Preferred Stock immediately
before that change.
 
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(v)           Adjustments for Merger, Sale, Lease or Conveyance.  In case of any
share exchange, reorganization, consolidation with or merger of the Corporation
with or into another corporation, or in case of any sale, lease, conveyance or
disposition to another Corporation of the assets of the Corporation as an
entirety or substantially as an entirety, which is not treated as a liquidation,
dissolution or winding up pursuant to Section 4(d) above, the Series B Preferred
Stock shall after the date of such share exchange, reorganization,
consolidation, merger, sale, lease, conveyance or disposition be convertible
into the number of shares of stock or other securities or property (including
cash) to which the Common Stock issuable (at the time of such consolidation,
merger, sale, lease, conveyance or disposition) upon conversion of the Series B
Preferred Stock would have been entitled upon such share exchange,
reorganization, consolidation, merger, sale, lease, conveyance or disposition;
and in any such case, if necessary, the provisions set forth herein with respect
to the rights and interests thereafter of the holders of the Series B Preferred
Stock shall be appropriately adjusted so as to be applicable, as nearly as may
reasonably be, to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares of Series B Preferred Stock.
 
(vi)           Fractional Shares.  If any adjustment under this Section 5(d)
would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be rounded to the
nearest whole number of shares with one-half share being rounded up.
 
(vii)           Notice of Adjustment.  Concurrent with any adjustment pursuant
to this Section 5(d), the Corporation shall provide prompt notice to the holders
of Series B Preferred Stock notifying such holders of any such adjustment.
 
Section 6.     Voting Rights.  Except to the extent otherwise expressly provided
by law and in Section 7, the Series B Preferred Stock shall vote together with
all other classes and series of voting stock of the Corporation as a single
class on all actions to be taken by the stockholders of the Corporation.  Each
share of Series B Preferred Stock shall entitle the holder thereof to the number
of votes equal to the number of shares of Common Stock into which each share of
Series B Preferred Stock is convertible (determined without regard to Section
5(c)(iv)) on all matters to be voted on by the stockholders of the Corporation;
provided, however, that solely for purposes of this Section 6, the number of
votes for each share of Series B Preferred Stock shall not exceed the number of
shares of Common Stock into which each share of Series B Preferred Stock would
be convertible if the applicable Conversion Price were $6.50 (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
similar recapitalizations affecting such shares).
 
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Section 7.     Protective Provisions.  The Corporation shall not, without first
obtaining the written consent of the holders of at least a majority of the then
outstanding shares of Series B Preferred Stock voting as a separate class:
 
(i)           increase or decrease the total number of authorized shares of
Series B Preferred Stock or the authorized shares of Common Stock reserved for
issuance upon conversion of the Series B Preferred Stock (except as otherwise
required by the Charter or this Certificate of Designations);
 
(ii)           increase or decrease the number of authorized shares of Preferred
Stock or Common Stock (except any increase or decrease in the number of
authorized shares of Series A Preferred Stock and the shares of Common Stock
into which they are convertible, and as otherwise required by the Charter and
this Certificate of Designations);
 
(iii)           alter, amend, repeal, substitute or waive any provision of the
Charter or the Corporation’s bylaws, so as to affect adversely the voting
powers, preferences or other rights, including, without limitation, the
liquidation preferences, dividend rights, conversion rights, redemption rights
or any reduction in the stated value of the Series B Preferred Stock, whether by
merger, consolidation or otherwise;
 
(iv)           authorize, create, issue or sell any Senior Securities or any
Parity Securities (other than additional shares of Series A Preferred Stock that
may be issued as a dividend on the Series A Preferred Stock pursuant to Section
3(a) of the Certificate of Designations, Powers, Preferences and Rights of the
Series A Preferred Stock (the “Series A Preferred Certificate of Designations”))
or securities that are convertible into Senior Securities or Parity Securities
with respect to voting, dividend, liquidation or redemption rights, including
subordinated debt;
 
(v)           authorize, create, issue or sell any Junior Securities other than
Common Stock or securities that are convertible into Junior Securities other
than Common Stock with respect to voting, dividend, liquidation or redemption
rights, including subordinated debt;
 
(vi)           authorize, create, issue or sell any Series B Preferred Stock
other than the Series B Preferred Stock authorized, created, issued and sold
pursuant to the Purchase Agreement and Series B Preferred Stock issued in
replacement or exchange therefore;
 
(vii)          engage in a Transaction which would result in an Internal Rate of
Return to holders of Series B Preferred Stock of less than 25.00%;
 
(viii)         declare or pay any dividends or distributions on the capital
stock of the Corporation in a cumulative amount in excess of the dividends and
distributions paid on the Series A Preferred Stock and the Series B Preferred
Stock in accordance with their respective Certificates of Designations;
 
(ix)           authorize or effect the voluntary liquidation, dissolution,
recapitalization, reorganization or winding up of the business of the
Corporation;
 
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(x)           purchase, redeem or otherwise acquire any capital stock of the
Corporation other than Series A Preferred Stock or Series B Preferred Stock, or
any warrants or other rights to subscribe for or to purchase, or any options for
the purchase of, capital stock of the Corporation or securities convertible into
or exchangeable for capital stock of the Corporation; or
 
(xi)           unless the Corporation has obtained stockholder approval of the
transactions contemplated by the Purchase Agreement pursuant to NASDAQ
Marketplace Rule 4350(i), issue or sell, or engage in any transaction wherein
the Corporation shall have been deemed to have issued or sold, any shares of
Common Stock or securities convertible into Common Stock for a consideration per
share that, as a result of the provisions of Section 5(d)(i), would result in
the issuance of Common Stock upon conversion of the Series B Preferred Stock in
excess of the Conversion Limitation.
 
 
Section 8.      Status of Converted Stock.  In the event any shares of Series B
Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so
converted shall be canceled, shall return to the status of authorized but
unissued Preferred Stock of no designated series, and shall not be issuable by
the Corporation as Series B Preferred Stock.
 
Section 9.       Preemptive Rights.
 
(a)           So long as at least 50% of the shares of Series B Preferred Stock
remain outstanding, the Corporation shall not issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or exchange,
(i) any shares of the capital stock of the Corporation (excluding any shares of
Series A Preferred Stock and any shares of Common Stock issuable upon conversion
of Series A Preferred Stock), (ii) any option, warrant or other right to
subscribe for, purchase or otherwise acquire any capital stock of the
Corporation, or (iii) any securities convertible into capital stock of the
Corporation (collectively, but not including any Series A Preemptive Rights
Securities (as defined below), the “Offered Securities”), unless in each such
case the Corporation shall have first complied with this Section 9; provided,
however, that (x) the preemptive rights of any holder of Series B Preferred
Stock shall not include rights with respect to any securities of the Corporation
as to which any holder of Series A Preferred Stock has exercised its rights (the
“Series A Preemptive Rights Securities”) and (y) the preemptive rights of the
holder of Series B Preferred Stock shall not arise or be exercisable until after
all holders of Series A Preferred Stock have exercised their preemptive rights,
in whole or in part, or declined to exercise such rights.  The Corporation shall
deliver to each holder of the Series B Preferred Stock a written notice of any
proposed, intended or potential (i.e., in the event the holders of the Series A
Preemptive Rights Securities elect not to exercise any or all of their
preemptive rights with respect to the Series A Preemptive Rights Securities)
issuance, sale or exchange of Offered Securities (the “Offer”), which Offer
shall (i) identify and describe the Offered Securities, (ii) describe the price
and other terms upon which they are to be issued, sold or exchanged, and the
number or amount of the Offered Securities to be issued, sold or exchanged,
(iii) identify the persons or entities (if known) to which or with which the
Offered Securities are to be offered, issued, sold or exchanged, and (iv) offer
to issue and sell to or exchange with such holder of the Series B Preferred
Stock (A) a pro rata portion of the Offered Securities determined by dividing
(x) the aggregate number of shares of Common Stock then held by such holder of
the Series B Preferred Stock (giving effect to the conversion of all shares of
convertible preferred stock then held by such holder) by (y) the total number of
shares of Common Stock then held by all holders of the Series B Preferred Stock
(giving effect to the conversion of all outstanding shares of convertible
preferred stock then held by such holders) (such pro rata portion of the Offered
Securities, the “Basic Amount”), and (B) any additional portion of the Offered
Securities attributable to the Basic Amounts of other holders of the Series B
Preferred Stock as such holder shall indicate it will purchase or acquire should
the other holders subscribe for less than their Basic Amounts (the
“Undersubscription Amount”).
 
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(b)           To accept an Offer, in whole or in part, a holder of the Series B
Preferred Stock must deliver a written notice to the Corporation prior to the
end of the 30-day period of the Offer, setting forth the portion of the holder’s
Basic Amount that such holder elects to purchase and, if such holder shall elect
to purchase all of its Basic Amount, the Undersubscription Amount (if any) that
such holder elects to purchase (the “Notice of Acceptance”).  If the Basic
Amounts subscribed for by all holders of the Series B Preferred Stock are less
than the total of all of the Basic Amounts available for purchase, then each
holder who has set forth an Undersubscription Amount in its Notice of Acceptance
shall be entitled to purchase, in addition to the Basic Amounts subscribed for,
the Undersubscription Amount it has subscribed for; provided, however, that if
the Undersubscription Amounts subscribed for exceeds the difference between the
total of all of the Basic Amounts available for purchase and the Basic Amounts
subscribed for (the “Available Undersubscription Amount”) each holder of Series
B Preferred Stock who has subscribed for any Undersubscription Amount shall be
entitled to purchase only that portion of the Available Undersubscription Amount
as the Undersubscription Amounts subscribed for by such holder bears to the
total Undersubscription Amounts subscribed for by all holders of the Series B
Preferred Stock, subject to rounding by the Board to the extent it deems
reasonably necessary.
 
(c)           The Corporation shall have 90 days from the expiration of the
period set forth in Section 9(b) to issue, sell or exchange all or any part of
such Offered Securities as to which a Notice of Acceptance has not been given by
the holders of the Series B Preferred Stock (the “Refused Securities”), but only
to the offerees or purchasers described in the Offer (if so described therein)
and only upon terms and conditions (including, without limitation, unit prices
and interest rates) which are not more favorable, in the aggregate, to the
acquiring person or persons or less favorable to the Corporation than those set
forth in the Offer.
 
(d)           In the event the Corporation shall propose to sell less than all
the Refused Securities (any such sale to be in the manner and on the terms
specified in Section 9(c)), then each holder of the Series B Preferred Stock
may, at its sole option and in its sole discretion, reduce the number or amount
of the Offered Securities specified in its Notice of Acceptance to an amount
that shall be not less than the number or amount of the Offered Securities that
the holder of the Series B Preferred Stock elected to purchase pursuant to
Section 9(b) multiplied by a fraction, (i) the numerator of which shall be the
number or amount of Offered Securities the Corporation actually proposes to
issue, sell or exchange (including Offered Securities to be issued or sold to
Purchasers pursuant to Section 9(b) prior to such reduction), plus the number or
amount of the Series A Preemptive Rights Securities, if any, and (ii) the
denominator of which shall be the original amount of the Offered Securities plus
the number or amount of the Series A Preemptive Rights Securities, if any.  In
the event that any holder of the Series B Preferred Stock so elects to reduce
the number or amount of Offered Securities specified in its Notice of
Acceptance, the Corporation may not issue, sell or exchange more than the
reduced number or amount of the Offered Securities unless and until such
securities have again been offered to the Purchasers in accordance with Section
9(a).
 
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(e)           Upon the closing of the issuance, sale or exchange of all or less
than all of the Refused Securities, the holders of the Series B Preferred Stock
shall acquire from the Corporation, and the Corporation shall issue to the
holders of the Series B Preferred Stock, the number or amount of Offered
Securities specified in the Notices of Acceptance, as reduced pursuant to
Section 9(d) if the holders have so elected, upon the terms and conditions
specified in the Offer.  The purchase by the holders of the Series B Preferred
Stock of any Offered Securities is subject in all cases to the preparation,
execution and delivery by the Corporation and the holders of a purchase
agreement relating to such Offered Securities satisfactory in form and substance
to the holders of the Series B Preferred Stock and their respective counsel.
 
(f)           Any Offered Securities not acquired by the holders of the Series B
Preferred Stock or other persons in accordance with Section 9(c) may not be
issued, sold or exchanged until they are again offered to the holders of the
Series B Preferred Stock under the procedures specified in this Section 9.
 
(g)           The rights of the holders of the Series B Preferred Stock under
this Section 9 shall not apply to Preemptive Rights Excluded Securities.
 
(h)           The failure of any holder of Series B Preferred Stock to exercise
its rights under this Section 9 shall not be deemed to be a waiver of its rights
hereunder in connection with any subsequent issuance, sale or exchange,
agreement to issue, sell or exchange, or reservation or setting aside for
issuance, sale or exchange of Offered Securities.
 
Section 10.        Reservation of Stock.  The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of shares of Series B
Preferred Stock issued or issuable to the holders, such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Series B Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of Series B Preferred
Stock, in addition to such other remedies as shall be available to the holder of
Series B Preferred Stock, the Corporation shall take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number as shall be sufficient for such
purposes, including, without limitation, using best efforts to obtain
stockholder approval of any necessary amendment to the Charter.
 
Section 11.         Definitions.  As used in this Certificate, the following
capitalized terms have the following meanings.
 
“Anti-Dilution Excluded Securities” mean any of the following securities:
(1)  securities issued to employees, officers or directors of the Corporation or
options to purchase Common Stock granted by the Corporation to employees,
officers or directors of the Corporation pursuant to any option plan, agreement
or other arrangement duly adopted by the Corporation and the grant of which is
approved by the compensation committee of the Board; (2) any Series A Preferred
Stock issued as a dividend on shares of Series A Preferred Stock, (3) any Common
Stock issued upon conversion of the Series A Preferred Stock; (4) the Series B
Preferred Stock and any Common Stock issued upon conversion of the Series B
Preferred Stock; (5) for the avoidance of doubt, securities issued on the
conversion of any Convertible Securities or the exercise of any Options, in each
case, outstanding on the date of the first filing of this Certificate of
Designations; and (6) for the avoidance of doubt, securities issued in
connection with a stock split, stock dividend, combination, reorganization,
recapitalization or other similar event for which adjustment is made in
accordance with Section 5(d)(iii) or (iv).
 
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“Internal Rate of Return” means the discount rate that makes the net present
value of all cash payments equal zero.  In determining the Internal Rate of
Return, the initial investment of the holders of the Series B Preferred Stock
shall include all transaction costs and expenses incurred by the initial holder
of the Series B Preferred Stock in connection with the transactions contemplated
by the Purchase Agreement and all additional costs and expenses of the holders
of Series B Preferred Stock in respect of the investment incurred through the
date of the determination shall be treated as cash expenditures when made.  For
purposes of determining the Internal Rate of Return, any dividends,
distributions or payments other than in cash shall be deemed to have no
value.  In determining the Internal Rate of Return in respect of a Transaction,
the final payment for purposes of such determination shall be the cash, if any,
distributable or payable to holders of the Series B Preferred Stock upon the
closing of the Transaction assuming that the holders had converted all of the
outstanding Series B Preferred Stock to Common Stock immediately prior to the
closing of the Transaction.
 
“Market Price” shall be the closing sale price (on the applicable Trading
Market) per share of Common Stock on any specified date, or, if such date does
not fall on a Trading Day, then the closing sale price per share of Common Stock
on the first Trading Day preceding such date which shall also constitute the
“market price” for purposes of the Series A Preferred Certificate of
Designations.
 
“Purchase Agreement” means that certain Securities Purchase Agreement, dated
March 18, 2008, between the Corporation and Lyles United, LLC.
 
“Preemptive Rights Excluded Securities” mean any of the following
securities:  (1) securities issued to employees, officers or directors of the
Corporation or options to purchase Common Stock granted by the Corporation to
employees, officers or directors of the Corporation pursuant to any option plan,
agreement or other arrangement duly adopted by the Corporation and the grant of
which is approved by the compensation committee of the Board; (2) any Series A
Preferred Stock issued as a dividend on shares of Series A Preferred Stock and
any Common Stock issued on conversion of any shares of Series A Preferred Stock
or as a dividend to any holder of Series A Preferred Stock; (3) the Series B
Preferred Stock and any Common Stock issued on conversion of the Series B
Preferred Stock or issued as a dividend on the Series B Preferred Stock; (4) for
the avoidance of doubt, securities issued on the conversion of any Convertible
Securities or the exercise of any Options, in each case, outstanding on the date
of the first filing of this Certificate of Designations; (5) for the avoidance
of doubt, securities issued in connection with a stock split, stock dividend,
combination, reorganization, recapitalization or other similar event for which
adjustment is made in accordance with Section 5(d)(iii), (iv) or (v); and (6)
the issuance of securities of the Corporation issued for consideration other
than cash pursuant to a merger, consolidation, acquisition or similar business
combination by the Corporation approved by the Board.
 
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“Trading Day” means any day on which the Common Stock is listed or quoted and
traded on the applicable Trading Market.
 
“Trading Market” means the NASDAQ Global Market or, if the Common Stock is not
then traded on the NASDAQ Global Market, any national securities exchange,
market or trading or quotation facility on which the Common Stock is then listed
or quoted.
 
 
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IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed on its behalf by its Chief Financial Officer this 26th day of March,
2008.
 
PACIFIC ETHANOL, INC.
 
By:           /s/ JOSEPH W.
HANSEN                                                                
Name:      Joseph W. Hansen
Title:        Chief Financial Officer
 
 
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